Philip Long v. Commissioner of IRS
2014 U.S. App. LEXIS 21876
| 11th Cir. | 2014Background
- Long (sole proprietor of Las Olas Tower Company) negotiated a Riverside Agreement to buy land and later obtained a Florida judgment enforcing that contract; he sold his position in the related litigation (assignment of his plaintiff’s rights) to Ferris for $5,750,000 in 2006.
- Long had prior arrangements with Steelervest (creditor/participant in related ventures); an Amended AJV Agreement changed Long’s obligations and Steelervest accepted $600,000 in settlement of its claims.
- Long reported $0 taxable income for 2006; IRS issued a notice of deficiency asserting ~$4.15 million taxable income and $1.43 million tax liability.
- At Tax Court trial Long argued the $5.75 million was long‑term capital gain and that the $600,000 paid to Steelervest was deductible (or reduced income); he also sought to deduct ~$238,000 in legal fees but proffered only an attorney letter which the Tax Court excluded as hearsay and he abandoned the claim.
- Tax Court held the $5.75 million was ordinary income (substitute for ordinary income) and rejected deductibility of the $600,000 and the unproven legal fees; this Court reversed characterization of the $5.75 million as ordinary income and remanded, but affirmed the disallowance of the $600,000 deduction and the legal‑fee deduction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Characterization of $5.75M (capital gain v. ordinary income) | Long: sale was of a contractual/judgment right (asset) held >1 year, so long‑term capital gain | IRS: lump sum was a substitute for future ordinary income; short‑term if not long‑term | Reversed Tax Court: sale was of assignable contractual right (capital asset); substitute‑for‑ordinary‑income doctrine does not apply here — capital gains treatment on remand |
| Treatment of $600,000 paid to Steelervest | Long: payment was a deductible business expense or profit participation reduction of income | IRS: payment was repayment/substituted obligation of indebtedness — non‑deductible | Affirmed: Long failed to meet burden to prove deduction; payment characterized as loan repayment/non‑deductible |
| Deductibility of ~$238k legal fees | Long: attorney letter shows additional deductible legal fees paid in 2006 | IRS: letter is inadmissible hearsay and insufficient proof | Affirmed: letter excluded as hearsay; taxpayer abandoned at trial and failed to carry burden of proof |
| Timing/holding period for asset sold | Long: he held the right since 2002 (Riverside Agreement) or at least since filing suit in 2004, satisfying >1 year | IRS: proceeds were short‑term because judgment was entered in 2005 and sale in 2006 | Court: holding period measured from acquisition of assignable right (Riverside Agreement/filing), so long‑term treatment appropriate on remand |
Key Cases Cited
- Comm’r v. P.G. Lake, Inc., 356 U.S. 260 (doctrine that lump‑sum paid in lieu of future ordinary income is taxable as ordinary income)
- Womack v. Comm’r, 510 F.3d 1295 (11th Cir. 2007) (capital asset definition construed narrowly; analysis of substitute‑for‑ordinary‑income doctrine)
- Tufts v. Comm’r, 461 U.S. 300 (loan proceeds and repayments do not qualify as income or deductible when repaying indebtedness)
- Pounds v. United States, 372 F.2d 342 (5th Cir. 1967) (contractual/assignment rights can be capital assets)
- United States v. Dresser Indus., Inc., 324 F.2d 56 (5th Cir. 1963) (sale of right to earn future undetermined income can be capital in nature)