Court Opinion

ID: 9443139
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:12:13.019737+00
Date Added: 2024-06-11T17:29:23.218709
License: Public Domain

RIVES, Circuit Judge
(specially concurring).
I concur in the result and in most of the opinion. When the opinion speaks of examining a claimed family partnership with an eye single to determining whether in law and in fact it is a reality or a sham, I take those words to mean not merely that the partnership must be valid according to state law standards, but also that it must be tested in the light of the economic realities underlying the federal income tax law. My understanding is that every contract, whether of trust, employment,- partnership, or other business relationship, in order to be recognized in attributing income, must meet the tests of economic reality according to the concepts of the federal income tax law. That is recognized in the part of the Senate Finance Committee Report quoted in the third footnote to the opinion which says: “Cases will arise where the gift or sale is a mere sham. Other cases will arise where the transferor retains so many of the incidents of ownership that he will continue to be recognized as a substantial owner of the interest which he purports to have given away, as was held by the Supreme Court in an analogous trust situation involved in the case of Helvering v. Clifford (309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788).” (Emphasis supplied.)
In determining “whether the partnership is real within the meaning of the federal revenue laws”, Commissioner of Internal Revenue v. Tower, 327 U.S. 290, 66 S.Ct. 532, 537, 90 L.Ed. 670, or whether “the parties in good faith and acting with a business *926purpose intended to join together in the present conduct of the enterprise”, Commissioner of Internal Revenue v. Culbertson, 337 U.S. at page 742, 69 S.Ct. at page 1214, we should apply the earner test, Lucas v. Earl, 281 U.S. Ill, 50 S.Ct. 241 as well as the ownership test, Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788. Generally, partnership income is the product of both personal services and capital. The division of profits according to the partnership agreement must not be patently unreasonable when compared with the actual contributions of labor and capital of the family partners. See Woosley v. Commissioner of Internal Revenue, 6 Cir., 1948, 168 F.2d 330, 333; Hartz v. Commissioner of Internal Revenue, 8 Cir., 1948, 170 F.2d 313, 318.
In the Culbertson case the Court said that, “No question as to the allocation of income between capital and services is presented in this case, and we intimate no opinion on that subject.” 337 U.S. at page 748, 69 S.Ct. at page 1217. However, that subject is dealt with in Section 340(b) of the Revenue Act of 1951, 26 U.S.C.A. § 191, relating to “Family Partnerships” as follows: “In the case of any partnership interest created by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensation for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to donated capital is proportionately greater than the share of the donor attributable to the donor’s capital.” (Emphasis supplied.)
It is true that that section further provides : “The determination as to whether a person shall be recognized as a partner for income tax purposes for any taxable year beginning before January 1, 1951, shall be made as if this section had not been enacted and without inferences drawn from the fact that this section is not expressly made applicable with respect to taxable years beginning before January 1, 1951.” 26 U.S.C.A. § 191 note.
However, I am assuming as indicated by the court in this case in its references to the legislative reports preceding the enactment of that section, that we may refer to the legislative development of the law in arriving at its prior meaning and content. It seems to me that even for the years before the 1951 Revenue Act became effective, economic realities have to be taken into consideration in determining the validity and effect taxwise of a family partnership.