COMMISSIONER V. TOWER, 327 U. S. 280 (1946)

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U.S. Supreme Court

Commissioner v. Tower, 327 U.S. 280 (1946)

Commissioner v. Tower

No. 317

Argued January 10, 11, 1946

Decided February 25, 1946

327 U.S. 280


Respondent had managed and controlled a manufacturing business since 1927. From 1933 to 1937, it was operated as a corporation. He was president, owning 445 out of 500 shares; his wife was nominal vice-president, owning five shares, and one Amidon was secretary, owning 25 shares. Respondent transferred 190 shares to his wife, paying a gift tax, and, three days later, in order to save taxes, the corporation was dissolved and a partnership was organized consisting of respondent and Amidon as general partners and respondent's wife as a limited partner, with no authority to participate in the conduct of the business. Each contributed the value of his stock, and no new capital was contributed. Respondent continued to manage and control the business, which was conducted as before except that respondent and Amidon ceased to draw salaries. The wife contributed no services to the business, and used her share of the income to buy the same type of things she had bought for herself, home, and family before the partnership was formed.


1. These facts were sufficient to support a finding by the Tax Court that, as between respondent and his wife, no genuine "partnership" within the meaning of 26 U.S.C. §§ 181, 182, existed, that respondent earned the income, and that he should be taxed on it under 26 U.S.C. § 22(a). Pp. 327 U. S. 286, 327 U. S. 291-292.

2. A finding of fact by the Tax Court, being supported by evidence, is final. P. 327 U. S. 287.

3. In passing on the question whether an alleged partnership is a real partnership within the meaning of the federal tax laws, the Tax Court is not governed by the treatment of the partnership by state law and decisions for purposes of state law. P. 327 U. S. 287.

4. While the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits cannot be doubted, Gregory v. Helvering, 293 U. S. 465, this Court cannot order the Tax Court to shut its eyes to the realities of tax avoidance schemes. P. 327 U. S. 288.

Page 327 U. S. 281

5. In passing on the applicability of 26 U.S.C. §§ 181, 182, to income from a "family partnership" --

(a) The question is not simply who actually owned a share of the capital attributed to the wife on the partnership books, but who earned the income. P. 327 U. S. 289.

(b) In this case, that issue depends on whether the husband and wife really intended to carry on business as a partnership. P. 327 U. S. 289.

(c) These issues cannot be decided simply by looking at a single step in a complicated transaction. Pp. 327 U. S. 289-290.

(d) To decide who worked for, otherwise created, or controlled the income, all steps in the process of earning the profits must be taken into consideration. Pp. 327 U. S. 290.

6. A wife may become a general or limited partner with her husband for tax, as for other, purposes, but, when the husband purports to have given her a partnership interest, she does not share in the management and control of the business, and she contributes no vital additional service, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal tax laws. P. 327 U. S. 290.

7. If, in the circumstances of this case, the end result of the creation of a husband-wife partnership, though valid under state laws, is that income produced by the husband's efforts continues to be used for the same business and family purposes as before the partnership, failure to tax it as the husband's income would frustrate the purpose of 26 U.S.C. § 22(a), defining gross income as including all earnings of any individual from "any source whatever." P. 327 U. S. 291.

8. Single tax earnings cannot be divided into two tax units and surtaxes avoided by the simple expedient of drawing up papers creating a husband-wife partnership. P. 327 U. S. 291.

148 F.2d 388, reversed.

The Commissioner of Internal Revenue levied a deficiency assessment against respondent on the ground that the part of the earnings of a "family partnership" which had been paid to, and reported by, his wife actually had been earned by respondent, and should have been reported as his income. The Tax Court sustained the levy. 3 T.C. 396. The circuit court of appeals reversed. 148

Page 327 U. S. 282

F.2d 388. This Court granted certiorari. 326 U.S. 703. Reversed, p. 327 U. S. 292.

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