## Facts

- Sol and Muriel Diamond filed joint federal income tax returns for 1961 and 1962; Sol Diamond worked as a mortgage broker and builder.
- The Commissioner determined income tax deficiencies for 1961 and 1962, including issues involving (i) 1961 commissions and claimed expense deductions and (ii) 1962 treatment of a venture interest received for services and a claimed loss.
- In late 1961, Philip Kargman acquired rights under a contract to buy an office building for $1,100,000 and asked Diamond to obtain mortgage financing for the full purchase price.
- Diamond agreed to secure the loan in exchange for a 60% share of the venture’s profits and losses.
- On December 15, 1961, Diamond and Kargman executed a written joint venture agreement providing, among other terms:
  - a stated 24-year venture term (tied to the mortgage) unless earlier terminated by sale or agreement;
  - Kargman would advance cash needed beyond mortgage proceeds;
  - profits and losses would be allocated 40% to Kargman and 60% to Diamond; and
  - on sale, proceeds would first repay Kargman’s advances, with remaining net profits split 40/60.
- Diamond obtained a $1,100,000 mortgage loan from Marshall Savings & Loan, and title was placed into an Illinois land trust in 1962.
- Diamond received the 60% venture interest solely for arranging the loan, then sold that interest within less than three weeks for $40,000 cash.
- The Commissioner treated the $40,000 as ordinary income for services; the Diamonds asserted nonrecognition principles associated with receiving a partnership interest and also claimed a $40,000 loss deduction tied to termination of the venture.

## Issues

1. Whether Diamond’s receipt of a 60% venture (profits) interest for services had a determinable fair market value upon receipt, requiring inclusion in gross income as compensation under I.R.C. § 61(a)(1).
2. Whether I.R.C. § 721 and Treas. Reg. § 1.721-1(b)(1) prevented recognition of income on receipt of the interest.
3. Whether the Diamonds were entitled to a $40,000 deduction for an asserted partnership loss arising from termination of the venture under I.R.C. §§ 708 and 752.

## Decision

- The Tax Court sustained the Commissioner’s determinations on the profits-interest and loss issues.
- The court found the venture interest had a fair market value of $40,000 when received, as shown by the near-immediate arm’s-length sale for $40,000.
- The court held the $40,000 was ordinary income under § 61(a)(1) as compensation for services in obtaining financing.
- The court held § 721 did not apply to exclude the value of the interest from income where the interest was received for services and had ascertainable value.
- The court denied the claimed $40,000 loss deduction for failure to establish an allowable partnership loss under §§ 708 and 752.

## Legal Principles

- Gross income includes compensation for services, including property or an equity interest received in exchange for services, measured by fair market value when that value is determinable. (I.R.C. § 61(a)(1))
- A service provider’s receipt of a partnership or venture interest may be taxable upon receipt when the interest has a readily ascertainable fair market value.
- Nonrecognition rules for contributions to a partnership under § 721 do not convert service compensation into nonrecognition treatment when the substance is payment for services.
- The taxpayer bears the burden to substantiate entitlement to deductions, including claimed partnership loss deductions and their statutory prerequisites.

## Conclusion

The Tax Court treated a profits interest granted for arranging financing as taxable compensation because the interest had an ascertainable $40,000 fair market value upon receipt, and it rejected both § 721 nonrecognition and an offsetting claimed partnership-loss deduction for lack of proof.


Diamond v. Commissioner, 56 T.C. 530 (1971)