## Facts

- John W. Ledoux and Geraldine C. Ledoux filed joint federal income tax returns for 1972–1974.
- A Florida greyhound racetrack was owned by a corporation whose owners also operated the track through related business arrangements.
- In 1955, an operating agreement granted certain operators the right to manage and operate the racetrack for a long term, with an obligation to pay the corporation the first \$200,000 of annual net profits.
- John Ledoux entered a partnership with Jerry and Jack Collins to manage and operate the track; Ledoux held a 25% interest.
- The partnership operated the racetrack successfully through the 1972 season.
- After the 1972 season, the Collinses purchased Ledoux’s 25% partnership interest for \$800,000, a price tied to a multiple of his share of 1972 earnings.
- The Ledouxes reported the gain from the sale as capital gain.
- The Commissioner determined that \$575,392.50 of the gain was attributable to the partnership’s interest in the racetrack operating contract and was ordinary income under I.R.C. § 751 as gain from “unrealized receivables.”

## Issues

1. Whether I.R.C. § 751 required recharacterization of any portion of Ledoux’s gain on the sale of his partnership interest as ordinary income attributable to partnership “unrealized receivables.”
2. Whether the partnership’s racetrack operating contract constituted an “unrealized receivable” under § 751(c) to the extent its value represented a right to future income from services.

## Decision

- The Tax Court sustained the deficiency determination on the ground that a substantial portion of the sale proceeds was attributable to partnership unrealized receivables under § 751.
- The court treated the racetrack operating contract, in significant part, as a contract right to payment for services, bringing it within § 751(c).
- The court held that the portion of Ledoux’s gain attributable to that contract right was ordinary income; decision was entered for the Commissioner.
- The judgment was affirmed on appeal.

## Legal Principles

- A partnership interest is generally a capital asset, but § 751 “looks through” the partnership interest and recharacterizes gain attributable to certain partnership assets as ordinary income.
- “Unrealized receivables” under § 751(c) broadly include rights to payment for services rendered or to be rendered, to the extent the related income has not been recognized.
- When a sale price for a partnership interest reflects, in substantial part, the present value of expected future income tied to service-based contract rights, § 751 may require ordinary-income treatment for that portion of gain.

## Conclusion

The court held that the partnership’s long-term racetrack operating contract was, to a significant extent, a right to future income for services within § 751(c), so the portion of Ledoux’s sale proceeds attributable to that contract was taxed as ordinary income rather than capital gain.


Ledoux v. Comm’r of Internal Revenue, 77 T.C. 293 (1981)