Jupiter Corp. v. United States

Outer Drive East Corporation (Outer Drive), a wholly owned subsidiary of Jupiter Corporation (plaintiff), was the majority owner and general partner of Randolph Outer Drive Venture (Venture), in which Empire Properties (Empire) was a limited partner and minority owner. Pursuant to the partnership agreement, Outer Drive loaned Venture $4,000,000 for a construction project. Venture subsequently reorganized to add two limited partners (the Wilkows) to raise capital to repay Outer Drive’s loan. Despite the reorganization, Outer Drive wanted to remain in control of Venture’s management, and the Wilkows did not want any control. The Wilkows were admitted to the partnership with a 20-percent interest and a guaranteed annual return, which was unique to the Wilkows. In exchange, the Wilkows contributed capital and a loan to Venture. The Wilkows’ 20-percent interest came out of Outer Drive’s interest, while Empire’s interest remained the same. Shortly after the Wilkows were admitted, the loan they provided to Venture was used to repay Outer Drive’s initial loan, and the remainder of the Wilkows’ loan and their capital contribution were distributed to Outer Drive and Empire. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined that the distribution Outer Drive had received from the Wilkows was proceeds from Outer Drive’s sale of a portion of its partnership interest and therefore that the transaction was taxable. However, Outer Drive contended that the distribution by Venture was not taxable, pursuant to § 731 of the Internal Revenue Code, which provides that a partner does not recognize a gain on money distributed by the partnership unless the money exceeds the adjusted basis of the partner’s partnership interest.