Commissioner v. Tower - 327 U.S. 280, 66 S. Ct. 532 (1946)

Rule:

A wife and a husband may, under certain circumstances, become partners for tax, as for other, purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U.S.C.S. §§ 181, 182. The Tax Court has recognized that under such circumstances the income belongs to the wife. A wife may become a general or a limited partner with her husband. But when she does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws.

Facts:

The Commissioner of Internal Revenue determined that respondent's wife had in her income tax returns for 1940 and 1941 reported as her earnings income that actually had been earned by her husband but had not been reported in his returns. A deficiency assessment was consequently levied against the respondent by the Commissioner. The particular earnings involved were a portion of net income attributed to a partnership to which 90 percent of the capital had been contributed by the taxpayer and his wife. Of this, 51 percent had been contributed by the taxpayer and 39 percent by his wife. The Tax Court sustained the levy, holding that no real partnership between respondent and his wife for purposes of carrying on a business enterprise was formed. The Circuit Court of Appeals for the Sixth Circuit reversed. The Court granted certiorari.

Issue:

Under the circumstances, was it proper to levy a deficiency assessment against the respondent? 

Answer:

Yes.

Conclusion:

The Court held that the tax court was justified in finding that the partnership brought about no real change in the economic relation of the taxpayer and his wife to the income in question. Before the partnership, the husband managed, controlled, and did a good deal of the work involved in running the business, and he had funds at his disposal that he either used in the business or expended for family purposes. Therefore, the evidence supported the finding that no genuine union for partnership business purposes was ever intended and that the husband earned the income.