## Facts

- David H. Foxman, Horace W. Grenell, and Norman B. Jacobowitz were equal partners in Abbey Record Manufacturing Company and equal shareholders in Sound Plastics, Inc.
- Following disputes among the owners, the parties executed a May 21, 1957 agreement restructuring their interests.
- Under the agreement, Foxman and Grenell acquired Jacobowitz’s entire partnership interest for $242,500, payable over time, and Jacobowitz acquired Foxman’s and Grenell’s corporate shares.
- Transaction documents repeatedly described the partnership transfer as a “sale” by Jacobowitz and a “purchase” by Foxman and Grenell.
- Promissory notes for the purchase price were personally guaranteed by Foxman and Grenell; the notes were secured by a chattel mortgage on partnership assets.
- Payments to Jacobowitz were made by checks drawn on the partnership’s bank account.
- The partnership return treated the amount paid above Jacobowitz’s capital account as a § 736(a) “guaranteed payment” for a retiring partner, reducing Foxman’s and Grenell’s distributive shares.
- Jacobowitz reported the same excess amount as capital gain from the sale of a partnership interest under §§ 741–742.
- The Commissioner asserted deficiencies against Foxman and Grenell (disallowing the claimed § 736 treatment) and also asserted a deficiency against Jacobowitz.
- The Tax Court sustained the deficiencies against Foxman and Grenell and rejected the deficiency against Jacobowitz; Foxman and Grenell appealed, and the Commissioner filed a conditional cross-petition as to Jacobowitz.

## Issues

1. Whether the payments to Jacobowitz were § 736(a) payments to a retiring partner (potentially deductible/allocable to remaining partners) or consideration for a sale of his partnership interest under §§ 741–742.
2. Whether the Tax Court clearly erred in characterizing the transaction as a sale by Jacobowitz to Foxman and Grenell despite payments being made from the partnership account.
3. Whether the Commissioner’s conditional cross-petition regarding Jacobowitz needed to be reached if the characterization as to Foxman and Grenell was affirmed.

## Decision

- The Third Circuit affirmed the Tax Court.
- The court held that the transaction was a sale of Jacobowitz’s partnership interest to Foxman and Grenell, not § 736(a) guaranteed payments by the partnership.
- The deficiencies against Foxman and Grenell were sustained.
- Because Foxman’s and Grenell’s appeals were rejected, the court did not reach the Commissioner’s conditional cross-petition concerning Jacobowitz; the Tax Court’s ruling favorable to Jacobowitz remained in place.

## Legal Principles

- A transfer of a partner’s entire interest will be treated as a sale under §§ 741–742 when the transaction’s structure and documentation reflect a purchaser–seller relationship, including personal obligations of the acquiring partners.
- Use of partnership funds to make installment payments does not control characterization when the legal obligation to pay is undertaken by the acquiring partners, and partnership payment reflects internal financing rather than a partnership-level liquidation.
- Appellate review defers to the Tax Court’s supported factual findings (including findings drawn from stipulated materials and testimonial conflicts) absent clear error.
- Parties cannot obtain favorable tax results by recharacterizing a transaction on returns when the operative documents and obligations evidence a different substantive arrangement.

## Conclusion

The court treated the buyout of a departing partner as a sale of a partnership interest under §§ 741–742, rejecting the remaining partners’ attempt to treat the premium as deductible § 736(a) payments, and it affirmed the Tax Court’s deficiencies against the purchasing partners.


Foxman v. Comm’r, 352 F.2d 466 (3d Cir. 1965)