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U.S. Supreme Court

Commissioner v. Culbertson, 337 U.S. 733 (1949)

Commissioner v. Culbertson

No. 313

Argued February 7, 1949

Decided June 27, 1949

337 U.S. 733


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.


1. Members of a partnership who contributed neither capital nor services during the tax year cannot be regarded as "carrying on business in partnership" within the meaning of § 181 of the Internal Revenue Code. Pp. 337 U. S. 737-740.

(a) To hold that "individuals carrying on business in partnership" includes persons who contribute nothing during the tax period would violate the first principle of income taxation: that income must be taxed to him who earns it. Pp. 337 U. S. 739-740.

(b) The intent to provide money, goods, labor, or skill sometime in the future cannot satisfy the requirement of §§ 11 and 22(a) of the Code that he who presently earns the income through his labor and skill be taxed therefor. P. 337 U. S. 740.

2. In determining whether there was a true partnership for income tax purposes, the fact that there was no contribution of "original capital" or "vital services" is to be taken into consideration, but it is not conclusive. Pp. 337 U. S. 741-745.

Page 337 U. S. 734

(a) The test 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. P. 337 U. S. 742.

(b) If, upon a consideration of all the facts, it is found that the partners joined together in good faith to conduct a business, having agreed that the services or capital to be contributed presently by each is of sufficient value to the partnership that the contributor should participate in the distribution of profits, that is sufficient. Pp. 337 U. S. 744-745.

3. A contribution of "original capital" is not essential to membership in a family partnership. Pp. 337 U. S. 745-748.

(a) A finding that no true partnership was intended is not to be inferred automatically from the fact of a gift to a member of one's family, followed by its investment in the family partnership. P. 337 U. S. 746.

(b) If the donee of property who then invests it in the family partnership exercises dominion and control over that property -- and through that control influences the conduct of the partnership and the disposition of its income -- he may well be a true partner. P. 337 U. S. 747.

4. The cause must be remanded to the Tax Court for decision as to which, if any, of respondent's sons were partners with him in the operation of the business during the tax years in question. P. 337 U. S. 748.

168 F.2d 979 reversed.

The Commissioner's determination of a deficiency in respondent's income tax for 1940 and 1941 was sustained by the Tax Court. The Court of Appeals reversed. 168 F.2d 979. This Court granted certiorari. 335 U.S. 883. Reversed and remanded, p. 337 U. S. 748.

Page 337 U. S. 735

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