337 U.S. 733 (1949), 313, Commissioner v. Culbertson

Docket Nº:No. 313
Citation:337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659
Party Name:Commissioner v. Culbertson
Case Date:June 27, 1949
Court:United States Supreme Court

Page 733

337 U.S. 733 (1949)

69 S.Ct. 1210, 93 L.Ed. 1659




No. 313

United States Supreme Court

June 27, 1949

Argued February 7, 1949




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.


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. 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. 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. 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. 741-745.

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(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. 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. 744-745.

3. A contribution of "original capital" is not essential to membership in a family partnership. Pp. 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. 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. 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. 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. 748.

Page 735

VINSON, J., lead opinion

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,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

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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 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 [69 S.Ct. 1212] 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.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

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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 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.


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