Foxman v. Commissioner

David Foxman, Horace Grenell (plaintiffs), and Norman Jacobowitz were equal partners in Abbey Record Manufacturing Company and equal shareholders in Sound Plastics, Inc. When differences arose, Foxman and Grenell tried to persuade Jacobowitz to withdraw from the partnership. In early negotiations Jacobowitz offered Foxman and Grenell an option referring to selling his interest and execution of a “bill of sale.” Negotiations culminated in an attorney for Foxman and Grenell preparing a contract to acquire Jacobowitz’s interest, while Jacobowitz acquired Foxman and Grenell’s shares in the corporation. The contract said the parties were “desirous of selling, conveying, transferring and assigning” their interests to each other, then said Foxman and Grenell “hereby purchase” and Jacobowitz “does hereby sell” his interest in the partnership for $242,500 in cash. Foxman and Grenell signed in their individual capacities and on behalf of the partnership, although Foxman and Grenell held primary liability personally. Foxman and Grenell signed promissory notes as individual guarantors using the partnership’s name as maker, secured by a chattel mortgage on the partnership’s assets that again referred to the “sale” of Jacobowitz’s interest. Foxman and Grenell used checks drawn on the partnership’s account to pay Jacobowitz all the payments. The partnership’s tax return treated the consideration Jacobowitz received less the value of his partnership interest as a guaranteed payment to liquidate a retiring partner’s interest. That treatment reduced Foxman and Grenell’s distributive shares, reducing their tax liability. Meanwhile, Jacobowitz treated the consideration less the value of his partnership interest as capital gain realized upon selling his interest, not income, resulting in lower taxes. The tax commissioner (defendant) assessed deficiencies against Foxman and Grenell, and they petitioned the tax court for review. The tax court ruled in the commissioner’s favor, finding Jacobowitz had treated the payment correctly. Foxman and Grenell appealed. The commissioner petitioned for review of the tax court’s decision as it related to Jacobowitz only if the appellate court reversed as to Foxman and Grenell.