Commissioner v. Culbertson - 337 U.S. 733, 69 S. Ct. 1210 (1949)

Rule:

The question in determining whether a family partnership is real for income tax purposes is 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.

Facts:

Respondent taxpayer, engaged in the business of breeding and selling cattle, formed a family partnership with his four sons, to whom he sold an undivided one-half interest in the business, taking their promissory note therefor. The note was paid by proceeds from the business and by gifts from respondent. The eldest son was, before and after the formation of the partnership, foreman of the ranch and received compensation as such. In 1940, the first year during which the partnership operated, the second son finished college and went into the Army. The two younger sons went to school in the winter and worked on the ranch in the summer. For the taxable years 1940 and 1941, the Tax Court held that the entire income of the business was taxable to respondent, on the ground that the sons had not contributed to the partnership any capital originating with them nor any vital services. The Court of Appeals reversed, holding that the expectation that the sons would in the future contribute their time and services was sufficient for recognition of the partnership for income tax purposes. 

Issue:

Did the Tax Court erroneously construe the decisions in Commissioner v. Tower, 327 US 280, 90 L ed 670, 66 S Ct 532, 164 ALR 1135, and Lusthaus v. Commissioner, 327 US 293, 90 L ed 679, 66 S Ct 539, as making the issue depending solely upon two essential tests of partnership for income-tax purposes: that each partner contribute to the partnership either (1) vital services, or (2) capital originating with him?

Answer:

Yes.

Conclusion:

The court reversed and remanded the case to the Tax Court for a decision as to which, if any, of respondent's sons were partners during the two tax years because the lower court applied an improper objective standard. The court ruled that under the correct standard, if upon consideration of all the facts, it was found that partners joined together in good faith to conduct a business, having agreed that the services or capital to be contributed by each was of such value that the contributor should participate in the distribution of profits, that was sufficient.