                        T.C. Memo. 1996-547



                      UNITED STATES TAX COURT



     70 ACRE RECOGNITION EQUIPMENT PARTNERSHIP, BOOTH CREEK
      INVESTMENT, INC., TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6558-91.                  Filed December 18, 1996.



     William R. Cousins III, Joel N. Crouch, and Josh O.

Ungerman, for petitioner.

     Alvin A. Ohm and Abbey B. Garber, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notice of final partnership administrative

adjustment dated January 8, 1991, respondent determined

adjustments to items claimed on 70 Acre Recognition Equipment

Partnership's 1983 return.   Unless otherwise indicated, all
                                - 2 -

section references are to the Internal Revenue Code for the year

in issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.   After concessions, the sole issue for

decision is whether Booth Creek Investment, Inc., and State

Savings and Loan Association of Lubbock formed a valid

partnership for tax purposes.    We conclude that they did.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.     At

the time the petition was filed, the principal place of business

of 70 Acre Recognition Equipment Partnership was in Dallas,

Texas.

     Booth Creek Investment, Inc. (BCI), was a corporation formed

under Texas law.   Its primary activity was the purchase of real

estate for immediate resale.    BCI participated in the booming

Texas real estate market of the early 1980's, and it executed

transactions quickly and frequently.    BCI engaged in numerous

joint purchases of real estate, and written partnership

agreements were not always executed.

     In 1982, BCI became interested in purchasing approximately

70 acres of real estate (the 70-Acre Tract) from Recognition

Equipment Inc. (REI).   On December 23, 1982, BCI and REI entered

into an agreement entitled "CONTRACT OF SALE" whereby BCI agreed

to purchase, and REI agreed to sell, the 70-Acre Tract.

Consistent with its past investment strategy, BCI intended to

quickly develop and sell the property for substantial profit.
                                - 3 -

The purchase price was agreed to be $4.30 per square foot

multiplied by the property's total square feet.   The contract

provided that REI would finance part of the contract price and

that the remainder would be paid in cash.

     BCI needed to raise funds to pay the cash portion of the

purchase price.   It approached Leonard Thomas, a real estate

agent and mortgage broker, to locate a party willing to finance a

portion of the acquisition.   Mr. Thomas brought BCI and State

Savings and Loan Association of Lubbock (State Savings) together.

He previously had been hired by State Savings to find profitable

real estate investments for the institution.   Mr. Thomas had

arranged 20 to 30 such investments for State Savings.    After the

closing of each deal, Mr. Thomas monitored the investment on

behalf of State Savings.

     State Savings was wholly owned by Terry Barker.    When Mr.

Barker acquired it, the institution was experiencing severe

financial difficulties.    Mr. Barker had no previous experience in

the savings and loan industry and often complained about

regulatory restrictions on the ability of a savings and loan

institution to participate in the business dealings of its

clients.   In a bid to earn profits and save the institution, Mr.

Barker arranged for State Savings to finance numerous real estate

transactions in which the institution shared the profits.

     By commitment letter dated March 18, 1983, State Savings

offered to finance the least of (1) $6,400,000, (2) the appraised
                               - 4 -

value of the 70-Acre Tract, or (3) 100 percent of actual

development costs.   In exchange, State Savings required

(1) repayment with interest calculated on a floating rate with a

14-percent floor and (2) a 50-percent interest in net profits

from the sale of the 70-Acre Tract.     By separate letter on the

same date, State Savings offered to purchase the 70-Acre Tract

and give BCI a 50-percent interest in net profits in the event

that State Savings could not lend the necessary funds to BCI and

BCI was otherwise prepared to purchase the land.

     On March 25, 1983, the purchase of the 70-Acre Tract closed.

On the same date, BCI sold 25 acres of the 70-Acre Tract (the 25-

Acre Tract) for $6,950,978 in cash.     The remaining 45 acres were

never sold by BCI.   Some of the funds from the sale of the 25-

Acre Tract were applied to closing expenses, and the remainder

was used to satisfy the cash portion of the 70-Acre Tract

purchase price.   BCI purchased the 70-Acre Tract for $13,228,021

and took title solely in its name.     It paid $6,334,514 in cash

and issued two nonrecourse promissory notes payable to REI for

the balance.   The promissory notes were secured by a deed of

trust on part of the 70-Acre Tract, and Hal Pettigrew, BCI's

president and founder, personally guaranteed payment.

     Also on March 25, 1983, BCI issued a promissory note payable

to State Savings in exchange for a $1,800,000 nonrecourse loan.

This amount was later increased to $2,830,000.     The funds were

necessary to build roads and install utilities on part of the 70-
                                - 5 -

Acre Tract.    The promissory note provided for calculation of

interest and repayment by BCI on or before a specific date.        It

was secured by a deed of trust in favor of State Savings.

     On July 11, 1984, an information return was filed for the

1983 tax year in the name of 70 Acre Recognition Equipment

Partnership.    The return indicated that the sale of the 25-Acre

Tract had produced a $2,587,365 short-term capital gain.

Schedules K-1 (Partner's Share of Income, Credits, Deductions,

etc.) attached to the return allocated 50 percent of the short-

term capital gain to BCI and the other 50 percent to State

Savings.   BCI reported its share of the short-term capital gain

on its corporate income tax return.

     On January 8, 1991, respondent issued a notice of final

partnership administrative adjustment.      In it, respondent reduced

the short-term capital gain to $2,170,571.      Respondent

determined, however, that BCI and State Savings had not formed a

valid partnership for tax purposes.      As a result, respondent

allocated 100 percent of the gain to BCI.

                               OPINION

     Section 761(a) defines a partnership as including "a

syndicate, group, pool, joint venture or other unincorporated

organization through or by means of which any business, financial

operation, or venture is carried on, and which is not * * * a

corporation or a trust or estate."      See also sec. 7701(a)(2).

Whether a partnership exists for tax purposes is determined under
                               - 6 -

Federal law.   Hensel Phelps Constr. Co. v. Commissioner, 74 T.C.

939, 947-948 (1980), affd. 703 F.2d 485 (10th Cir. 1983).    In

determining whether a partnership has been formed for tax

purposes, the Supreme Court in Commissioner v. Culbertson, 337

U.S. 733, 742 (1949), held that the inquiry is:

     whether, considering all the facts--the agreement, the
     conduct of the parties in execution of its provisions,
     their statements, the testimony of disinterested
     persons, the relationship of the parties, their
     respective abilities and capital contributions, the
     actual control of income and the purposes for which it
     is used, and any other facts throwing light on their
     true intent--the parties in good faith and acting with
     a business purpose intended to join together in the
     present conduct of the enterprise. * * * [Fn. ref.
     omitted.]

The determination of whether the parties intended to enter into a

partnership is a question of fact.     See Commissioner v. Tower,

327 U.S. 280, 287 (1946).

     A joint venture has been defined as a special combination of

two or more persons, where in some specific venture a profit is

jointly sought without any actual partnership or corporate

designation.   Beck Chem. Equip. Corp. v. Commissioner, 27 T.C.

840, 848 (1957).   The partnership analysis set out in Culbertson

is equally applicable to determining whether a joint venture

exists.   Luna v. Commissioner, 42 T.C. 1067, 1077 (1964).    As a

result, we must determine whether State Savings and BCI intended

to, and did, join together in the present conduct of such an

enterprise.
                                - 7 -

     As a preliminary matter, we consider respondent's contention

that petitioner's agent Coopers & Lybrand has admitted the

nonexistence of a valid partnership.    In a letter to respondent,

Coopers & Lybrand stated that they agreed with respondent's

determination that BCI and State Savings had not formed a valid

partnership.    This letter represents nothing more than an

accountant's conclusion after applying law to facts.    We must

conduct our own analysis.

     Representatives of BCI and State Savings testified that they

intended to form a partnership at the time of the transaction,

and we found them to be highly credible witnesses.    The parties

agreed that BCI would contribute real estate expertise and manage

the property, while State Savings would make funds available for

the acquisition or development of the 70-Acre Tract.    In

addition, the partnership filed contemporaneous information

returns and issued Schedules K-1.

     Respondent contends that State Savings contributed nothing

of value to the partnership.    Petitioner contends, however, that

the parties to the transaction considered State Savings'

commitment to make funds available a contribution of a valuable

service.    The Supreme Court has indicated that the services or

capital contributed by a partner need not meet an objective

standard.    See Commissioner v. Culbertson, supra at 742-743.     The

Court further stated:
                               - 8 -

     If, upon a consideration of all the facts, it is found
     that the partners joined together in good faith to
     conduct a business, having agreed that the services or
     capital to be contributed presently by each is of such
     value to the partnership that the contributor should
     participate in the distribution of profits, that is
     sufficient. The Tower case did not purport to
     authorize the Tax Court to substitute its judgment for
     that of the parties; it simply furnished some guides to
     the determination of their true intent. * * * [Id. at
     744-745.]

We believe that, in the unique circumstances of this no-cash,

quick-turn-around real estate transaction, the parties agreed

that State Savings' commitment to stand ready to make necessary

loans was a service of sufficient value to warrant its inclusion

in a partnership.   Having made this determination, we will heed

the Supreme Court's directive and decline to substitute our

judgment for that of the parties.   The parties intended to, and

did, enter into a partnership valid for tax purposes.

     The March 25, 1983, commitment letter from State Savings to

BCI, wherein State Savings promised to purchase the 70-Acre Tract

if State Savings could not make the requisite loans, supports our

conclusion.   In effect, each party to the transaction stood ready

to (1) take title to the land and (2) share the profits equally

with the other partner.   This willingness on the part of State

Savings to bear the risks associated with ownership removes it

from the realm of the ordinary lender.

     Respondent contends that a number of factors preclude a

finding that BCI and State Savings entered into a partnership

valid for tax purposes.   First, respondent emphasizes the absence
                                - 9 -

of a written partnership agreement as evidence that no

partnership was formed.   Petitioner correctly states, however,

that the law does not require a written partnership agreement.

See, e.g., Ayrton Metal Co. v. Commissioner, 34 T.C. 464, 472

(1960), affd. in part and revd. in part 299 F.2d 741 (2d Cir.

1962); cf. Commissioner v. Culbertson, supra at 736 (concerning

an oral partnership agreement).   Second, respondent contends that

State Savings did not contribute capital or services of

sufficient value to warrant its inclusion in a partnership.     We

have concluded, however, that in the unique circumstances of this

case, BCI valued State Savings' provision of credit.   Third,

respondent emphasizes the lack of documentary evidence supporting

the existence of a partnership.   In light of both parties' rather

casual methods of operation, together with Mr. Barker's attitude

toward applicable regulatory restrictions, the paucity of

documentation in this case is not surprising.   Fourth, respondent

contends that no document conferred on State Savings the right to

jointly manage the 70-Acre Tract (and later the remaining 45

acres).    State Savings, however, delegated day-to-day management

and development responsibility to BCI and supervised the

venture's progress through Mr. Thomas.   Given BCI's expertise in

developing real estate, we do not consider this arrangement

unusual.    Fifth, respondent emphasizes that State Savings did not

agree to share in losses.   Sharing of losses, however, is not

required.   See McDougal v. Commissioner, 62 T.C. 720, 725 (1974).
                              - 10 -

     In short, respondent fails to consider the highly unusual

facts and circumstances of this case.    Neither party was required

to contribute cash for the purchase of the 70-Acre Tract.    The

gain from resale of part of the 70-Acre Tract was realized on the

same day it was purchased.   Documents were executed in the name

of only one partner for the sake of administrative convenience.

State Savings was purposefully recognized as a partner by BCI in

consideration of the performance of a valuable service (i.e.,

making credit available for the transaction).

     Accordingly, we hold that BCI and State Savings formed a

partnership valid for tax purposes.    As a result, the partnership

properly allocated 50 percent of the gain realized from the sale

of the 25-Acre Tract to State Savings.

     We have considered all other arguments made by petitioner

and respondent and found them to be either irrelevant or without

merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for petitioner.
