## Facts

- Richard O. Wheeler was in real-estate development and construction and sought financing for projects he would locate, build, and lease.
- Ainslie Perrault was a wealthy financier who supplied cash and credit for Wheeler-led projects.
- In early dealings, Perrault funded projects while Wheeler handled development work; profits were split by agreement (with different percentages across projects).
- Around 1962, Wheeler and Perrault reached a broader oral understanding for future projects: Perrault would provide the front money; Wheeler would handle development, construction, financing arrangements, and leasing.
- Their arrangement provided that Perrault would first recover his investment (plus a stated return), and then remaining profits would generally be split 75% to Perrault and 25% to Wheeler.
- Wheeler also received a fixed monthly salary (initially about $700, later about $1,000) apart from any profit split.
- The parties later reduced the arrangement to a written agreement describing a “joint venture” to develop and manage real property.
- Under the written terms, real property was to be held in Perrault’s name, and Perrault would bear the venture’s overall losses (with losses on a particular project potentially affecting profit calculations).
- In 1968, in connection with one of the ventures, Wheeler received consideration including stock, debentures, and a note.
- Wheeler reported amounts connected to the venture as long-term capital gain on the theory that he held a 25% joint-venture interest.
- The Commissioner issued notices of deficiency for 1968 and 1969, asserting that what Wheeler received was ordinary income (compensation), not capital gain, and disputing timing and valuation of the stock and debt instruments.
- The case also raised whether petitioners made a timely election for income averaging under the Code.

## Issues

1. Whether Wheeler and Perrault’s arrangement constituted a joint venture/partnership for federal income tax purposes, or instead an employer-employee relationship with profit-based pay.
2. Whether the stock, debentures, and note received by Wheeler in 1968 were taxable as compensation for services (ordinary income) or as a distributive share of venture gain (capital gain), in whole or in part.
3. Whether restrictions on the stock affected the year Wheeler had to recognize income from receiving it.
4. What the fair market value of the stock, debentures, and note was when received.
5. Whether petitioners made a timely income-averaging election in the Tax Court proceeding.

## Decision

- The Tax Court concluded that Wheeler was not merely Perrault’s employee; the parties’ course of dealing and agreements supported treating them as joint venturers for tax purposes.
- The court did not treat everything Wheeler received as capital gain: it separated items attributable to Wheeler’s service compensation (including his salary component) from amounts attributable to his share of venture profits.
- The court held Wheeler realized taxable income in 1968 upon receipt of the stock and debt instruments, notwithstanding transfer restrictions, to the extent the property had an ascertainable fair market value.
- The court determined the fair market values of the stock, debentures, and the note as of the time of receipt and directed that those values be used in computing the deficiencies.
- The court permitted petitioners to use income averaging based on the election made in the Tax Court proceeding.
- The final deficiencies were left for computation and entry of decision under Tax Court Rule 155.

## Legal Principles

- Whether a joint venture/partnership exists for federal tax purposes turns on the parties’ actual relationship and conduct, not solely on labels in an agreement.
- A person may be a joint venturer even if another participant supplies most cash and holds record title, where the parties agree to share profits from jointly undertaken business activity and the arrangement is carried out in practice.
- Payments connected to a business relationship may include both (a) compensation for services (ordinary income) and (b) a participant’s distributive share of venture gains (which may qualify for capital-gain treatment depending on the underlying asset and holding period).
- Receipt of stock or other property can create current taxable income when the recipient obtains beneficial ownership and the property’s fair market value is reasonably determinable; transfer restrictions do not automatically postpone recognition.
- Fair market value of closely held stock and nontraded debt instruments is a factual question determined from the surrounding evidence; face amount is not necessarily fair market value.
- Income-averaging treatment depends on meeting statutory election requirements, and an election may be allowed in the Tax Court proceeding when made within the permissible period and without unfair prejudice to the government.

## Conclusion

In *Wheeler v. Commissioner*, the Tax Court treated Wheeler as a joint venturer with Perrault rather than solely an employee, so Wheeler’s 25% profit participation could produce capital-gain treatment to the extent it reflected a distributive share of venture gain. At the same time, the court treated service-based components as ordinary income, required inclusion in 1968 based on the determined fair market values of the stock and debt received, allowed income averaging, and ordered the final tax calculations to be completed under Rule 155.


Wheeler v. Commissioner, 37 T.C.M. 883 (1978)