Diamond v. Commissioner

In 1961, Philip Kargman purchased the buyer’s rights in a contract for the sale of an office building. Kargman asked mortgage broker Sol Diamond (plaintiff) to obtain a mortgage loan for the office building’s purchase price, and Diamond did so. Diamond and Kargman then entered an agreement under which Diamond and Kargman would be associated as joint venturers for the mortgage term, and Kargman and Diamond would split the profits and losses of the venture 40 percent to Kargman and 60 percent to Diamond. The sale of the office building closed in February 1962. A short time later, Diamond decided to sell his interest in the venture to another person for $40,000. To effectuate the sale, Diamond assigned his interest to Kargman for $40,000, and Kargman conveyed a similar interest to the other person. Diamond and his wife reported the $40,000 sale proceeds as a short-term capital gain on their 1962 income-tax returns. The Diamonds did not report any tax consequences from Diamond’s original receipt of the interest in the Kargman-Diamond real estate venture because Diamond asserted that his partnership interest was not taxable income. The Commissioner of Internal Revenue (the commissioner) assessed a deficiency in the Diamonds’ tax returns, asserting that Diamond had realized ordinary income when he received the interest in the real estate venture. The Diamonds challenged the deficiency in tax court, but the court agreed with the commissioner. The court found that the profit-share Diamond had received in the partnership had a market value of $40,000 and that Diamond’s acquisition of the interest was ordinary income because the acquisition was compensation for services rendered by Diamond. The Diamonds appealed.