Champagne, Sidney A.

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Louisiana Law ReviewVolume 10 | Number 1November 1949Taxation - Family PartnershipsSidney A. ChampagneThis Note is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted for inclusionin Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact kreed25@lsu.edu.Repository CitationSidney A. Champagne, Taxation - Family Partnerships, 10 La. L. Rev. (1949)Available at: https://digitalcommons.law.lsu.edu/lalrev/vol10/iss1/18LOUISIANA LAW REVIEWTAXATION-FAMILY PARTNERSHIPS *-Taxpayer, a Texas ranch-er, had operated a cattle business in partnership with a non-family member. During the latter part of 1939, the partnershipwas dissolved upon the condition that the taxpayer, Culbertson,would sell an undivided one-half interest in the herd to his foursons. The sons gave their father an interest-bearing note forone-half interest in the new partnership. This note was paid inthe following manner: credit for overcharge $5,930; gifts fromtaxpayer $21,744; and one-half of a loan procured by the newpartnership, Culbertson & Sons, $30,000. The loan was repaidfrom the proceeds from the operation of the ranch. The oldest sonperformed services for the partnership until he entered the army.The second son went into the army directly from college andrendered no services to the partnership. The two younger sonswent to school during the winter and worked on the ranch duringthe summer.The tax court, applying the dual test of "original capital"and "vital additional services" disallowed any division of incomeand held the entire income of the partnership taxable to thefather.' The Court of Appeals for the Fifth Circuit, reversingthe tax court, recognized the partnership tax wise, for the courtfound that the partnership was formed "with the full expecta-tion and purpose that the boys would, in the future, contributetheir time and services to the partnership. ' 2 The Supreme Courtdisagreed with the tax court and the court of appeals and re-manded the case to the tax court to determine which, if any, oftaxpayer's sons were partners with him in the operation of theranch during the taxable years involved, 1940 and 1941. Com-missioner v. Culbertson, 69 S.Ct. 1210 (U.S. 1949).The remand was based on the query as to which of the sons,if any, "was there a bona fide intent that they be partners inthe conduct of the cattle business, either because of services tobe performed during those years, or because of contributions ofcapital of which they were the true owners."'8Mr. Chief Justice Vinson, speaking for a divided court,4* See Prentice Hall Tax Service I1 70,515 (1949) for a tabulation of familypartnership cases decided since the Culbertson case.1. T.C. Memo. Decision Docket Nos. 4184, 4185 (1947).2. Culbertson v. Commissioner, 168 F.(2d) 979 (C.C.A. 5th, 1948).03. 69 S.Ct. 1210, 1217 (U.S. 1949).4. Although Black and Rutledge, J.J., concurred, they expressed theview that the tax court properly applied the principles of the Tower andLusthaus decisions. Burton, J., concurred, stating that there was nothing asa matter of law that would preclude the tax court from finding that the[VOL. XNOTESasserted that the true test of a valid partnership for tax pur-poses is intent-whether "the parties in good faith and actingwith a business purpose intended to join together in the pres-ent conduct of the enterprise."5 Although the Tower and Lust-hauS7 cases were affirmed, the Supreme Court criticized the taxcourt for emphasizing the dual test of "original capital" and"vital services" and omitting any consideration of "managementand control." "The question is not whether the services or cap-ital contributed by a partner are of sufficient importance to meetsome objective standard supposedly established by the Towercase, but whether, considering all the facts-the agreement, theconduct of the parties in execution of its provisions, their state-ments, the testimony of disinterested persons, the relationshipof the parties, their respective abilities and capital contributions,the actual control of income and the purposes for which it isused, and any other facts throwing light on their true intent-the parties in good faith and acting with a business purposeintended to join together in the present conduct of the enter-prise." The Supreme Court then pointed out that the tax courtnever made "even an oblique reference to any lack of intent onthe part of respondent and his sons to combine their capitaland services 'for the 13urpose of carrying on the business.'"The court relied on the Tower case to overthrow the posi-tion of the court of appeals. "If it is conceded that some of thepartners contributed neither capital nor services to the partner-ship during the tax years in question, as the court of appeals wasapparently willing to do in the present case, it can hardly becontended that they are in any way responsible for the produc-tion of income during those years. . . . our decision in Commis-sioner v. Tower clearly indicates the importance of participationin the business by the partners during the tax year. We theresaid that a partnership is created 'when persons join togethertheir money, goods, labor, or skill for the purpose of carryingincome was properly taxable on a partnership basis. Frankfurter, J., con-curred in a separate opinion, making more explicit the appropriate legalcriteria of a partnership for income tax purposes. Jackson, J., dissented,taking the view that the ordinary common law tests of validity of partner-ships are the tests for tax purposes and that they were met in this case.5. 69 S.Ct. 1210, 1214 (1949). Cf. approach taken (in theory) by the Bureauof Internal Revenue in 1947. I.T. 3845, 1947-1 Cum. Bull. 66.6. Commissioner v. Tower, 327 U.S. 280, 66 S.Ct. 532, 90 L.Ed. 670, 164A.L.R. 1135 (1946).7. Commissioner v. Lusthaus, 327 U.S. 293, 66 S.Ct. 539, 90 L.Ed. 679(1946).8. 69 S.Ct. 1210, 1214 (U.S. 1949).9. Id. at 1215.1949]LOUISIANA LAW REVIEWon a trade, profession or business and where there is communityof interest in the profits and losses.' ",a It should be noted thatthis language is couched in terms of a present contribution ofcapital or services. To hold otherwise would be a violation ofthe fundamental principle that income must be taxed to himwho earns it."The Culbertson case makes it clear that in order for a part-nership to be recognized tax wise, the partners must contributeeither capital or services; nevertheless the requisite capital mayhave been acquired by gift-even where the gift was in connec-tion with the creation of the partnership. 2 However the opinionwarns that transactions between members of a family will becarefully scrutinized since "the family relationship often makesit possible for one to shift tax incidence by surface changes ofownership without disturbing in the least his dominion and con-trol over the subject of the gift or the purposes for which theincome from the property is used.' 3 How is the taxpayer goingto prove that the gift was not a mere "camouflage"? The courtindicated the answer, stating, "If the donee of property who theninvests it in the family partnership exercises dominion and con-trol over that property-and through that control influences theconduct of the partnership and the disp6sition of its income-he may well be a true partner. Whether or not he is free to anddoes, enjoy the fruits of the partnership is strongly indicative ofthe reality of his participation in the enterprise."'1 4 Apparently,a donee will not be allowed to delegate his control over thedonated property, even though it is generally considered thata donee who delegates managerial powers to another, but re-tains the right to revoke or limit those powers at any time, isstill the true owner. A more practical test would be whether thedonee has the right to exercise control, rather than the actualexercise of it.' The Court of Appeals for the Fifth Circuit hashad some difficulty in the application of the Culbertson case.10. Id. at 1213.11. Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930); Helver-ing v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788 (1940). Cf. Poe v.Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239 (1930).12. Walsh v. Commissioner, 170 F.(2d) 535 (C.C.A. 8th, 1948). But seeCole v. Commissioner, 173 F.(2d) 893 (C.C.A. 6th, 1949).13. 69 S.Ct. 1210, 1216 (U.S. 1949). In Edward A. Theurkauf, 13 T.C. No.70 (1949), the tax court sustained the validity of a partnership where thefacts were similar to those in the Tower case, the distinguishing featurebeing that there was no condition attached to the gift.14. Id. at 1217.15. Cf. Henson v. Commissioner, 174 F.(2d) 846 (C.C.A. 5th, 1949).[VOL. XNOTESIn a recent case it held the income of a partnership taxable tothe donor's parents, stating that there was no showing that any-one but the father controlled the capital used in production ofthe income.' 6 After argument on rehearing, the original opinionwas vacated and the case was remanded to the district court.Ironically, the court which started the trend towards the "intent"test 17 said very little about intent in its original opinion of theGinsburg case.Prior to the Tower case, a "donee partner" rendering noservices could be sustained only if capital was a substantial in-come-producing factor.' 8 This rule will probably hold true underthe Culbertson decision. Where the income is primarily attribu-table to capital, the question of services should be immaterial.An interesting problem is presented when the income of thepartnership is attributable to both capital and services. Shoulda reapportionment be required when one partner contributescapital only? This question was raised in the instant case, butthe court "intimated no opinion on that subject."' 9 The taxcourt has reallocated income in such cases but this action hasfound disapproval by the courts of appeal.20 A probable safe-guard against a reallocation by the commissioner would be aprovision in the partnership agreement for a reasonable salaryfor the working partner before the division of profits accordingto capital invested.It may well be that the Culbertson case is the beginning ofa new era in family partnerships and it is hoped that the Bureauof Internal Revenue and the tax court will not again go astrayin interpreting the leading decision on the problem. Although16. Ginsburg v. Arnold, 176 F.(2d) 879 (C.C.A. 5th, 1949), wherein Waller,J., the author of the majority opinion of the Gulbertson case in the court ofappeals, dissented. But see 0. H. Delchamps, 13 T.C. No. 39 (1949), wherethe partnership was upheld where donee partners performed insignificantservices.17. Culbertson v. Commissioner, 168 F.(2d) 979 (C.C.A. 5th, 1948); Walshv. Commissioner, 170 F.(2d) 535 (C.C.A. 8th, 1948); Isaac Blumberg, 11T.C. 663 (1948).18. Robert P. Scherer, 3 T.C. 776 (1944); J. D. Johnston, Jr., 3 T.C. 799(1944); Davis B. Thornton, 5 T.C. 116 (1945).19. 69 S.Ct. 1210, 1217.20. Canfield v. Commissioner, 168 F.(2d) 907 (C.C.A. 6th, 1948). In Woos-ley v. Commissioner, 168 F.(2d) 330, 333 (C.C.A. 6th, 1948), the court said,"In our judgment the Tax Court clearly erred as a matter of law in attrib-uting to the capital contributions all of the income earned by the partner-ship and in making the allocation which it did contrary to the express pro-visions of the articles of partnership." Hartz v. Commissioner, 170 F.(2d)313 (C.C.A. 8th, 1948), cert. denied 69 S.Ct. 1528 (U.S. 1949).1949]100 LOUISIANA LAW REVIEW [VoL. Xthe Revenue Act of 194821 makes the partnership question be-tween spouses principally an academic one, it is still importantas between other family members. The latter type of partner-ship has a far greater chance of recognition tax wise, for "it hasbeen aptly said that 'bed chamber arrangements' between ahusband and wife will be viewed with suspicion."22SIDNEY A. CHAMPAGNE21. 62 Stat. 110 (1948).22. Laikin, Tax Pitfalls (1947) 25 Taxes 657.

Taxation - Family Partnerships

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Taxation - Family Partnerships

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