Ledoux v. Commissioner of Internal Revenue

The Sanford-Orlando Kennel Club, Inc. (the corporation) held a state-issued permit to operate a greyhound-racing track in Florida. The corporation’s sole shareholders were also copartners in the Sanford-Orlando Kennel Club (the copartnership), which operated the racetrack. In mid-1955, the copartnership entered into an agreement with racetrack operators Jerry and Jack Collins. Under that agreement, the Collinses took over the right to manage and operate the racetrack for 20 years—later extended until 1999—and agreed to pay the copartnership the first $200,000 of the racetrack’s net profits each year. In October 1955, Jerry Collins’s son-in-law, John Ledoux (plaintiff), entered into a partnership with Jerry and Jack (the Collins-Ledoux partnership) to manage and operate the racetrack. Jerry had a 50 percent partnership interest, and Jack and Ledoux each had 25 percent interests. The Collinses also amended their original agreement with the copartnership to include Ledoux as a party. The copartnership subsequently terminated, and the corporation succeeded to the copartnership’s interests in the agreement with the Collinses and Ledoux. The Collins-Ledoux partnership continued to operate the racetrack until September 1972, and the racetrack became quite successful. After the 1972 racing season, Jerry and Jack purchased Ledoux’s partnership interest for $800,000, which represented five times Ledoux’s share of the partnership’s 1972 earnings. On Ledoux’s federal income-tax returns, Ledoux reported the gain from the sale of his partnership interest as capital gain. The Commissioner of Internal Revenue (the commissioner) (defendant) determined a deficiency in Ledoux’s taxes based on the commissioner’s calculation that $575,392.50 of the gain was related to Ledoux’s interest in the racetrack agreement and should have been treated as ordinary income. The commissioner’s determination was based on § 751 of the Internal Revenue Code, under which if a partner sold a partnership interest, the portion of the sale proceeds attributable to the partnership’s unrealized receivables was ordinary income to the partner rather than capital gain. Ledoux challenged the commissioner’s determination in tax court.