McDougal v. Commissioner - 62 T.C. 720 (1974)

Rule:

A joint venture is deemed to arise when two or more persons agree, expressly or impliedly, to enter actively upon a specific business enterprise, the purpose of which is the pursuit of profit; the ownership of whose productive assets and of the profits generated by them is shared; the parties to which all bear the burden of any loss; and the management of which is not confined to a single participant, Estate of Kahn v. Commissioner, 499 F. 2d 1186.

Facts:

As compensation for services rendered, the McDougals gave McClanahan a 50-percent interest in the capital and profits of a joint venture to which the McDougals contributed appreciated property. The trial court found that the transfer of October 4, 1968, gave rise to a joint venture to which the McDougals are deemed to have contributed Iron Card and in which they are deemed to have granted McClanahan an interest in the capital and profits thereof, equal to their own, as compensation for his having trained Iron Card. The trial court also found that the McClanahans failed to report $ 500 of income for the year 1969. 

Issue:

Did the McDougals' transfer of a one-half interest in the racehorse, Iron Card, to Gilbert McClanahan constitute a contribution to a joint venture previously or contemporaneously formed by the McDougals and Gilbert McClanahan?

Answer:

Yes.

Conclusion:

The court held that the McDougals recognized gain to the extent that the value of a half interest in the contributed property exceeded the McDougal's adjusted basis in the aforesaid half interest. It further held that in determining the joint venture's basis in the contributed property, it is to be deemed that the McDougals transferred a half interest in the said property to McClanahan and thereafter, in concert with him, contributed the entire asset to the venture.