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joint venture through which any business or venture is carried
on, and which is not a corporation, trust, or estate). The
nature of an item of income, gain, loss, deduction, or credit is
determined in the hands of the partnership before distribution to
the partner. See sec. 702(b); Podell v. Commissioner, 55 T.C.
429, 432-433 (1970). Here, the trade or business of the joint
venture included the acquisition, development, and sale to
customers of real estate. Consequently, the 40 acres did not
constitute a capital asset, and the income realized by the joint
venture on the sale of the 40 acres was ordinary income. See
Podell v. Commissioner, supra at 433.
We sustain respondent’s determination on this issue.
Issue 4. Deductibility of Liability Under Letter of Credit
Background
On August 16, 1988, Towers Construction entered into a
contract (the construction contract) with Key West Polo Club
Apartments, Ltd. (Key West Polo), to build apartments in Key
West, Florida. Because of poor credit, Towers Construction was
unable to secure bonding. On August 22, 1988, Columbus Bank &
Trust Co. of Columbus, Georgia (CB&T), established with Towers
Construction a $460,000 irrevocable letter of credit (the letter
of credit), which states that it was given in lieu of Towers
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