## Facts

- Ian Allison and Stanley Krikac operated Lumbermans Acceptance Company (Acceptance), a commercial-loan brokerage that owned Lumbermans Mortgage Company (Mortgage).
- Acceptance entered a written “Joint Venture Agreement” with McCoy Investment Company, Inc. (Investment), owned by real estate broker James McCoy, to acquire and subdivide ranch property into about 200 lots known as Goose Lake Estates.
- The agreement did not state that the parties would sell lots together or share profits and losses; instead, it provided that Acceptance would receive 75 specific lots in exchange for arranging and providing financing, and the agreement would end when the lots were distributed.
- To fund the acquisition, Acceptance lent about $53,000 and arranged an additional bank loan of about $80,000. McCoy’s company was directly liable on the loans, even though Acceptance later paid off outstanding indebtedness.
- Investment had no control over how Acceptance disposed of its 75 lots. By the time Acceptance received the lots, it had already arranged sales for 72 of them without Investment’s participation.
- The parties only occasionally worked together on development tasks, did not keep partnership books or capital accounts, and did not file partnership tax returns.
- The Commissioner determined deficiencies across four consolidated Tax Court dockets involving Acceptance, Mortgage, and the individual owners, raising issues that included the Goose Lake lots, related-party allocations, limits on claimed “advertising” deductions, accounting-method questions for state franchise tax deductions, and gain recognition on a separate property transaction (Wildlife Estates).
- Petitioners reported Acceptance’s receipt of the 75 lots as a nontaxable partnership distribution; the Commissioner treated the lots as property received for services, taxable as ordinary income at fair market value when received, and also made related adjustments including reallocations under I.R.C. § 482.

## Issues

1. Whether Acceptance and Investment formed a partnership/joint venture for federal tax purposes regarding Goose Lake Estates.
2. If not, whether Acceptance’s receipt of 75 Goose Lake Estates lots was taxable as ordinary income for services, and what fair market value applied.
3. Whether the Commissioner could reallocate income among Acceptance and related entities under I.R.C. § 482 based on transfers and sales of Goose Lake lots within the controlled group.
4. Whether certain amounts claimed as advertising expenses were instead business gifts subject to the $25-per-recipient limitation of I.R.C. § 274(b).
5. Whether Acceptance and/or Mortgage could change their method of computing deductions for state franchise taxes for the years at issue without the Commissioner’s consent.
6. Whether Mortgage could report gain from the sale of its interest in Wildlife Estates using installment or deferred-payment reporting, or had to recognize the gain in 1970.

## Decision

- The Tax Court held that Acceptance and Investment did not form a bona fide partnership or joint venture for federal income tax purposes for the Goose Lake Estates project.
- The court sustained the Commissioner’s determination that the 75 lots received by Acceptance were compensation for financing and related services and therefore ordinary income at their fair market value when received.
- The court addressed and, to the extent required to reflect income properly among controlled entities, sustained § 482 reallocations connected to related-party transfers and sales of Goose Lake lots.
- The court held that certain items deducted as advertising were subject to the § 274(b) business-gift limitation and were not fully deductible as claimed.
- The court ruled that the attempted change in the method of deducting state franchise taxes was a change in accounting method requiring the Commissioner’s consent, which had not been obtained.
- The court held that Mortgage’s Wildlife Estates transaction did not qualify for installment or deferred-payment reporting and that gain was recognizable in 1970.
- The court directed that the final tax liabilities be computed under the Tax Court’s post-opinion computation procedures (Rule 155).

## Legal Principles

- Whether a partnership exists for federal tax purposes depends on the parties’ intent and the substance of their relationship; a contract label such as “joint venture” is not controlling.
- A partnership/joint venture generally requires co-ownership of a business with meaningful sharing of profits and losses and some level of joint control; a fixed allotment of property for one party’s financing/services points away from partnership treatment.
- Property received in exchange for services is includible in gross income as ordinary income at fair market value when received (subject to the taxpayer’s method of accounting and timing rules).
- I.R.C. § 482 permits the Commissioner to allocate income among commonly controlled entities to prevent tax avoidance and to reflect each entity’s income accurately when intercompany dealings shift income.
- The § 274(b) limitation applies to business gifts to identifiable recipients even if the taxpayer characterizes the expenditures as advertising.
- A material change in how a taxpayer computes a deduction can be a change in accounting method; generally, the taxpayer must obtain the Commissioner’s consent before making such a change.
- Installment or deferred-payment reporting requires statutory and regulatory conditions to be met; if they are not, gain is recognized in the year required under general realization and recognition rules.

## Conclusion

Allison v. Commissioner held that the Goose Lake Estates arrangement was not a tax partnership, so Acceptance’s receipt of 75 subdivision lots was taxable as ordinary income for financing and related services at fair market value, while the court also resolved related controlled-group reallocations, deduction limitations for business gifts, accounting-method restrictions for state franchise tax deductions, and required current gain recognition on the Wildlife Estates sale.


Allison v. Commissioner, 35 T.C.M. 1069 (1976)