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is one in which capital is a "material income-producing
factor", and (2) the person "owns" the partnership
interest. Ketter v. Commissioner, 70 T.C. 637, 643 (1978),
affd. without published opinion, 605 F.2d 1209 (8th Cir.
1979); see also Elrod v. Commissioner, 87 T.C. 1046, 1070-
1072 (1986). Section 704(e) states as follows:
(e) Family Partnerships.--
(1) Recognition of interest created by
purchase or gift.--A person shall be recognized
as a partner for the purposes of this subtitle
if he owns a capital interest in a partnership
in which capital is a material income-producing
factor, whether or not such interest was derived
by purchase or gift from any other person.
The purpose of section 704(e) is "to harmonize the
rules governing interests in so-called family partnerships
with those generally applicable to other forms of property
or business". S. Rept. 781, 82d Cong., 1st Sess. 39
(1951), 1951-2 C.B. 458, 485; H. Rept. 586, 82d Cong., 1st
Sess. 33 (1951), 1951-2 C.B. 357, 380-381. In the case of
a family partnership which derives income from the
ownership of property, as opposed to providing personal
services, section 704(e) makes it clear that the income is
taxable to the owner of a partnership interest if he or she
is the real owner. This is true even if the owner acquired
his or her partnership interest as an intra-family gift and
performs no substantial services for the partnership.
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