Law School Case Brief
First Nw. Indust., Inc. v. Commissioner - 649 F.2d 707 (9th Cir. 1981)
Sale of a portion of a partnership interest is treated as a sale of a capital asset under I.R.C. § 741. Rev. Rul. 59-109.
Appellee taxpayer purchased a National Basketball Association (NBA) team, and acquired certain related rights. The NBA expanded and the proceeds were distributed to the existing owners. The Tax Court held that that appellee could subtract from the expansion proceeds an equivalent proportion of its cost. Appellant Commissioner of Internal Revenue contended that the franchise rights acquired by appellee were not transferred to the new team owners and, therefore, appellee had no basis to subtract from the amount realized in computing taxable gain.
Were the franchise rights acquired by the taxpayer transferred to the new owners?
The Court of Appeals for the Ninth Circuit concluded that some, but not all, of the rights acquired by appellee were partially transferred to the new owners. The court agreed with appellant that appellee's franchise rights were not transferred, and held that the tax court erred in including the cost of acquiring these rights in its calculation of appellee's basis. The court concluded that a portion of the remaining basic nonterminable rights was transferred. The court reversed the decision and remanded. The court instructed the tax court to determine whether there was sufficient evidence to ascertain the cost of the rights that were transferred.
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