Respondent taxpayer, engaged in the business of breeding and
selling cattle, formed a family partnership with his four sons, to
whom he sold an undivided one-half interest in the business, taking
their promissory note therefor. The note was paid by proceeds from
the business and by gifts from respondent. The eldest son was,
before and after the formation of the partnership, foreman of the
ranch, and received compensation as such. In 1940, the first year
during which the partnership operated, the second son finished
college and went into the Army. The two younger sons went to school
in the winter and worked on the ranch in the summer. For the
taxable years 1940 and 1941, the Tax Court held that the entire
income of the business was taxable to respondent, on the ground
that the sons had not contributed to the partnership any capital
originating with them nor any vital services. The Court of Appeals
reversed, holding that the expectation that the sons would in the
future contribute their time and services was sufficient for
recognition of the partnership for income tax purposes.
Held:
1. Members of a partnership who contributed neither capital nor
services during the tax year cannot be regarded as "carrying on
business in partnership" within the meaning of § 181 of the
Internal Revenue Code. Pp.
337 U. S. 737-740.
(a) To hold that "individuals carrying on business in
partnership" includes persons who contribute nothing during the tax
period would violate the first principle of income taxation: that
income must be taxed to him who earns it. Pp.
337 U. S.
739-740.
(b) The intent to provide money, goods, labor, or skill sometime
in the future cannot satisfy the requirement of §§ 11 and 22(a) of
the Code that he who presently earns the income through his labor
and skill be taxed therefor. P.
337 U. S.
740.
2. In determining whether there was a true partnership for
income tax purposes, the fact that there was no contribution of
"original capital" or "vital services" is to be taken into
consideration, but it is not conclusive. Pp.
337 U. S.
741-745.
Page 337 U. S. 734
(a) The test is whether, considering all the facts -- the
agreement, the conduct of the parties in execution of its
provisions, their statements, the testimony of disinterested
persons, the relationship of the parties, their respective
abilities and capital contributions, the actual control of income
and the purposes for which it is used, and any other facts throwing
light on their true intent -- the parties in good faith and acting
with a business purpose intended to join together in the present
conduct of the enterprise. P.
337 U. S.
742.
(b) If, upon a consideration of all the facts, it is found that
the partners joined together in good faith to conduct a business,
having agreed that the services or capital to be contributed
presently by each is of sufficient value to the partnership that
the contributor should participate in the distribution of profits,
that is sufficient. Pp.
337 U. S.
744-745.
3. A contribution of "original capital" is not essential to
membership in a family partnership. Pp.
337 U. S.
745-748.
(a) A finding that no true partnership was intended is not to be
inferred automatically from the fact of a gift to a member of one's
family, followed by its investment in the family partnership. P.
337 U. S.
746.
(b) If the donee of property who then invests it in the family
partnership exercises dominion and control over that property --
and through that control influences the conduct of the partnership
and the disposition of its income -- he may well be a true partner.
P.
337 U. S.
747.
4. The cause must be remanded to the Tax Court for decision as
to which, if any, of respondent's sons were partners with him in
the operation of the business during the tax years in question. P.
337 U. S.
748.
168 F.2d 979 reversed.
The Commissioner's determination of a deficiency in respondent's
income tax for 1940 and 1941 was sustained by the Tax Court. The
Court of Appeals reversed. 168 F.2d 979. This Court granted
certiorari. 335 U.S. 883.
Reversed and remanded, p.
337 U. S.
748.
Page 337 U. S. 735
MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.
This case requires our further consideration of the family
partnership problem. The Commissioner of Internal Revenue ruled
that the entire income from a partnership allegedly entered into by
respondent and his four sons must be taxed to respondent, [
Footnote 1] and the Tax Court sustained
that determination. The Court of Appeals for the Fifth Circuit
reversed. 168 F.2d 979. We granted certiorari, 335 U.S. 883, to
consider the Commissioner's claim that the principles of
Commissioner v. Tower, 327 U. S. 280, and
Lusthaus v. Commissioner, 327 U.
S. 293, have been departed from in this and other courts
of appeals decisions.
Respondent taxpayer is a rancher. From 1915 until October, 1939,
he had operated a cattle business in partnership with R.S. Coon.
Coon, who had numerous business interests in the Southwest and had
largely financed the partnership, was 79 years old in 1939, and
desired to dissolve the partnership because of ill health. To that
end, the bulk of the partnership herd was sold until, in October of
that year, only about 1,500 head remained. These cattle were all
registered Herefords, the brood or foundation herd. Culbertson
wished to keep these cattle, and approached Coon with an offer of
$65 a head. Coon agreed to sell at that price, but only upon
Page 337 U. S. 736
condition that Culbertson would sell an undivided one-half
interest in the herd to his four sons at the same price. His
reasons for imposing this condition were his intense interest in
maintaining the Hereford strain which he and Culbertson had
developed, his conviction that Culbertson was too old to carry on
the work alone, and his personal interest in the Culbertson boys.
Culbertson's sons were enthusiastic about the proposition, so
respondent thereupon bought the remaining cattle from the Coon and
Culbertson partnership for $99,440. Two days later, Culbertson sold
an undivided one-half interest to the four boys, and, the following
day, they gave their father a note for $49,720 at 4 percent
interest due one year from date. Several months later, a new note
for $57,674 was executed by the boys to replace the earlier note.
The increase in amount covered the purchase by Culbertson and his
sons of other properties formerly owned by Coon and Culbertson.
This note was paid by the boys in the following manner:
Credit for overcharge $ 5,930
Gifts from respondent 21,744
One-half of a loan procured by
Culbertson & Sons partnership 30,000
The loan was repaid from the proceeds from operation of the
ranch.
The partnership agreement between taxpayer and his sons was
oral. The local paper announced the dissolution of the Coon and
Culbertson partnership and the continuation of the business by
respondent and his boys under the name of Culbertson & Sons. A
bank account was opened in this name, upon which taxpayer, his four
sons, and a bookkeeper could check. At the time of formation of the
new partnership, Culbertson's oldest son was 24 years old, married,
and living on the ranch, of which he had for two years been foreman
under the
Page 337 U. S. 737
Coon and Culbertson partnership. He was a college graduate, and
received $100 a month plus board and lodging for himself and his
wife both before and after formation of Culbertson & Sons and
until entering the Army. The second son was 22 years old, was
married, and finished college in 1940, the first year during which
the new partnership operated. He went directly into the Army
following graduation, and rendered no services to the partnership.
The two younger sons, who were 18 and 16 years old, respectively,
in 1940, went to school during the winter and worked on the ranch
during the summer. [
Footnote
2]
The tax years here involved are 1940 and 1941. A partnership
return was filed for both years indicating a division of income
approximating the capital attributed to each partner. It is the
disallowance of this division of the income from the ranch that
brings this case into the courts.
First. The Tax Court read our decisions in
Commissioner v. Tower, supra, and
Lusthaus v.
Commissioner, supra, as setting out two essential tests of
partnership for income tax purposes: that each partner contribute
to the partnership either vital services or capital originating
with him. Its decision was based upon a finding that none of
respondent's sons had satisfied those requirements during the tax
years in question. Sanction for the use of these "tests" of
partnership is sought in this paragraph from our opinion in the
Tower case:
"There can be no question that a wife and a husband may, under
certain circumstances, becomes partners for tax, as for other,
purposes. If she either invests capital originating with her or
substantially
Page 337 U. S. 738
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. 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
laws."
327 U.S. at
327 U. S. 290.
It is the Commissioner's contention that the Tax Court's decision
can and should be reinstated upon the mere reaffirmation of the
quoted paragraph.
The Court of Appeals, on the other hand, was of the opinion that
a family partnership entered into without thought of tax avoidance
should be given recognition tax-wise whether or not it was intended
that some of the partners contribute either capital or services
during the tax year and whether or not they actually made such
contributions, since it was formed "with the full expectation and
purpose that the boys would, in the future, contribute their time
and services to the partnership." [
Footnote 3] We must consider, therefore, whether an
intention to contribute capital or services sometime in the future
is
Page 337 U. S. 739
sufficient to satisfy ordinary concepts of partnership, as
required by the
Tower case. The sections of the Internal
Revenue Code involved are §§ 181 and 182, [
Footnote 4] which set out the method of taxing
partnership income, and §§ 11 and 22(a), [
Footnote 5] which relate to the taxation of individual
incomes.
In the
Tower case, we held that, despite the claimed
partnership, the evidence fully justified the Tax Court's holding
that the husband, through his ownership of the capital and his
management of the business, actually created the right to receive
and enjoy the benefit of the income, and was thus taxable upon that
entire income under §§ 11 and 22(a). In such case, other members of
the partnership cannot be considered "Individuals carrying on
business in partnership" and thus "liable for income tax . . . in
their individual capacity" within the meaning of § 181. If it is
conceded that some of the partners contributed neither capital nor
services to the partnership during the tax years in question, as
the Court of Appeals was apparently willing to do in the present
case, it can hardly be contended that they are in any way
responsible for the production of income during those years.
[
Footnote 6] The partnership
sections of the Code are, of course, geared to the sections
relating to taxation of individual income, since no tax is imposed
upon partnership income as such. To hold that "Individuals carrying
on business in partnership" include persons who contribute nothing
during the tax period would violate the first principle of income
taxation: that income must
Page 337 U. S. 740
be taxed to him who earns it.
Lucas v. Earl,
281 U. S. 111;
Helvering v. Clifford, 309 U. S. 331;
National Carbide Corp. v. Commissioner, 336 U.
S. 422.
Furthermore, our decision in
Commissioner v. Tower,
supra, clearly indicates the importance of participation in
the business by the partners during the tax year. We there said
that a partnership is 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."
This is, after all, but the application of an often iterated
definition of income -- the gain derived from capital, from labor,
or from both combined [
Footnote
7] -- to a particular form of business organization. A
partnership is, in other words, an organization for the production
of income to which each partner contributes one or both of the
ingredients of income -- capital or services.
Ward v.
Thompson, 22 How. 330,
63 U. S. 334. The
intent to provide money, goods, labor, or skill sometime in the
future cannot meet the demands of §§ 11 and 22(a) of the Code that
he who presently earns the income through his own labor and skill
and the utilization of his own capital be taxed therefor. The
vagaries of human experience preclude reliance upon even good faith
intent as to future conduct as a basis for the present taxation of
income. [
Footnote 8]
Page 337 U. S. 741
Second. We turn next to a consideration of the Tax
Court's approach to the family partnership problem. It treated as
essential to membership in a family partnership for tax purposes
the contribution of either "vital services" or "original capital."
[
Footnote 9] Use of these
"tests" of partnership indicates at best, an error in emphasis. It
ignores what we said is the ultimate question for decision --
namely, "whether the partnership is real within the meaning of the
federal revenue laws" and makes decisive what we described as
"circumstances [to be taken] into consideration" in making that
determination. [
Footnote
10]
The
Tower case thus provides no support for such an
approach. We there said that the question whether the family
partnership is real for income tax purposes depends upon
"whether the partners really and truly intended to join together
for the purpose of carrying on the business and sharing in the
profits and losses or both. And their intention in this respect is
a question of fact, to be determined from testimony disclosed
by
Page 337 U. S. 742
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."
327 U.S. at
327 U. S.
287.
The question is not whether the services or capital contributed
by a partner are of sufficient importance to meet some objective
standard supposedly established by the
Tower case, but
whether, considering all the facts -- the agreement, the conduct of
the parties in execution of its provisions, their statements, the
testimony of disinterested persons, the relationship of the
parties, their respective abilities and capital contributions, the
actual control of income and the purposes for which it is used, and
any other facts throwing light on their true intent -- the parties
in good faith and acting with a business purpose intended to join
together in the present conduct of the enterprise. [
Footnote 11]
Page 337 U. S. 743
There is nothing new or particularly difficult about such a
test. Triers of fact are constantly called upon to determine the
intent with which a person acted. [
Footnote 12] The Tax Court, for example, must make such a
determination in every estate tax case in which it is contended
that a transfer was made in contemplation of death, for "The
question, necessarily, is as to the state of mind of the donor."
United States v. Wells, 283 U. S. 102,
283 U. S. 117.
See Allen v. Trust Co. of Georgia, 326 U.
S. 630. Whether the parties really intended to carry on
business as partners is not, we think, any more difficult of
determination or the manifestations of such intent any less
perceptible than is ordinarily true of inquiries into the
subjective.
But the Tax Court did not view the question as one concerning
the
bona fide intent of the parties to join together as
partners. Not once in its opinion is there even an oblique
reference to any lack of intent on the part of respondent and his
sons to combine their capital and services "for the purpose of
carrying on the business." Instead, the court, focusing entirely
upon concepts of "vital services" and "original capital," simply
decided that
Page 337 U. S. 744
the alleged partners had not satisfied those tests when the
facts were compared with those in the
Tower case. The
court's opinion is replete with such statements as "we discern
nothing constituting what we think is a requisite contribution to a
real partnership," "we find no son adding
vital additional
service' which would take the place of capital contributed because
of formation of a partnership," and "the sons made no capital
contribution within the meaning of the Tower case."
[Footnote 13]
Unquestionably a court's determination that the services
contributed by a partner are not "vital" and that he has not
participated in "management and control of the business" [
Footnote 14] or contributed
"original capital" has the effect of placing a heavy burden on the
taxpayer to show the
bona fide intent of the parties to
join together as partners. But such a determination is not
conclusive, and that is the vice in the "tests" adopted by the Tax
Court. It assumes that there is no room for an honest difference of
opinion as to whether the services or capital furnished by the
alleged partner are of sufficient importance to justify his
inclusion in the partnership. If, upon a consideration of all the
facts, it is found that the partners joined
Page 337 U. S. 745
together in good faith to conduct a business, having agreed that
the services or capital to be contributed presently by each is of
such value to the partnership that the contributor should
participate in the distribution of profits, that is sufficient. The
Tower case did not purport to authorize the Tax Court to
substitute its judgment for that of the parties; it simply
furnished some guides to the determination of their true intent.
Even though it was admitted in the
Tower case that the
wife contributed no original capital, management of the business,
or other vital services, this Court did not say as a matter of law
that there was no valid partnership. We said instead that
"There was thus more than ample evidence to support the Tax
Court's finding that no genuine union for partnership purposes
was ever intended, and that the husband earned the
income."
327 U.S. at
327 U. S. 292.
(Italics added.)
Third. The Tax Court's isolation of "original capital"
as an essential of membership in a family partnership also
indicates an erroneous reading of the
Tower opinion. We
did not say that the donee of an intra-family gift could never
become a partner through investment of the capital in the family
partnership, any more than we said that all family trusts are
invalid for tax purposes in
Helvering v. Clifford, supra.
The facts may indicate, on the contrary, that the amount thus
contributed and the income therefrom should be considered the
property of the donee for tax, as well as general law, purposes. In
the
Tower and
Lusthaus cases, this Court,
applying the principles of
Lucas v. Earl, supra; Helvering v.
Clifford, supra, and
Helvering v. Horst, 311 U.
S. 112, found that the purported gift, whether or not
technically complete, had made no substantial change in the
economic relation of members of the family to the income. In each
case, the husband continued to manage and control the business
Page 337 U. S. 746
as before, and income from the property given to the wife and
invested by her in the partnership continued to be used in the
business or expended for family purposes. We characterized the
results of the transactions entered into between husband and wife
as "a mere paper reallocation among the family members," noting
that "[t]he actualities of their relation to the income did not
change." This, we thought, provided ample grounds for the finding
that no true partnership was intended -- that the husband was still
the true earner of the income.
But application of the
Clifford-Horst principle does
not follow automatically upon a gift to a member of one's family,
followed by its investment in the family partnership. If it did, it
would be necessary to define "family," and to set precise limits of
membership therein. We have not done so for the obvious reason that
existence of the family relationship does not create a status which
itself determines tax questions, [
Footnote 15] but is simply a warning that things may not
be what they seem. It is frequently stated that transactions
between members of a family will be carefully scrutinized. But,
more particularly, the family relationship often makes it possible
for one to shift tax incidence by surface changes of ownership
without disturbing in the least his dominion and control over the
subject of the gift or the purposes for which the income from the
property is used. He is able, in other words, to retain "the
substance of full enjoyment of all the rights which previously he
had in the property."
Helvering v. Clifford, supra, at
309 U. S. 336.
[
Footnote 16]
Page 337 U. S. 747
The fact that transfers to members of the family group may be
mere camouflage does not, however, mean that they invariably are.
The
Tower case recognized that one's participation in
control and management of the business is a circumstance indicating
an intent to be a
bona fide partner despite the fact that
the capital contributed originated elsewhere in the family.
[
Footnote 17] If the donee
of property who then invests it in the family partnership exercises
dominion and control over that property -- and, through that
control, influences the conduct of the partnership and the
disposition of its income -- he may well be a true partner. Whether
he is free to, and does, enjoy the fruits of the partnership is
strongly indicative of the reality of his participation in the
enterprise. In the
Tower and
Lusthaus cases, we
distinguished between active participation in the affairs of the
business by a donee of a share in the partnership, on the one
hand,
Page 337 U. S. 748
and his passive acquiescence to the will of the donor, on the
other. [
Footnote 18] This
distinction is of obvious importance to a determination of the true
intent of the parties. It is meaningless if "original capital" is
an essential test of membership in a family partnership.
The cause must therefore be remanded to the Tax Court for a
decision as to which, if any, of respondent's sons were partners
with him in the operation of the ranch during 1940 and 1941. As to
which of them, in other words, was there a
bona fide
intent that they be partners in the conduct of the cattle business,
either because of services to be performed during those years or
because of contributions of capital of which they were the true
owners, as we have defined that term in the
Clifford,
Horst, and
Tower cases? No question as to the
allocation of income between capital and services is presented in
this case, and we intimate no opinion on that subject.
The decision of the Court of Appeals is reversed with directions
to remand the cause to the Tax Court for further proceedings in
conformity with this opinion.
Reversed and remanded.
MR. JUSTICE BLACK and MR. JUSTICE RUTLEDGE think that the Tax
Court properly applied the principles of the
Tower and
Lusthaus decisions,
327 U. S. 327 U.S.
280,
id., 327 U. S. 293, in
this case. However, they consider it of paramount importance in
this case to have a court interpretation of the applicable taxing
statute for guidance in its application. Accordingly, they
acquiesce in the Court's opinion and judgment.
Page 337 U. S. 749
MR. JUSTICE BURTON, concurring, states that, upon remand of the
cause to the Tax Court, there is nothing in the facts which have
been presented here which, as a matter of law, will preclude that
court from finding that the 1940 and 1941 income was properly
taxable on a partnership basis. The physical absence of some of the
Culbertson boys from the ranch does not necessarily preclude them
or others from the obligations or the benefits of the partnership
for tax purposes. Their contributions of capital, their
participation in the income, and their commitments to return to the
ranch or otherwise to render service to the partnership are among
the material factors to be considered. A present commitment to
render future services to a partnership is, in itself, a material
consideration to be weighed with all other material considerations
for the purposes of taxation as well as for other partnership
purposes.
MR. JUSTICE JACKSON would affirm on the opinion of the court
below, being of the view that the ordinary common law tests of
validity of partnerships are the tests for tax purposes, and that
they were met in this case.
[
Footnote 1]
Gladys Culbertson, the wife of W. O. Culbertson, Sr., is joined
as a party because of her community of interest in the property and
income of her husband under Texas law.
[
Footnote 2]
A daughter was also made a member of the partnership some time
after its formation upon the gift by respondent of one-quarter of
his one-half interest in the partnership. Respondent did not
contend before the Tax Court that she was a partner for tax
purposes.
[
Footnote 3]
168 F.2d 979 at 982. The court further said:
"Neither statute, common sense, nor impelling precedent requires
the holding that a partner must contribute capital or render
services to the partnership prior to the time that he is taken into
it. These tests are equally effective whether the capital and the
services are presently contributed and rendered or are later to be
contributed or to be rendered."
168 F.2d at 983.
See Note, 47 Mich.L.Rev. 595.
[
Footnote 4]
26 U.S.C. §§ 181, 182.
[
Footnote 5]
26 U.S.C. §§ 11, 22(a).
[
Footnote 6]
Of course, one who has been a
bona fide partner does
not lose that status when he is called into military or government
service, and the Commissioner has not so contended. On the other
hand, one hardly becomes a partner in the conventional sense merely
because he might have done so had he not been called.
[
Footnote 7]
Eisner v. Macomber, 252 U. S. 189,
252 U. S. 207;
Merchants Loan & Trust Co. v. Smietanka, 255 U.
S. 509,
255 U. S. 519.
See Treas.Reg. 101, Art. 22(a)-1.
See 1 Mertens,
Law of Federal Income Taxation, 159
et seq.
[
Footnote 8]
The
reductio ad absurdum of the theory that children
may be partners with their parents before they are capable of being
entrusted with the disposition of partnership funds or of
contributing substantial services occurred in
Tinkoff v.
Commissioner, 120 F.2d 564, where a taxpayer made his son a
partner in his accounting firm the day the son was born.
[
Footnote 9]
While the Tax Court went on to consider other factors, it is
clear from its opinion that a contribution of either "vital
services" or "original capital" was considered essential to
membership in the partnership. After finding that none of
respondent's sons had, in the court's opinion, contributed either,
the court continued:
"In addition to the above inquiry as to the presence of those
elements deemed by the
Tower case essential to
partnerships recognizable for Federal tax purposes, . . ."
6 CCH TCM 692, 699. Again, the court commented:
"Though the petitioner urges that many cattle businesses are
composed of fathers and sons, and that the nature of the industry
so requires, we think the same is probably equally true of other
industries where men wish to take children into business with them.
Nevertheless, we think that fact does not override the many
decisions to the general effect that partners must contribute
capital originating with them, or vital services."
Id. at 700.
[
Footnote 10]
See Mannheimer and Mook, A Taxwise Evaluation of Family
Partnerships, 32 Iowa L.Rev. 436, 447-48.
[
Footnote 11]
This is not, as we understand it, contrary to the approach taken
by the Bureau of Internal Revenue in its most recent statement of
policy. I.T. 3845, 1947 Cum.Bull. 66, states at p. 67:
"Where persons who are closely related by blood or marriage
enter into an agreement purporting to create a so-called family
partnership or other arrangement with respect to the operation of a
business or income-producing venture, under which agreement all of
the parties are accorded substantially the same treatment and
consideration with respect to their designated interests and
prescribed responsibilities in the business as if they were
strangers dealing at arm's length; where the actions of the parties
as legally responsible persons evidence an intent to carry on a
business in a partnership relation, and where the terms of such
agreement are substantially followed in the operation of the
business or venture, as well as in the dealings of the partners or
members with each other, it is the policy of the Bureau to
disregard the close family relationship existing between the
parties and to recognize, for Federal income tax purposes, the
division of profits prescribed by such agreement. However, where
the instrument purporting to create the family partnership
expressly provides that the wife or child or other member of the
family shall not be required to participate in the management of
the business, or is merely silent on that point, the extent and
nature of the services of such individual in the actual conduct of
the business will be given appropriate evidentiary weight as to the
question of intent to carry on the business as partners."
[
Footnote 12]
Nearly three-quarters of a century ago, Bowen, L.J. made the
classic statement that "the state of a man's mind is as much a fact
as the state of his digestion."
Edgington v. Fitzmaurice,
29 L.R.Ch.Div. 459, 483. State of mind has always been
determinative of the question whether a partnership has been formed
as between the parties.
See, e.g., Drennen v. London Assurance
Co., 113 U. S. 51,
113 U. S. 56;
Meehan v. Valentine, 145 U. S. 611,
145 U. S. 621;
Barker v. Kraft, 259 Mich. 70, 242 N.W. 841;
Zuback v.
Bakmaz, 346 Pa. 279, 29 A.2d 473;
Kennedy v. Mullins,
155 Va. 166, 154 S.E. 568.
[
Footnote 13]
In the
Tower case, the taxpayer argued that he had a
right to reduce his taxes by any legal means, to which this Court
agreed. We said, however, that existence of a tax avoidance motive
gives some indication that there was no
bona fide intent
to carry on business as a partnership. If
Tower had set up
objective requirements of membership in a family partnership, such
as "vital services" and "original capital," the motives behind
adoption of the partnership form would have been irrelevant.
[
Footnote 14]
Although "management and control of the business" was one of the
circumstances emphasized by the
Tower case, along with
"vital services" and "original capital," the Tax Court did not
consider it an alternative "test" of partnership.
See
discussion
infra at part
Third,
and
note 17
[
Footnote 15]
Except, of course, when Congress defines "family" and attaches
tax consequences thereto.
See, e.g., 26 U.S.C. §
503(a)(2).
[
Footnote 16]
It is not enough to say in this case, as we did in the
Clifford case, that
"It is hard to imagine that respondent felt himself the poorer
after this [partnership agreement] had been executed, or, if he
did, that it had any rational foundation in fact."
309 U.S. at
309 U. S. 336.
Culbertson's interest in his partnership with Coon was worth about
$50,000 immediately prior to dissolution of the partnership. In
order to sustain the Tax Court, we would have to conclude that he
felt himself worth approximately twice that much upon his purchase
of Coon's interest, even though he had agreed to sell that interest
to his sons at the same price.
[
Footnote 17]
[
Footnote 18]
There is testimony in the record as to the participation by
respondent's sons in the management of the ranch. Since such
evidence did not fall within either of the "tests" adopted by the
Tax Court, it failed to consider this testimony. Without intimating
any opinion as to its probative value, we think that it is clearly
relevant evidence of the intent to carry on business as
partners.
MR. JUSTICE FRANKFURTER, concurring.
The Court finds that the Tax Court applied wrong legal standards
in determining that the arrangement in controversy did not
constitute a partnership. It remands the case to the Tax Court
because it is for that court, and not for the Court of Appeals, to
ascertain, on the basis of appropriate legal criteria, the
existence of a partnership within the provisions of Int.Rev.Code,
§§ 181 and 182. With these conclusions I agree. I think, however,
that it is due to the Tax Court, the Courts of Appeals, the
Treasury, and the bar to make more explicit what the appropriate
legal criteria are.
The Tax Court's decision rested on a misconception of our
decision in
Commissioner v. Tower, 327 U.
S. 280.
Page 337 U. S. 750
It is, however, fair to say that it was led into that
misconception by phrases which it culled from the
Tower
opinion with inadequate attention to the opinion in its entirety --
both what it said and what it significantly did not say. The
Tower opinion did not say what the Government now urges
upon this Court; the Court's opinion did not take the position of
the concurring opinion. In short, the opinion did not say that
family partnerships are not to be regarded as partnerships for
income tax purposes even though they be genuine commercial
partnerships; the opinion did not even announce hobbling
presumptions under the income tax law against such
partnerships.
On the contrary, in defining the relevant considerations for
determining the existence of a partnership, the Court in the
Tower case relied on familiar decisions formulating the
concept of partnership for purposes of various commercial
situations in which the nature of that concept was decisive. It is
significant that among the cases cited was the leading case of
Cox v. Hickman, 8 H.L.Cas. 268. The Court today reaffirms
this reliance by its quotation from the
Tower case. The
final sentence of the portion quoted underlines the fact that the
Court did not purport to announce a special concept of
"partnership" for tax purposes differing from the concept that
rules in ordinary commercial law cases. The sentence is:
"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."
327 U.S. at
327 U. S.
287.
The taxability of income under §§ 181 and 182 is not a purely
economic problem like the determination under § 22(a) of what is
income and to whom it is attributable. The word "income" has none
but an economic significance, and so the application of § 22(a) is
properly a matter of economic analysis.
Cf. 281 U.
S. Earl, 281 U.S.
Page 337 U. S. 751
111. But §§ 181 and 182 import a concept of a different sort.
These sections make taxability turn on the existence of the
relation of "partnership." The term carries its own meaning, just
as does "negligence" in the Federal Employers' Liability Act,
because such a common law concept has a content familiar throughout
the country to those to whom the law speaks. The basic criteria
which determine its applicability have been so well and so long
established that they were implicitly incorporated by the Internal
Revenue Code's definition of "partnership." [
Footnote 2/1] Congress has thereby stamped a nationwide
meaning upon the term which disregards minor local variants or an
occasional legal sport. Only in the application to a given case of
the criteria thus incorporated do economic data become relevant,
and such data are inevitably subject to differing inferences by
different triers of fact. It is in the appraisal of facts,
therefore, that difficulty arises, and this difficulty is reflected
by an appellate court in the degree of respect it accords to the
particular tribunal whose appraisal of the facts is before it for
review.
That, as I see it, is the crux of the problem that is presented
by these family partnerships in their relation to
Page 337 U. S. 752
the income tax. Men may put on the habiliments of a partnership
whenever it advantages them to be treated as partners underneath,
although in fact it may be a case of "The King has no clothes on"
to the sharp eyes of the law. Since there are special temptations
to appear as a partnership in order to avoid the hardships of heavy
taxation, the tribunal which presumably is gifted with superior
discernment in differentiating between the real thing and the
imitation -- the Tax Court -- will naturally be on the alert
against being taken in. Therefore, a finding by the Tax Court that
that which has the outward appearance of an arrangement to engage
in a common enterprise is not in fact such an associated business
venture ought to be respected when challenged in another court,
unless such a determination is wholly without warrant in fact, or,
as in this case, the wrong standards for judgment have been
applied.
A fair reading of our
Tower opinion in its entirety
reflects the formulation of the concept of partnership which is set
forth at the beginning of its analysis and which the Court now
quotes. While recognizing the importance of the question "who
actually owned a share of the capital attributed to the wife on the
partnership books," the
Tower opinion states the ultimate
issue to be "whether this husband and wife really intended to carry
on business as a partnership." 327 U.S. at
327 U. S. 289.
To that determination, it was, of course, relevant that no new
capital was brought into the business as a result of the formation
of the partnership, that the wife drew on income of the partnership
only to pay for the type of things she had previously bought for
the family, and that the consequence was a mere paper reallocation
of income. But these circumstances were not cited as giving the
term "partnership" a content peculiar to the Internal Revenue Code.
They were characterized, rather, simply as
"more than ample evidence to support
Page 337 U. S. 753
the Tax Court's finding that no genuine union for partnership
business purposes was ever intended,"
and, as a corollary, "that the husband earned the income." 327
U.S. at
327 U. S.
292.
Recognition of the importance, in applying §§ 181 and 182, of
the appraisal of facts makes manifest why, quite apart from the
definition contained in § 3797, a determination by a State court
should not, as the
Tower opinion pointed out, foreclose a
contrary determination by a federal tribunal charged with
administration of the tax laws. Such an inconsistency would not
mean that the legal standards applied by each were inconsistent; it
would be a result simply of the commonplace that no finder of fact
can see through the eyes of any other finder of fact.
See Texas
v. Florida, 306 U. S. 398,
306 U. S. 411.
Nor would inconsistency be created by a State court's concern for
the protection of creditors which lead it to seize upon adoption of
the outward form as the vital fact. So, indeed, might the taxing
authorities refuse to be precluded from holding the taxpayer to his
election to adopt the form of a partnership.
Cf. Higgins v.
Smith, 308 U. S. 473,
308 U. S. 477.
The need for guarding against misuse of the outward form of a
partnership as a device for obtaining tax advantages is properly
satisfied by reliance on the vigilance of the Tax Court, not by
distorting the concept of partnership. It is not for this Court, by
redefinition or the erection of presumptions, to amend the Internal
Revenue Code so as virtually to ban partnerships composed of the
members of an intimate family group.
The present case, nevertheless, is not the first manifestation
of an impression that the
Tower opinion had precisely such
an effect. [
Footnote 2/2] It seems
to me important, therefore,
Page 337 U. S. 754
to make crystal clear that there is no special concept of
"partnership" for tax purposes, while at the same time recognizing
that. in view of the temptations to assume a virtue that they have
not for the sake of tax savings, men and women may appear in a
guise which the gimlet eye of the Tax Court is entitled to pierce.
We should leave no doubt in the minds of the Tax Court, of the
Courts of Appeals, of the Treasury, and of the bar that the
essential holding of the
Tower case is that there is "no
reason" why the "general rule" by which the existence of a
partnership is determined "should not apply in tax cases where the
Government challenges the existence of a partnership for tax
purposes."
In plain English, if an arrangement among men is not an
arrangement which puts them all in the same business boat, then
they cannot get into the same boat merely to seek the benefits of
§§ 181 and 182. But, if they are in the same business boat,
although they may have varying rewards and varied responsibilities,
they do not cease to be in it when the tax collector appears.
[
Footnote 2/1]
The Code defines "partnership" in the following terms:
"§ 3797. Definitions."
"
* * * *"
"(2) Partnership and partner."
"The term 'partnership' includes a syndicate, group, pool, joint
venture, or other unincorporated organization, through or by means
of which any business, financial operation, or venture is carried
on, and which is not, within the meaning of this title, a trust or
estate or a corporation, and the term 'partner' includes a member
in such a syndicate, group, pool, joint venture, or
organization."
This definition carries two necessary implications: (1) recourse
to the law of a particular State is precluded,
see
Treas.Reg. 111, §§ 29.3797(1), 29.3797(4);
see also Lyeth v.
Hoey, 305 U. S. 188,
305 U. S.
193-194; (2) use of the words "The term
partnership'
includes" presupposes that the term has a recognized content. If
this is not to be found in the law of a particular State, it can
only be found in the general law of partnership.
[
Footnote 2/2]
See, e.g., Fletcher v. Commissioner, 164 F.2d 182;
Hougland v. Commissioner, 166 F.2d 815. In this
connection,
see also Tuttle and Wilson, The Confusion on
Family Partnerships, 9 Ga.B.J. 353 (1947).