## Facts

- Life Insurance Company of Georgia (LOG) wanted to develop a hotel complex near its corporate headquarters and contacted real estate developer DeNean Stafford about the project.
- After negotiations, LOG issued Stafford a letter of intent concerning the development; it reflected a basic agreement but stated that additional terms still had to be resolved before a final agreement.
- Stafford and other investors formed a limited partnership, Center Investments, Ltd. (Center), to pursue the project.
- Stafford bought two $100,000 partnership units for cash and received a third $100,000 unit in exchange for contributing to Center his interest in the LOG letter of intent.
- LOG continued to act consistently with the letter’s terms after Stafford transferred it to Center.
- On their 1969 federal income-tax return, Stafford and his wife did not report Stafford’s receipt of the third partnership unit as income.
- The Commissioner of Internal Revenue determined that the third unit was taxable income because it was compensation for services Stafford allegedly performed for Center in negotiating and developing the LOG deal, and assessed a tax deficiency of about $64,000.
- The Staffords paid the assessment, sought a refund, and after the IRS denied the claim, filed a refund action against the United States in federal district court.
- The district court granted summary judgment for the Staffords, holding that I.R.C. § 721(a) applied because Stafford contributed property to Center in exchange for the partnership interest.
- An appellate court reversed, and on remand the district court granted summary judgment for the government, concluding that Stafford’s contribution did not satisfy § 721(a)’s “property” and “exchange” requirements.
- The Staffords appealed the adverse summary judgment to the Eleventh Circuit.

## Issues

1. Under I.R.C. § 721(a), did Stafford receive the third partnership unit in an exchange for contributed “property” (the LOG letter of intent), or was the unit taxable as compensation for services?
2. Did the district court use the correct legal standard in evaluating whether the letter of intent could qualify as “property” and whether an “exchange” occurred under § 721(a)?
3. Did genuine disputes of material fact about the nature, value, and transferability of the letter of intent (and the consideration for the partnership unit) make summary judgment for the government improper?

## Decision

- The Eleventh Circuit reversed the district court’s summary judgment for the United States and remanded.
- The court held that the district court applied an incorrect legal standard in analyzing § 721(a)’s “property” and “exchange” requirements.
- The court concluded that a letter of intent and related rights may qualify as “property” under § 721(a) when they represent transferable rights with real economic value, rather than a mere expectancy.
- The court rejected the view that a partnership interest must be treated as compensation simply because the contributed item resulted from the taxpayer’s earlier efforts; efforts performed before the partnership exists may produce an asset that can later be contributed as property.
- Applying the proper test, the court concluded that some matters should have been resolved in the taxpayers’ favor and that other matters involved genuine factual disputes, making summary judgment inappropriate.

## Legal Principles

- I.R.C. § 721(a) generally provides nonrecognition of gain or loss when a partner contributes property to a partnership in exchange for a partnership interest.
- A partnership interest received for services is generally taxable; § 721(a) does not shelter compensation.
- “Property” for § 721(a) is not limited to cash or tangible assets; intangible rights may qualify if they are transferable and have economic value (for example, a commercially meaningful contractual right).
- Work performed before a partnership’s formation may create an identifiable asset; if that asset is later transferred to the partnership, the tax question is whether the partner transferred property in exchange for the interest, not whether the partner’s prior efforts should be recharacterized as partnership-compensated services.
- Summary judgment is improper when material facts about the character of the contributed item (such as its enforceability and value) or the nature of the transaction (exchange versus compensation) remain genuinely disputed.

## Conclusion

United States v. Stafford is a tax refund case about whether a developer’s transfer of a hotel-development letter of intent to a newly formed limited partnership in return for a partnership unit qualifies for nonrecognition under I.R.C. § 721(a) or must be taxed as compensation for services. The Eleventh Circuit held that the district court used the wrong legal standard in rejecting § 721(a) treatment, recognized that a letter of intent may constitute “property” if it embodies valuable, transferable rights, and found unresolved fact disputes that made summary judgment for the government improper; it therefore reversed and remanded.


United States v. Stafford, 727 F.2d 1043 (1984)