- 25 -
Section 1.704-1(e)(1)(iv), Income Tax Regs.,
establishes the following test for determining whether
capital is a "material income-producing factor":
Capital as a material income-producing factor.
For purposes of section 704(e)(1), the deter-
mination as to whether capital is a material
income-producing factor must be made by
reference to all the facts of each case.
Capital is a material income-producing factor
if a substantial portion of the gross income
of the business is attributable to the employ-
ment of capital in the business conducted by
the partnership. In general, capital is not
a material income-producing factor where the
income of the business consists primarily of
fees, commissions, or other compensation for
personal services performed by members or
employees of the partnership. On the other
hand, capital is ordinarily a material income-
producing factor if the operation of the business
requires substantial inventories or a substantial
investment in plant, machinery, or other equip-
ment.
See generally, Ketter v. Commissioner, supra.
In viewing the fact that any income from the
enterprise in this case would be attributable to the
purchase of a winning Lotto ticket, or to the investment of
the proceeds of a winning ticket, and none of the income
would consist "of fees, commissions, or other compensation
for personal services performed by members or employees of
the partnership", it is clear that capital is a material
income-producing factor in the enterprise. Sec. 1.704-
1(e)(1)(iv), Income Tax Regs. Thus, pursuant to section
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011