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entered into a purchase agreement in January 1998 for the 404-
acre subject property. Cherry conveyed the subject property
directly to Flagstaff Ranch on June 29, 1998, and the parties
closed escrow on June 30, 1998. All expenses incurred by FRGC in
1998 were directly connected to closing escrow on the subject
property. In fact, FRGC did not incur any of the expenses in
issue after June 30, 1998.
Partnership interests are capital assets pursuant to section
741. Citron v. Commissioner, 97 T.C. at 213; La Rue v.
Commissioner, 90 T.C. 465, 483 (1988). Pursuant to Flagstaff
Ranch’s private placement memorandum, upon acquisition of the
subject property, FRGC’s investors would receive interests in
Flagstaff Ranch equal to those held in FRGC. Although the
expenses in issue that were incurred by FRGC in 1998 could be
considered ordinary and necessary under different circumstances,
the facts of this case reflect that these expenses directly
related to acquiring property for Flagstaff Ranch. In substance,
FRGC performed services and due diligence to acquire property
that was contributed to Flagstaff Ranch in exchange for the
partnership interests. FRGC was a mere conduit for Flagstaff
Ranch’s expenses in acquiring the undeveloped land.
Accordingly, because FRGC’s investors received their
property interest in Flagstaff Ranch in exchange for FRGC’s
contribution of the property and work product, all expenses that
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