327 U.S. 280 (1946), 317, Commissioner v. Tower

Docket Nº:No. 317
Citation:327 U.S. 280, 66 S.Ct. 532, 90 L.Ed. 670
Party Name:Commissioner v. Tower
Case Date:February 25, 1946
Court:United States Supreme Court

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327 U.S. 280 (1946)

66 S.Ct. 532, 90 L.Ed. 670




No. 317

United States Supreme Court

Feb. 25, 1946

Argued January 10, 11, 1946




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 formed.


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. 286, 291-292.

2. A finding of fact by the Tax Court, being supported by evidence, is final. P. 287.

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. 287.

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. 288.

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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. 289.

(b) In this case, that issue depends on whether the husband and wife really intended to carry on business as a partnership. P. 289.

(c) These issues cannot be decided simply by looking at a single step in a complicated transaction. Pp. 289-290.

(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. 290.

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. 290.

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. 291.

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. 291.

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. 148

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F.2d 388. This Court granted certiorari. 326 U.S. 703. Reversed, p. 292.

BLACK, J., lead opinion

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 [66 S.Ct. 534] 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

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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.S. 112, 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 22(a)?

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 the

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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. Commissioner, 149 F.2d 232. Other Circuit Courts of Appeals have also sustained similar holdings by the Tax Court.1 As is indicated by numerous Tax Court decisions, attempts to escape surtaxes by dividing one earned income into two or more [66 S.Ct. 535] through the device of family partnerships have recently created an acute problem.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 case, post, p. 293.

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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...

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