The IRS is auditing your client, Artis, on the tax treatment of disposition of an interest in the ABC Partnership. Here’s the background: Partner Artis received $100,000 of cash from ABC Partnership on July 1, 2021, to retire her entire interest in ABC (ABC continues to operate). ABC is a service provider (consulting services), and Artis was a general partner. The ABC General Partnership agreement, which was drafted in 2016, did not explain how a retiring partner would be paid for their share of partnership goodwill. In 2020, the partnership executed an ‘‘Amendment of General Partnership Agreement,’’ which provided that Partner Artis was to receive $100,000 cash from the partnership on July 1, 2021, to retire the partnership interest. It continued to state that $30,000 of that amount was “in return for Artis’s one-third interest in the fair market value of the net assets of the partnership and the other $70,000 was a guaranteed payment, or a payment for goodwill.’’

Saying that the ‘‘Amendment of General Partnership Agreement’’ is not clear, the IRS wants to treat the payment for goodwill as ordinary income to Artis and deductible by the partnership. (This approach maximizes the tax revenue for the government.) Your manager recalls that a Tax Court case from several years ago addresses partnership agreements and goodwill. (The manager said “maybe it’s ‘Jordan’ or ‘Jackson’ or something.”) Use Checkpoint to research this issue. Can you find such a case? If so, does it help Artis’s position that she should receive a return of basis and capital gain treatment for the “goodwill” portion of the payment? Describe whether and how any subsequent cases have modified this ruling.