Court Opinion

ID: 9446939
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:22:09.724221+00
Date Added: 2024-06-11T17:30:50.851480
License: Public Domain

TUTTLE, Circuit Judge
(dissenting).
With deference to the views of my colleagues, I am constrained to dissent.
At the outset it must be remembered that we are dealing here with income which was paid exclusively to the taxpayer as his partnership share of a business in which, according to the written partnership agreement, only he and Leonard, as guardian for Leonard’s minor children, were the partners. The taxpayer therefore starts with something of a burden to establish some theory on which part of such income earned by such business and distributed to him as a partner rightfully belongs for income tax purposes to his two sisters.
In considering any theory advanced by the taxpayer, we must bear in mind the basic principle that normally income is taxable to him who earns it. I think it clear beyond any question that this income was earned by Neil as a member of a partnership of which the Tax Court was amply justified to find the sisters were not and never intended to be members.
There are several critical facts in this record that are documentary in form and are thus not dependent on oral testimony for their establishment. These facts, it seems to me add up to enough, if not to require the decision made by the Tax Court, then, at the very least, to warrant it.
*575A partnership contract was entered into in writing between Leonard, as guardian for his children, and W. H. Neil. The two parties were to invest $5,000 each in a business of acquiring and renting trucks to the Container Corporation of America, a relationship which apparently Neil’s father, J. R. Neil, could control. Neil’s $5,000 came by way of a loan from his father. The partnership agreement made no mention of Neil’s two minor sisters, although it did expressly name Leonard’s four minor children as the partners for whom he acted.
This business entity, thus created by the written contract, set up partnership books in which all business transactions were faithfully recorded. There was a capital account set up for Leonard, Guardian, and another for W. H. Neil. Leonard conducted all of the business in accordance with a stipulation in the written agreement. Neil’s partnership interest was acquired by his capital contribution plus the fact that his father guaranteed in writing all of his obligations. This guarantee did not mention the sisters.1
It was a highly profitable operation. The money poured in. The $5,000 loan was promptly paid back to Neil’s father and Neil loaned his father other sums which he received prior to January 1, 1949.
For all the years from the inception of the business through the last tax year the Leonard partnership filed regular partnership information returns which showed Leonard, guardian for his four named children, and W. H. Neil as the only partners. Through March, 1949, Neil filed his own individual income tax returns in which he reported as personal income to him his one-half of the net profits from the Leonard partnership.
As of January 1, 1949, Neil and his two sisters signed an agreement which expressly recognized that Neil alone was a partner with Leonard. It stated: “William Henry Neil is interested in a certain motor truck rental business with O. P. Leonard, which business is conducted under the general name and style of O. P. Leonard, Trustee.”
As we have just stated, this confirms all of the significant writings and acts of the parties up to that moment.
Moreover, even after this contract was signed, Neil signed his income tax return for the year 1948, in which he reported all the income from the Leonard partnership as his own personal income. No amended returns were ever made seeking to change this return.
Thereafter, for the tax years in question, Neil filed partnership returns for W. H. Neil, et al., showing as partners himself and his two sisters. Nowhere did he ever file or cause to be filed a partnership return showing his sisters to be partners in the Leonard partnership.
Now, it seems elemental that under the most liberal treatment ever afforded family partnership situations — certainly under the principles laid down in the-Culbertson case, it was within the compe*576tence of the Tax Court to find, as it did, that the Leonard partnership consisted of Leonard as guardian for his children and W. H. Neil, and that it did not include the two girls. And this it could find on this documentary record, notwithstanding the oral testimony given at the trial that when Neil, Sr. loaned the money to his son it was understood between them that the sisters were to share equally.
Certainly nothing contained in the agreement of January 1, 1949, printed in full in footnote 2, 269 F.2d 566, made the sisters members of the Leonard partnership. That gambit was tried by a taxpayer in Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 346, 76 L.Ed. 665. The Supreme Court said that one partner in a two-man firm cannot make his wife a partner with him to split up his share of the partnership income by making a sub-partnership agreement with her to that effect. That is the most that can be said of the effect of this 1949 agreement so far as creating a partnership or joint enterprise is concerned.
But now that litigation has commenced, for the first time Neil says that if the 1949 agreement did not make his sisters partners in the business that earned the income, then it created a trust for their benefit and their share of the income from the trust must be taxable to the sisters. This was also dealt with in the Leininger case. There the court said:
“The respondent urges that the assignment to his wife was of one-half of the ‘corpus’ of his interest and that this ‘corpus’ produced the income in question. The characterization does not aid the contention. That which produced the income was not Mr. Leininger’s individual interest in the firm, but the firm enterprise itself,, that is, the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business. There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management. If it be assumed that Mrs. Leininger became the beneficial owner of one-half of the income which her husband received from the firm enterprise, it is still true that he, and not she, was the member of the firm and that she had only a derivative interest.” Burnet v. Leininger, 285 U.S. 136, 141, 52 S.Ct. 345, 346, 76 L.Ed. 665.
To be sure a donor, father or brother, has the full and complete power to give property to a trustee, even, possibly, himself as trustee 2 for himself and others, and if properly distributed and properly reported as such, the income from this trust property is taxable to the beneficiaries. Here, however, no such thing happened. No trust res produced the income here dealt with. The Leonard business partnership produced the income. The members of the Leonard firm earned the income and it was only after it was thus earned that this 1949 agreement sought to convey or assign it to the sisters. The language is “so that from and after January 1, 1949, all net sums received by William Henry Neil should be divided into three equal parts and paid to the three signatories to this agreement.”
This is not remotely similar to the placing of property in trust for another. No peculiarities of the state law play any part in this particular area. The critical thing here is that there is no trust res which produced the income. The income, as so clearly pointed out in the Leininger case, supra, was produced by the Leonard partnership.
If we come to the oral testimony we find that it does not specifically conflict with the Tax Court’s finding that the sisters were not partners in the Leonard *577business enterprise. There is not a line of testimony, for instance, that either before, or by virtue of the 1949 agreement, the sisters were intended to become partners with Leonard or his children. The course of action of that business clearly negatives the fact that they did. Under the teaching of the Culbertson case cited so feelingly in the court’s opinion, such intent and course of dealing are two critical factors to be considered in determining whether a partnership in fact existed. Moreover, the taxpayer in his brief concedes:
“Neither W. H. Neil nor either of his two sisters has ever taken any part in the management or operation of the truck rental business conducted under the provision of the leasing contract. The affairs of that business at all times have been handled exclusively by or under the direction of O. P. Leonard. Moreover, no one of the three of them has ever rendered any service whatever to the truck leasing operation. In fact the two sisters and also W. H. Neil were away from Fort Worth during the greater part of the taxable years involved in this proceeding.”
These circumstances are also considered in Culbertson as being of prime significance in determining whether any partnership existed. Here is what the Supreme Court in that case said was the test:
“ * * * 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.” Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, 742, 69 S.Ct. 1210, 1214, 93 L.Ed. 1659.
With all deference to the views of my colleagues, I think it perfectly clear that the Tax Court, far from ignoring the teachings of the Culbertson case, actually made careful application of them. With as many of the essential factors favoring the existence of a partnership lacking, I think it little short of amazing that this court should criticize a finding by that court on this record that no such partnership here existed.
Even as to the “sub-partnership,” if that is what was intended by the document of 1949, no books were set up for at least three years; no contemporaneous entries of any capital account were set up on the part of the two sisters, and Neil still reported his 1948 income as belonging to him exclusively. This, of course, is entirely apart from the basic proposition that a partnership between these three alone would not serve to divide the income for tax purposes, as noted above and as clearly decided in the Leininger case.
I think the decision of the Tax Court was correct. That court could certainly take the view of the facts that the parties themselves took before a tax purpose became apparent. It was not bound to reject the documentary proof in favor of the testimony of the interested parties when even that testimony was not unequivocal as to the true effect of what was done. It was certainly consistent with all that we and the Supreme Court have said in this field. It will be remembered that the history of the Culbertson case is that this court reversed the Tax Court’s decision that no partnership existed. We sought to decide that the facts demanded the contrary result. The Supreme Court reversed our decision and remanded the case to the Tax Court to give effect to its formula for deciding the fact question: “As to which of them [the sons] * * * was there a bona fide intent that they be partners in the conduct of the cattle business, either because of service to be performed dur*578ing those years or because of contributions of capital of which they were the true owners, as we have defined the terms in the Clifford, Horst [Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75], and Tower cases?”
Some comment is made in the court’s opinion relative to the amendment of 1951 to the 1939 Code, which says:
“A person shall be recognized as a partner for income tax purposes if he owns a capital interest in a partnership in which capital is a material income-producing factor whether or not such interest was derived by gift or purchase from any other person.”
This, of course, merely changes the meaning of capital contribution as used in the Culbertson ease. It is no longer necessary that the capital investment which is one of the indicia of an intent to form a bona fide partnership be capital “originating with the partner.” This amendment does not change the requirement that there must be a bona fide intent on the part of the parties to engage as partners in a business enterprise. Here the Tax Court, with ample justification, found that no such intent on the part of the sisters existed. Thus the owning of a capital interest in a partnership does not even under that amendment create a partnership. It merely defines one of the alternative prerequisites: “service or capital,” one of which must be cowpled with a bona fide intent to engage as partners in a business enterprise to satisfy the Culbertson definition. It is clear that this amendment is only intended to take the “curse” off of family-originated capital which still lingered in the law after Culbertson because of its reference to the definition of capital in the Tower ease. Now it is possible for a father to give or lend his son funds with which the latter can engage in a partnership enterprise with the father, if there is in fact a bona fide intent on the part of the pair to carry on a partnership business.3 The circumstances which the court must consider to determine whether there was such an intent are those set out in the above quoted portion of the Culbertson opinion. Here the court gave full consideration to them and, with ample justification, found that no such intent existed as to the sisters.
I think the decision of the Tax Court should be affirmed.

. It is significant that this guaranty noted that Leonard was acting as guardian for his children, and that no such designation or a designation as trustee was mentioned for Neil. The letter follows:
“March 16, 1946
“O. P. Leonard, Guardian of Obie Paul Leonard, Robert Wooldridge Leonard, Margery Ann Leonard, and Martha Jane Leonard,
“Fort Worth, Texas.
“Dear Sir:
“I have examined and am familiar with the agreement entered into this date between you as Guardian of your minor cMldren and my son, William H. Neil, covering the leasing of certain rolling stock to Container Corporation.
“This is to advise you that in consideration of one dollar cash, the receipt of which is hereby acknowledged, and other valuable considerations, I personally will guarantee the payment of all the expenses and cost and the performance of all obligations assumed Try my son under said agreement should he for any reason fail or refuse to pay or perform such.”" (Emphasis added.)
“Very truly yours,
“(S) J. R. NEIL.”

. It was only by virtue of this amendment that W. H. Neil himself could really be considered to be a partner in the Leonard business. Otherwise clearly this Leonard partnership might well be held to be a partnership of the father and Leonard for tax purposes, since the father furnished the capital, guaranteed the credit and provided the only source of profit to the firm.