Respondent had managed and controlled a manufacturing business
since 1927. From 1933 to 1937, it was operated as a corporation. He
was president, owning 445 out of 500 shares; his wife was nominal
vice-president, owning five shares, and one Amidon was secretary,
owning 25 shares. Respondent transferred 190 shares to his wife,
paying a gift tax, and, three days later, in order to save taxes,
the corporation was dissolved and a partnership was organized
consisting of respondent and Amidon as general partners and
respondent's wife as a limited partner, with no authority to
participate in the conduct of the business. Each contributed the
value of his stock, and no new capital was contributed. Respondent
continued to manage and control the business, which was conducted
as before except that respondent and Amidon ceased to draw
salaries. The wife contributed no services to the business, and
used her share of the income to buy the same type of things she had
bought for herself, home, and family before the partnership was
1. These facts were sufficient to support a finding by the Tax
Court that, as between respondent and his wife, no genuine
"partnership" within the meaning of 26 U.S.C. §§ 181, 182, existed,
that respondent earned the income, and that he should be taxed on
it under 26 U.S.C. § 22(a). Pp. 327 U. S. 286
327 U. S.
2. A finding of fact by the Tax Court, being supported by
evidence, is final. P. 327 U. S.
3. In passing on the question whether an alleged partnership is
a real partnership within the meaning of the federal tax laws, the
Tax Court is not governed by the treatment of the partnership by
state law and decisions for purposes of state law. P. 327 U. S.
4. While the legal right of a taxpayer to decrease the amount of
what otherwise would be his taxes or altogether avoid them by means
which the law permits cannot be doubted, Gregory v.
Helvering, 293 U. S. 465
this Court cannot order the Tax Court to shut its eyes to the
realities of tax avoidance schemes. P. 327 U. S.
Page 327 U. S. 281
5. In passing on the applicability of 26 U.S.C. §§ 181, 182, to
income from a "family partnership" --
(a) The question is not simply who actually owned a share of the
capital attributed to the wife on the partnership books, but who
earned the income. P. 327 U. S.
(b) In this case, that issue depends on whether the husband and
wife really intended to carry on business as a partnership. P.
327 U. S.
(c) These issues cannot be decided simply by looking at a single
step in a complicated transaction. Pp. 327 U. S.
(d) To decide who worked for, otherwise created, or controlled
the income, all steps in the process of earning the profits must be
taken into consideration. Pp. 327 U. S.
6. A wife may become a general or limited partner with her
husband for tax, as for other, purposes, but, when the husband
purports to have given her a partnership interest, she does not
share in the management and control of the business, and she
contributes no vital additional service, the Tax Court may properly
take these circumstances into consideration in determining whether
the partnership is real within the meaning of the federal tax laws.
P. 327 U. S.
7. If, in the circumstances of this case, the end result of the
creation of a husband-wife partnership, though valid under state
laws, is that income produced by the husband's efforts continues to
be used for the same business and family purposes as before the
partnership, failure to tax it as the husband's income would
frustrate the purpose of 26 U.S.C. § 22(a), defining gross income
as including all earnings of any individual from "any source
whatever." P. 327 U. S.
8. Single tax earnings cannot be divided into two tax units and
surtaxes avoided by the simple expedient of drawing up papers
creating a husband-wife partnership. P. 327 U. S.
148 F.2d 388, reversed.
The Commissioner of Internal Revenue levied a deficiency
assessment against respondent on the ground that the part of the
earnings of a "family partnership" which had been paid to, and
reported by, his wife actually had been earned by respondent, and
should have been reported as his income. The Tax Court sustained
the levy. 3 T.C. 396. The circuit court of appeals reversed.
Page 327 U. S. 282
F.2d 388. This Court granted certiorari. 326 U.S. 703.
p. 327 U. S.
MR. JUSTICE BLACK delivered the opinion of the Court.
The Commissioner of Internal Revenue determined that
respondent's wife had, in her income tax returns for 1940 and 1941,
reported as her earnings income that actually had been earned by
her husband but had not been reported in his returns. A deficiency
assessment was consequently levied against the respondent by the
Commissioner. The particular earnings involved were a portion of
net income attributed to a partnership, to which, according to its
records, 90 percent of the capital had been contributed by
respondent and his wife; of this, 51 percent had been contributed
by the respondent and 39 percent by his wife. If, as respondent
asserts, the circumstances surrounding the formation and operation
of this partnership were such as to bring it within the meaning of
Sections 181 and 182 of Title 26 of the United States Code, then
the respondent and his wife are liable only for their respective
individual share of the business' income. These sections provide
that partners are liable for taxes on partnership income only in
their "individual capacity," and that each partner shall report
"his distributive share of the ordinary net income . . . of the
partnership." But Section 11 of Title 26 of the United States Code
levies a tax on the "net income of every individual," and the "net
income" is required to be computed on the basis of "gross income"
as defined in Section 22(a), which broadly includes
Page 327 U. S. 283
all earnings of any individual from "any source whatever." And
we have held that the dominant purposes of all sections of the
revenue laws, including these, is "the taxation of income to those
who earn or otherwise create the right to receive it and enjoy the
benefit of it when paid." Helvering v. Horst, 311 U.
, 311 U. S. 119
The basic question in deciding whether the Commissioner's
deficiency assessment was proper, is: was the income attributed to
the wife as a partner income from a partnership for which she alone
was liable in her "individual capacity," as provided by 26 U.S.C.
§§ 181, 182, or did the husband, despite the claimed partnership,
actually create the right to receive and enjoy the benefit of the
income so as to make it taxable to him under Sections 11 and
The respondent asked the Tax Court to review and redetermine the
Commissioner's deficiency assessment, insisting that the income in
question was not the respondent's, but his wife's, share in a
partnership. The Commissioner urged in the Tax Court that the wife
had contributed neither services nor capital to the partnership,
and that her alleged membership in the partnership was a sham.
Respondent admitted that she had not contributed her services, but
contended that she had made a contribution of capital as shown by
the amount attributed to her on the partnership books, and that she
was a bona fide
partner. Her alleged contribution
consisted of assets which the husband claimed to have given to her
three days before the formation of the partnership.
The Tax Court concluded that the respondent had never executed a
complete gift of the assets which his wife later purportedly
contributed to the partnership; that, after the partnership was
formed, respondent continued to manage and control the business as
he had done for many years before; that his economic relation to
the portion of the partnership income which was attributed to his
wife was such that it continued to be available to be used for
Page 327 U. S. 284
same purposes as before, including ordinary family purposes;
that the effect of the whole partnership arrangement, so far as it
involved respondent and his wife, was a mere reallocation of
respondent's business income within the family group, and that the
dissolution of the corporation and the subsequent formation of the
partnership fulfilled no business purpose other than a reduction of
the husband's income tax. The Tax Court concluded that this family
partnership income was, in fact, earned by the husband; that there
was no real partnership between petitioner and his wife for
purposes of carrying on a business enterprise; that the wife
received a portion of the income "only by reason of her marital
relationship," and held that the entire income was therefore
taxable to the respondent under 26 U.S.C. § 22(a), 3 T.C. 396. The
Circuit Court of Appeals for the Sixth Circuit reversed. 148 F.2d
388. The Circuit Court of Appeals for the Third Circuit Court
sustained a holding by the Tax Court, 3 T.C. 540, based on facts in
all material respects similar to the ones in this case, that all
the income from a husband-wife partnership was taxable income of
the husband under 26 U.S.C. § 22(a). Lusthaus v.
149 F.2d 232. Other Circuit Courts of Appeals
have also sustained similar holdings by the Tax Court. [Footnote 1
] As is indicated by numerous
Tax Court decisions, attempts to escape surtaxes by dividing one
earned income into two or more through the device of family
partnerships have recently created an acute problem. [Footnote 2
] Because of the various views
expressed as to controlling legal principles in the decisions
discussing such arrangements, we granted certiorari both in this
and the Lusthaus
p. 327 U. S. 293
Page 327 U. S. 285
A statement of some of the pertinent facts shown by the record
and on which the Tax Court based its conclusion will cast some
light on the problem. Broadly speaking, these facts follow a
general pattern found in many of the "family partnership" cases.
The business here involved, R. J. Tower Iron Works, is located in
Greenville, Michigan, and has manufactured and sold sawmill
machinery and wood and metal stampings. Respondent's participation
in the business dates back twenty-eight years. He has managed and
controlled the company since the death of his father in 1927.
During the tax years in question, the business had forty to sixty
employees on its pay roll. From 1933 to 1937, the business was
operated as a corporation. The respondent was the president of the
corporation and owned 445 out of the 500 shares outstanding,
] his wife was
vice-president and owned five shares, and one Mr. Amidon was the
secretary, owning twenty-five shares. These three also constituted
the Board of Directors, and, while Tower managed the corporate
affairs, Amidon acted as bookkeeper. Mrs. Tower performed no
In 1937, substantial profits pointed to increased taxes.
Respondent's attorney and his tax accountant advised him that
dissolution of the corporation and formation of a partnership with
his wife as a principal partner would result in tax savings and
eliminate the necessity of filing various corporate returns. The
suggested change was put into effect. August 25, 1937, respondent
transferred 190 shares of the corporation's stock to his wife on
the condition that she place the corporate assets represented by
these shares into the new partnership. Respondent, treating the
stock transfer to his wife as a gift valued at $57,000, later paid
a gift tax of $213.44. Three days
Page 327 U. S. 286
after the stock transfer, the corporation was liquidated, a
limited partnership was formed, and a certificate of partnership
was duly filed for record as required by Michigan law. According to
the books, the value of the donated stock became the wife's
contribution to the partnership. The formation of the partnership
did not in any way alter the conduct of the business, except that
both Amidon and Tower ceased to draw salaries. By an agreement made
shortly thereafter, a readjustment was made in the amount of
profits each partner was to receive, under which Amidon's share
became the equivalent of, if not more than, the amount of the
salary he had previously drawn. Under the partnership agreement,
the respondent continued to have the controlling voice in the
business as to purchases, sales, salaries, the time of distribution
of income, and all other essentials. Respondent's wife, as a
limited partner, was prohibited from participation in the conduct
of the business. So far as appears, the part of her purported share
of the partnership business she actually expended was used to buy
what a husband usually buys for his wife, such as clothes and
things for the family or to carry on activities ordinarily of
interest to the family as a group.
We are of the opinion that the foregoing facts were sufficient
to support the Tax Court's finding that the wife was not a partner
in the business. [Footnote 4
partnership is generally said to be created when persons join
together their money, goods, labor, or skill for the purpose of
carrying on a trade, profession, or business and when there is
community of interest in the profits and losses. [Footnote 5
] When the existence of
Page 327 U. S. 287
an alleged partnership arrangement is challenged by outsiders,
the question arises whether the partners really and truly intended
to join together for the purpose of carrying on business and
sharing in the profits or losses or both. And their intention in
this respect is a question of fact, to be determined from testimony
disclosed by their "agreement, considered as a whole, and by their
conduct in execution of its provisions." Drennen v. London
Assurance Co., 113 U. S. 51
113 U. S. 56
Cox v. Hickman,
8 H.L.Cas. 268. We see no reason why this
general rule should not apply in tax cases where the government
challenges the existence of a partnership for tax purposes.
] Here, the Tax
Court, acting pursuant to its authority in connection with the
enforcement of federal laws, has found from testimony before it
that respondent and his wife did not intend to carry on business as
a partnership. This finding of fact, since supported by evidence,
is final. Commissioner v. Heininger, 320 U.
, 320 U. S. 475
Dobson v. Commissioner, 320 U. S. 489
decision of the Tax Court was therefore correct unless, as
respondent contends, the Tax Court erroneously disregarded or
improperly applied certain legal principles.
Respondent contends that the partnership arrangement here in
question would have been valid under Michigan law, and argues that
the Tax Court should consequently have held it valid for tax
purposes also. But the Tax Court in making a final authoritative
finding on the question whether this was a real partnership is not
governed by how Michigan law might treat the same circumstances for
purposes of state law. Thus, Michigan could and might decide that
the stock transfer here was sufficient under state law to pass
title to the wife, so that, in the
Page 327 U. S. 288
event of her death it would pass to whatever members of her
family would be entitled to receive it under Michigan's law of
descent and distribution . But Michigan cannot, by its decisions
and laws governing questions over which it has final say, also
decide issues of federal tax law, and thus hamper the effective
enforcement of a valid federal tax levied against earned income.
The contention was rejected in Lucas v. Earl, 281 U.
. There, husband and wife made an agreement for
joint ownership of the husband's future income. Assuming that the
husband's future earnings were, under California law, considered as
partly owned by the wife, this Court refused to accept the state's
concept of the effect of the agreement which would have reduced the
federal tax on income actually earned by the husband. And, in
Helvering v. Clifford, 309 U. S. 331
309 U. S.
-335, we held that the purpose of 26 U.S.C. § 22(a)
to tax all income against the person who controlled its
distribution could not be frustrated by family group arrangements,
even though the distribution arrangements were valid for state law
purposes. The statutes of Congress designed to tax income actually
earned because of the capital and efforts of each individual member
of a joint enterprise are not to be frustrated by state laws which,
for state purposes, prescribe the relations of the members to each
other and to outsiders. Cf. Burk-Waggoner Oil Assn. v.
Hopkins, 269 U. S. 110
269 U. S. 114
Respondent contends that the Tax Court's holding that he is
taxable for the profits from the partnership is contrary to a
principle long recognized by this Court that
"The legal right of a taxpayer to decrease the amount of what
would otherwise be his taxes, or altogether avoid them, by means
which the law permits, cannot be doubted."
Gregory v. Helvering, 293 U. S. 465
293 U. S. 469
We do not reject that principle. It would clearly apply, for
example, in a situation where a member of a partnership,
Page 327 U. S. 289
in order to keep from paying future taxes on partnership profits
and in order to get into a lower income tax bracket, sells his
interest to a stranger, relinquishing all control of the business.
But the situation is different where the taxpayer draws a paper
purporting to sell his partnership interest even to a stranger,
though actually he continues to control the business to the extent
he had before the "sale" and channels the income to his wife. Then
a showing that the arrangement was made for the express purpose of
reducing taxes simply lends further support to the inference that
the husband still controls the income from his partnership
interest, that no partnership really exists, and that earnings are
really his, and are therefore taxable to him, and not to his wife.
The arrangement we are here considering was of the type where proof
of a motive to reduce income taxes simply lent further strength to
the inference drawn by the Tax Court that the wife was not really a
Paul, Selected Studies in Federal Taxation,
2d series, pp. 293-300. To rule otherwise would mean ordering the
Tax Court to shut its eyes to the realities of tax avoidance
Respondent urges further that the Tax Court erroneously
concluded that the gift was ineffective for tax purposes because it
was conditional, and therefore incomplete. The government defends
the Tax Court's conclusion. We do not find it necessary to decide
this issue. The question here is not simply who actually owned a
share of the capital attributed to the wife on the partnership
books. A person may be taxed on profits earned from property where
he neither owns nor controls it. Lucas v. Earl, supra.
] The issue is who
earned the income and that issue depends on whether this husband
and wife really intended to carry on business as a partnership.
Those issues cannot
Page 327 U. S. 290
be decided simply by looking at a single step in a complicated
transaction. To decide who worked for otherwise created or
controlled the income, all steps in the process of earning the
profits must be taken into consideration. See Commissioner v.
Court Holding Co., 324 U. S. 331
324 U. S. 334
Of course, the question of legal ownership of the capital
purportedly contributed by a wife will frequently throw light on
the broader question of whether an alleged partnership is real or
pretended. But here, the Tax Court's findings were supported by a
sufficient number of other factors in the transaction so that we
need not decide whether its holding as to the completeness of the
gift was correct. Cf. Helvering v. Hallock, 309 U.
, 309 U. S.
-118; Burnet v. Wells, 289 U.
, 289 U. S.
There can be no question that a wife and a husband may, under
certain circumstances, become partners for tax, as for other,
purposes. If she either invests capital originating with her or
substantially contributes to the control and management of the
business, or otherwise performs vital additional services, or does
all of these things she may be a partner as contemplated by 26
U.S.C. §§ 181, 182. The Tax Court has recognized that, under such
circumstances, the income belongs to the wife. [Footnote 8
] A wife may become a general or a
limited partner with her husband. But when she does not share in
the management and control of the business, contributes no vital
additional service, and where the husband purports in some way to
have given her a partnership interest, the Tax Court may properly
take these circumstances into consideration in determining whether
the partnership is real within the meaning of the federal revenue
It is the command of the taxpayer over the income which is the
concern of the tax laws. Harrison v. Schaffner,
312 U. S. 579
312 U. S.
-582. And income earned by one
Page 327 U. S. 291
person is taxable as his, if given to another for the donor's
satisfaction. Helvering v. Horst, 311 U.
, 311 U. S. 119
It is for this reason, among others, that we said in Helvering
v. Clifford, supra, 309 U. S. 335
that transactions between husband and wife calculated to reduce
family taxes should always be subjected to special scrutiny. For
if, under circumstances such as those now before us, the end result
of the creation of a husband-wife partnership, though valid under
state laws, is that income produced by the husband's efforts
continues to be used for the same business and family purposes as
before the partnership, failure to tax it as the husband's income
would frustrate the purpose of 26 U.S.C. § 22(a). By the simple
expedient of drawing up papers, single tax earnings cannot be
divided into two tax units, and surtaxes cannot be thus
Judged by the actual result achieved, the Tax Court was
justified in finding that the partnership here brought about no
real change in the economic relation of the husband and his wife to
the income in question. Before the partnership, the husband
managed, controlled, and did a good deal of the work involved in
running the business, and he had funds at his disposal which he
either used in the business or expended for family purposes. The
wife did not contribute her services to the business, and received
money from her husband for her own and family expenses. After the
partnership was formed, the husband continued to control and manage
the business exactly as he had before. The wife again took no part
in the management or operation of the business. If it be said that,
as a limited partner, she could not share in the management without
becoming a general partner, the result is the same. No capital not
available for use in the business before was brought into the
business as a result of the formation of the partnership. And the
wife drew on income which the partnership books attributed to her
only for purposes of buying and paying for the type of things she
Page 327 U. S. 292
for herself, home, and family before the partnership was formed.
Consequently, the result of the partnership was a mere paper
reallocation of income among the family members. The actualities of
their relation to the income did not change. There was thus more
than ample evidence to support the Tax Court's finding that no
genuine union for partnership business purposes was ever intended,
and that the husband earned the income. Whether the evidence would
have supported a different finding by the Tax Court is a question
not here presented.
THE CHIEF JUSTICE and MR. JUSTICE REED dissent for the reasons
stated in their dissenting opinion in Lusthaus v. Commissioner,
p. 327 U. S.
MR. JUSTICE JACKSON took no part in the consideration or
decision of this case.
Earp v. Jones,
131 F.2d 292; Mead v.
131 F.2d 323; Argo v. Commissioner,
F.2d 67; Lorenz v. Commissioner,
148 F.2d 527.
cases collected in Paul, Partnerships in Tax
Avoidance, 13 Geo.Wash.L.Rev. 121.
For about six months immediately following incorporation, the
respondent owned only 425 shares.
Since the Commissioner had determined that the wife was not
really a partner, the burden rested upon the respondent to produce
sufficient evidence to convince the Tax Court that the
Commissioner's determination was wrong. Welch v.
Helvering, 290 U. S. 111
Commissioner v. Heininger, 320 U.
, 320 U. S.
22 How. 330, 63 U. S.
-334; Meehan v. Valentine, 145 U.
, 145 U. S.
What would be the effect for tax purposes should taxpayers after
holding themselves out as a partnership later challenge the
existence of the partnership is a question not here presented.
See Higgins v. Smith, 308 U. S. 473
308 U. S.
Under some circumstances, income has been held taxable to a
person even when he does not own or control it. United States
v. Joliet & Chicago R. Co., 315 U. S.
, 315 U. S.
See e.g., Croft v. Commissioner,
T.C. No. 1432, decided
February 9, 1944.
MR. JUSTICE RUTLEDGE, concurring.
I agree with the result and with the Court's view that the
evidence was amply sufficient to sustain the Tax Court's findings
and conclusions in this case and in Lusthaus v. Commissioner,
p. 327 U. S. 293
Candor forces me to add, however, that, in my judgment, the
decisions' effect is to rule that, in situations of this character,
the formation of a limited partnership under state law between
husband and wife, with the latter as the limited partner, following
immediately upon the husband's donation to the wife of a share in
the assets of the business previously and afterwards conducted by
him and conditioned upon her leaving the assets in the business, as
a matter of federal tax law does not accomplish the formation of a
partnership sufficient to relieve the husband of tax liability for
the income derived after the transfer from use in the business of
the share thus donated to the wife. In other words, I think that,
as a matter of law, the taxpayers in these cases were
Page 327 U. S. 293
liable for the taxes assessed against them, including the
deficiency assessments, and therefore, in my opinion, the Tax Court
is not free in these or substantially similar circumstances to draw
either the contrary conclusion or opposing ones. While it is not
strictly necessary to express this opinion in these cases in view
of the Tax Court's consistent conclusions of liability, it is
inconceivable to me that the two cases, consistently with the
federal tax law, could be decided the other way, or with different
outcomes on the facts presented. Being of this opinion, I consider
the failure to state it could only tend to perpetuate a source of
possible confusion for the future.