Mr. Arnold Raum, Washington, D.C., for petitioner.
[337 U.S. 733 , 735] Mr. Be jamin L. Bird, Fort Worth, Tex., for respondents.
Mr. Chief Justice VINSON delivered the opinion of the Court.
This case requires our further consideration of the family partnership problem. The Commissioner of Internal Revenue ruled that the entire income from a partnership allegedly entered into by respondent and his four sons must be taxed to respondent,1 and the Tax Court sustained that determination. The Court of Appeals for the Fifth Circuit reversed. 168 F.2d 979. We granted certiorari, 335 U.S. 883 , to consider the Commissioner's claim that the principles of Commissioner v. Tower, 1946, 327 U.S. 280 , 164 A.L.R. 1135, and Lusthaus v. Commissioner, 1946, 327 U.S. 293 , have been departed from in this and other courts of appeals decisions.
Respondent taxpayer is a rancher. From 1915 until October 1939, he had operated a cattle business in partnership with R. S. Coon. Coon, who had numerous business interests in the Southwest and had largely financed the partnership, was 79 years old in 1939 and desired to dissolve the partnership because of ill health. To that end, the bulk of the partnership herd was sold until, in October of that year, only about 1,500 head remained. These cattle were all registered Herefords, the brood or foundation herd. Culbertson wished to keep these cattle and approached Coon with an offer of $65 a head. Coon agreed to sell at that price, but only upon [337 U.S. 733 , 736] condition that Culbertson would sell an undivided one-half interest in the herd to his four sons at the same price. His reasons for imposing this condition were his intense interest in maintaining the Hereford strain which he and Culbertson had developed, his conviction that Culbertson was too old to carry on the work alone, and his personal interest in the Culbertson boys. Culbertson's sons were enthusiastic about the proposition, so respondent thereupon bought the remaining cattle from the Coon and Culbertson partnership for $99,440. Two days later Culbertson sold an undivided one-half interest to the four boys, and the following day they gave their father a note for $49,720 at 4 per cent interest due one year from date. Several months later a new note for $57,674 was executed by the boys to replace the earlier note. The increase in amount covered the purchase by Culbertson and his sons of other properties formerly owned by Coon and Culbertson. This note was paid by the boys in the following manner:
Credit for overcharge $ 5,930 Gifts from respondent 21,744 One-half of a loan procured by Culbertson & Sons partnership 30,000
The loan was repaid from the proceeds from operation of the ranch.
The partnership agreement between taxpayer and his sons was oral. The local paper announced the dissolution of the Coon and Culbertson partnership and the continuation of the business by respondent and his boys under the name of Culbertson & Sons. A bank account was opened in this name, upon which taxpayer, his four sons and a bookkeeper could check. At the time of formation of the new partnership, Culbertson's oldest son was 24 years old, married, and living on the ranch, of which he had for two years been foreman under the [337 U.S. 733 , 737] Coon and Culbertson partnership. He was a college graduate and received $ 100 a month plus board and lodging for himself and his wife both before and after formation of Culbertson & Sons and until entering the Army. The second son was 22 years old, was married and finished college in 1940, the first year during which the new partnership operated. He went directly into the Army following graduation and rendered no services to the partnership. The two younger sons, who were 18 and 16 years old respectively in 1940, went to school during the winter and worked on the ranch during the summer. 2
The tax years here involved are 1940 and 1941. A partnership return was filed for both years indicating a division of income approximating the capital attributed to each partner. It is the disallowance of this division of the income from the ranch that brings this case into the courts.
First. The Tax Court read our decisions in Commissioner v. Tower, supra, and Lusthaus v. Commissioner, supra, as setting out two essential tests of partnership for income-tax purposes: that each partner contribute to the partnership either vital services or capital originating with him. Its decision was based upon a finding that none of respondent's sons had satisfied those requirements during the tax years in question. Sanction for the use of these 'tests' of partnership is sought in this paragraph from our opinion in the Tower case:
The Court of Appeals, on the other hand, was of the opinion that a family partnership entered into without thought of tax avoidance should be given recognition taxwise whether or not it was intended that some of the partners contribute either capital or services during the tax year and whether or not they actually made such contributions, since it was formed 'with the full expectation and purpose that the boys would, in the future, contribute their time and services to the partnership.'3 We must consider, therefore, whether an intention to contribute capital or services sometime in the future is [337 U.S. 733 , 739] sufficient to satisfy ordinary concepts of partnership, as required by the Tower case. The sections of the Internal Revenue Code involved are 181 and 182,4 which set out the method of taxing partnership income, and 11 and 22(a),5 which relate to the taxation of individual incomes.
In the Tower case we held that despite the claimed partnership, the evidence fully justified the Tax Court's holding that the husband, through his ownership of the capital and his management of the business, actually c eated the right to receive and enjoy the benefit of the income and was thus taxable upon that entire income under 11 and 22(a). In such case, other members of the partnership cannot be considered 'Individuals carrying on business in partnership' and thus 'liable for income tax * * * in their individual capacity' within the meaning of 181. If it is conceded that some of the partners contributed neither capital nor services to the partnership during the tax years in question, as the Court of Appeals was apparently willing to do in the present case, it can hardly be contended that they are in any way responsible for the production of income during those years. 6 The partnership sections of the Code are, of course, geared to the sections relating to taxation of individual income, since no tax is imposed upon partnership income as such. To hold that 'Individuals carrying on business in partnership' include persons who contribute nothing during the tax period would violate the first principle of income taxation: that income must [337 U.S. 733 , 740] be taxed to him who earns it. Lucas v. Earl, 1930, 281 U.S. 111 ; Helvering v. Clifford, 1940, 309 U.S. 331 ; National Carbide Corp. v. Commissioner, 1949, 336 U.S. 422 .
Furthermore, our decision in Commissioner v. Tower, supra, clearly indicates the importance of participation in the business by the partners during the tax year. We there said that a partnership is created 'when persons join together their money, goods, labor, or skill for the purpose of carrying on a trade, profession, or business and when there is community of interest in the profits and losses.' This is, after all, but the application of an often iterated definition of income-the gain derived from capital, from labor, or from both combined7-to a particular form of business organization. A partnership is, in other words, an organization for the production of income to which each partner contributes one or both of the ingredients of income-capital or services. Ward v. Thompson, 1859, 22 How. 330, 334. The intent to provide money, goods, labor, or skill sometime in the future cannot meet the demands of 11 and 22(a) of the Code that he who presently earns the income through his own labor and skill and the utilization of his own capital be taxed therefor. The vagaries of human experience preclude reliance upon even good faith intent as to future conduct as a basis for the present taxation of income. 8 [337 U.S. 733 , 741] Second. We turn next to a consideration of the Tax Court's approach to the family partnership problem. It treated as essential to membership in a family partnership for tax purposes the contribution of either 'vital services' or 'original capital.'9 Use of these 'tests' of partnership indicates, at best, an error in emphasis. It ignores what we said is the ultimate question for decision, namely, 'whether the partnership is real within the meaning of the federal revenue laws' and makes decisive what we d scribed as 'circumstances (to be taken) into consideration' in making that determination.