In 2003, an LLC bought oil and gas properties from another corporation and asked the corporate executives to manage the wells. The executives, which included the defendant, founded a limited partnership to manage exploration and production of the properties. The LLC loaned made a $6 million non-recourse loan to the LP for working capital. Ultimately, the LP wound up with a 20 percent interest in the sale revenue after the LLC recovered expenses and had a 10 percent return on investment. the LP partners limited tied their salaries to profits such that if the LLC earned nothing the partners did not have any profit. The LP arranged for the LLC to sell the properties with the LP's interest being approximately $20 million which it reported as ordinary income. Two years later, the LP filed an amended return reporting the $20 million as capital gain resulting from the sale of a partnership interest. Amended K-1s were issued to the partners, including the defendant. IRS issued refunds, but then later changed its mind and asserted that the income ordinary in nature as compensation for services rendered. The issue before the court was whether the LP had a profits interest for services, or whether the relationship with the LLC meant that the arrangement was compensation for services provided in arranging the sale of the oil and gas properties (i.e., a commission for sale). The IRS claimed that a partnership did not exist for tax purposes because the entity agreement disclaimed the existence of a partnership, the LLC contributed the funds and controlled the funds, owned the assets and the LP was not at risk. The IRS also argued that the LP was a mere contract employee. The LP claimed that it was a partnership for tax purposes and that it had exchanged the partners time and talent for a profit share. The court determined that the LP was a partnership for tax purposes based on the objective facts of the parties' relationship and ownership interest in the value of the oil and gas operation. Thus, because a partnership interest is a capital asset, the resulting income from the sale is capital gain. The IRS did not argue that the LP partners had actually received a partnership interest for services which would result in ordinary income when the interest was issued. United States v. Stewart, et al., No. H-10-294, 2015 U.S. Dist. LEXIS 110055 (S.D. Tex. Aug. 20, 2015).