## Facts

- Richard and Cheryl Jacobson and Lawrence and Donna Larson owned all interests in Jacobson Warehouse Company (JWC), a partnership.
- JWC owned real property (the McDonald properties) and had attempted to sell it for about two years.
- JWC and Metropolitan Life Insurance Co. formed a new partnership (V) with ownership interests of 25% (JWC) and 75% (Metropolitan).
- JWC contributed the McDonald properties to V.
- Metropolitan contributed cash to V equal to 75% of the agreed fair market value of the properties.
- V immediately transferred the contributed cash to or for the benefit of JWC.
- Petitioners reported the transaction as a nonrecognition property contribution under I.R.C. § 721 followed by a partnership distribution under § 731.
- The Commissioner determined the transaction was, in substance, a sale by JWC of a 75% interest in the property to Metropolitan and asserted investment tax credit recapture under I.R.C. § 47 to the extent the property was § 38 property.

## Issues

1. Whether the property transfer to V and immediate cash transfer to JWC should be characterized as a § 721 contribution followed by a § 731 distribution, or as a disguised sale of a 75% interest in the property.
2. Whether the transaction required investment tax credit recapture under § 47 for the portion of any § 38 property treated as sold.

## Decision

- The Tax Court held the transaction was, in substance, a sale by JWC of a 75% interest in the property to Metropolitan.
- The court followed Otey v. Commissioner and related Tax Court authority recharacterizing closely linked contribution-and-distribution transactions as disguised sales.
- The court held investment tax credit recapture applied under § 47 to the extent § 38 property was deemed sold (i.e., the 75% portion treated as sold).

## Legal Principles

- Federal tax characterization turns on substance over form; partnership form does not control if it functions as a conduit for a sale.
- When a partner contributes property to a partnership and, pursuant to a closely connected plan, receives an immediate cash transfer funded by another partner’s contribution, the transaction may be treated as a disguised sale rather than protected by §§ 721 and 731.
- Disguised sale treatment can be applied proportionally, treating only the portion economically exchanged for cash as sold and the remainder as a true contribution for a partnership interest.
- A deemed sale or disposition of § 38 property during the recapture period triggers investment tax credit recapture under § 47 to the extent of the portion treated as disposed of.

## Conclusion

The Tax Court recharacterized JWC’s contribution of real property and the partnership’s immediate cash transfer to JWC as a disguised sale of 75% of the property to Metropolitan, resulting in recognized gain and investment tax credit recapture under § 47 for the portion of any § 38 property deemed sold.


Jacobson v. Commissioner, 96 T.C. 577 (1991)