Court Opinion

ID: 9442630
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:54:02.643777+00
Date Added: 2024-06-11T16:41:10.227326
License: Public Domain

MAGRUDER, Chief Judge
(concurring).
In cases of this sort, involving taxation of income of family partnerships, a great deal of avoidable confusion has been engendered by the notion (which obtained some currency) that an association which for general purposes would be deemed a partnership under the usual common law tests will not necessarily be recognized as a partnership “for income tax purposes”. Thus was introduced a new legal concept; and the need arose to give some judicial definition of the special elements constituting a “partnership for income tax purposes”, where the purported partnership is between members of an intimate family group. So far as I can see, this notion was utterly devoid of statutory basis, as is apparent from a mere reading of Internal Revenue Code, §§ 181, 182, and 3797, 26 U.S.C.A. §§ 181, 182, 3797.1 As I read Com*158missioner Internal Revenue v. Culbertson, 1949, 337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659, the effect of that case is to sweep this earlier notion into the discard. This is more sharply pointed up, perhaps, in the concurring opinion by Mr. Justice Frankfurter. But the same viewpoint is discernible from a reading of the majority opinion as a whole. Thus, the opinion of the Court points out that the evidence in the particular case must be examined, to determine whether it is “sufficient to satisfy ordinary concepts of partnership.” 337 U.S. at page 739, 69 S.Ct. at page 1212. Again, the Court, Id. 337 U.S. at pages 741-742, 69 S.Ct. at page 1214, quotes with approval what had been said in the earlier case of Commissioner of Internal Revenue v. Tower, 1946, 327 U.S. 280, 66 S.Ct. 532, that when an issue is presented in an income tax case as to whether a “family partnership is real”, the inquiry must be “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, 56, 5 S.Ct. 341, [343,] 344, 28 L.Ed. 919; 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.” [Italics added.]
It is to be noted that neither of the cases cited in the foregoing quotation involved a family partnership. Nor did either of them involve any question of income tax liability. In each case the question arose in ordinary private litigation whether a certain agreement constituted a partnership according to the normal common law criteria. The Gourt did point out in the Culbertson case that the fact of the family relationship, taken in conjunction with the other evidence in the case, may warrant the inference that the arrangement is a “mere camouflage”. It pointed out further, 337 U.S. at page 746, 69 S.Ct. at page 1216, that “existence of the family relationship does not create a status which itself determines tax questions, but ¡is simply a warning that things may not be what they seem.”
In the case at bar there appears in the record a purported partnership agreement dated July 1, 1935, between the taxpayer W. Stanley Barrett, his wife Irene, Wallace L. Mossop, and George Barrett, Jr, If this agreement reflected the real understanding of the parties, then I would say, as a matter of law, that Irene Barrett became a member of the partnership, with the right as such to receive as her share one quarter of the net profits. It is of course possible, and indeed not uncommon, for a new person to be admitted into an existing partnership without any augmentation of the capital already embarked upon the business. Thus, partner A, desiring to reduce his commitments, may sell and assign a portion of his interest to an outsider, with the consent of his copartners that the outsider shall thereupon be admitted as a full partner in the business. As to the $35,000 transaction in the case at bar, I agree that the Tax Court was warranted in finding on the evidence that this was not a repayment by the taxpayer of a “loan” which he had theretofore obtained from his wife. Another possible interpretation of the transaction, which in fact would harmonize with the gift tax returns filed by the taxpayer, is that with the consent of his copartners the taxpayer withdrew $35,000 standing to his credit in the capital account of the firm and made a gift thereof to his wife pursuant to an understanding that his wife would be admitted as a partner in the firm and would pay in that amount of money as her contribution to the capital of the firm. The Culbertson case recognizes that a wife might in that manner become a bona fide partner with her husband. The Court stated, 337 U.S. at page 747, 69 S.Ct. at page 1217: “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 *159may 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 a footnote on the same page the Court refers to the “erroneous assumption that one can never make a gift to a member of one’s family without retaining the essentials of ownership, if the gift is then invested in a family partnership.”
Furthermore, if the written agreement dated July 1, 1935, expresses the true understanding of the parties, Irene Barrett was nonetheless a partner in the firm though she may not have contributed any personal services in the day-to-day management of its business. Not infrequently one or more bona fide partners may be inactive or dormant, this factor being compensated by the payment of salaries to the active partners. So here, the partnership -agreement provided that the partners “shall be paid such salaries as may be agreed upon, to be charged as an expense of the business.” Such an arrangement, so far as I can see, involves no problem of Lucas v. Earl, 1930, 281 U.S. 111, 74 L.Ed. 731. If the partnership agreement provides that the dormant partner is to receive one quarter of the net profits, such share of the net income, whether distributed or not, is taxable to the dormant partner under J.R.C. § 182. It is not taxable to the active partners on the theory that they “earned” it.
If the decision of the Tax Court in the case at bar was influenced by an adherence to the now discredited notion that a partnership for general purposes under the normal common law criteria may nevertheless not be recognized as a partnership “for income tax purposes”, then I think such decision would have to be vacated and the case remanded to the Tax Court, with direction to ascertain, according to appropriate standards, whether a partnership subsisted between the taxpayer and his wife in the taxable years, as was done in Commissioner v. Culbertson, supra. But as I read the .opinion of the Tax Court, it does not appear that the court was under misapprehension as to the purport of the Culbertson case or as to the proper criteria to be applied. The concluding finding of fact by the court was that the taxpayer, Mossop, and George Barrett, Jr., did not “really and truly intend to join with Irene Barrett for the purpose of carrying on the business 'as partners, and Irene is not recognizable as a partner for income tax purposes.” There were indications from the conduct of the parties that the purported partnership agreement of July 1, 1935, did not, and was not intended to, express the true understanding of the parties, but was, upon the contrary, a “mere camouflage”. The burden, of course, was on the petitioner to establish that the Commissioner’s determination of a deficiency was wrong. On the record as a whole, it cannot be said that the finding of fact by the Tax Court was clearly erroneous.

. Internal Revenue Code, § 3797(a) (2), does give a more inclusive definition of the term “partnership” so as to embrace syndicates, joint ventures, and certain other special types of business organization carried on in unincorporated form. But it cannot be inferred from this provision that an organization which would be deemed a partnership by the ordinary and generally applicable criteria may nevertheless not be a partnership “for income tax purposes”.