Source: https://supreme.justia.com/cases/federal/us/327/280/
Timestamp: 2019-04-19 04:40:39+00:00

Document:
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. 327 U. S. 286, 327 U. S. 291-292.
2. A finding of fact by the Tax Court, being supported by evidence, is final. P. 327 U. S. 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. 327 U. S. 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. 327 U. S. 288.
(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. 289.
(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. 289.
(c) These issues cannot be decided simply by looking at a single step in a complicated transaction. Pp. 327 U. S. 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. 327 U. S. 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. 327 U. S. 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. 327 U. S. 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. 327 U. S. 291.
F.2d 388. This Court granted certiorari. 326 U.S. 703. Reversed, p. 327 U. S. 292.
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, 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 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.
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. [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 case, post, p. 327 U. S. 293.
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, [Footnote 3] 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 business services.
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.
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. [Footnote 6] 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. S. 467, 320 U. S. 475; Dobson v. Commissioner, 320 U. S. 489. The decision of the Tax Court was therefore correct unless, as respondent contends, the Tax Court erroneously disregarded or improperly applied certain legal principles.
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. S. 111. 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. 334-335, 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.
"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."
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 partner. See 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 schemes.
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. S. 106, 309 U. S. 117-118; Burnet v. Wells, 289 U. S. 670, 289 U. S. 677.
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 laws.
person is taxable as his, if given to another for the donor's satisfaction. Helvering v. Horst, 311 U. S. 112, 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 avoided.
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, post, p. 327 U. S. 297.
Earp v. Jones, 131 F.2d 292; Mead v. Commissioner, 131 F.2d 323; Argo v. Commissioner, 150 F.2d 67; Lorenz v. Commissioner, 148 F.2d 527.
See 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. S. 467, 320 U. S. 475.
Ward v. Thompson, 22 How. 330, 63 U. S. 333-334; Meehan v. Valentine, 145 U. S. 611, 145 U. S. 618.
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. 477.
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. 44, 315 U. S. 46.
See e.g., Croft v. Commissioner, T.C. No. 1432, decided February 9, 1944.
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.

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