## Facts

- Colonnade Condominium, Inc. (a corporation) held an approximately 50.98% partnership interest in Georgia King Associates, a real estate partnership.
- Under the partnership agreement, Colonnade had a contractual obligation to contribute roughly $1.3 million of capital, but had contributed under $400,000, leaving a substantial unpaid capital commitment and a negative capital account.
- Colonnade was owned by three individual shareholders and was unable to satisfy its remaining capital contribution obligations.
- The partnership agreement was amended so that each shareholder became a general partner with a 13.66% interest, while Colonnade’s partnership interest was reduced to 10%.
- Contemporaneously, the shareholders agreed to assume Colonnade’s remaining capital contribution obligations to the partnership.
- Colonnade reported the restructuring as a nontaxable admission of new partners and reallocation of interests.
- The Commissioner determined the transaction was a sale or exchange by Colonnade of 40.98 percentage points of its partnership interest in exchange for the assumption/discharge of its capital contribution obligations, generating taxable gain.
- Colonnade petitioned the Tax Court to challenge the deficiency determination.

## Issues

1. Whether Colonnade’s reduction in its partnership interest, coupled with its shareholders’ assumption of Colonnade’s capital contribution obligations, constituted a taxable sale or exchange of part of Colonnade’s partnership interest.
2. Whether relief from a partner’s capital contribution obligations constitutes consideration (amount realized) for purposes of determining gain on a disposition of a partnership interest.

## Decision

- The Tax Court held for the Commissioner.
- The court treated the restructuring as a taxable sale or exchange by Colonnade of 40.98 percentage points of its partnership interest.
- The court concluded that the shareholders’ assumption of Colonnade’s remaining capital contribution obligations was consideration to Colonnade and part of Colonnade’s amount realized.
- The deficiency was sustained to the extent based on gain recognition from this characterization.

## Legal Principles

- A partnership interest is property; a transfer of a portion of that interest for consideration can be a taxable sale or exchange (generally governed by IRC § 741).
- A taxpayer’s relief from liabilities or analogous enforceable obligations can be treated as money received and included in the amount realized on a sale or exchange.
- Transaction labels in partnership amendments do not control tax consequences where the economic effect is a disposition of an interest for consideration; substance governs over form.
- When a partner’s interest is reduced and another party assumes the partner’s unpaid capital obligations, the arrangement may be treated as a sale of part of the partnership interest with resulting gain to the extent the amount realized exceeds basis.

## Conclusion

The Tax Court characterized the partnership restructuring as a taxable partial disposition of Colonnade’s partnership interest because the shareholders’ assumption of Colonnade’s unpaid capital contribution obligations provided consideration equivalent to relief from liabilities, requiring recognition of gain.


Colonnade Condominium, Inc. v. Commissioner, 91 T.C. 793 (1988)