Commissioner of Internal Revenue v. Culbertson/Concurrence Frankfurter

Mr. Justice FRANKFURTER, concurring.

The Court finds that the Tax Court applied wrong legal standards in determining that the arrangement in controversy did not constitute a partnership. It remands the case to the Tax Court because it is for that court, and not for the Court of Appeals, to ascertain, on the basis of appropriate legal criteria, the existence of a partnership within the provisions of Int.Rev.Code, §§ 181 and 182, 26 U.S.C.A. §§ 181, 182. With these conclusions I agree. I think, however, that it is due to the Tax Court, the Courts of Appeals, the Treasury and the bar to make more explicit what the appropriate legal criteria are.

The Tax Court's decision rested on a misconception of our decision in Commissioner v. Tower, 327 U.S. 280, 66 S.Ct. 532, 90 L.Ed. 670, 164 A.L.R. 1135. It is, however, fair to say that it was led into that misconception by phrases which it culled from the Tower opinion with inadequate attention to the opinion in its entirety-both what it said and what it significantly did not say. The Tower opinion did not say what the Government now urges upon this Court; the Court's opinion did not take the position of the concurring opinion. In short, the opinion did not say that family partnerships are not did not even announce hobbling presumptions purposes even though they be genuine commercial partnerships; the opinion did nto even announce hobbling presumptions under the income-tax law against such partnerships.

On the contrary, in defining the relevant considerations for determining the existence of a partnership, the Court in the Tower case relied on familiar decisions formulating the concept of partnership for purposes of various commercial situations in which the nature of that concept was decisive. It is significant that among the cases cited was the leading case of Cox v. Hickman, 8 H.L.Cas. 268. The Court today reaffirms this reliance by its quotation from the Tower case. The final sentence of the portion quoted underlines the fact that the Court did not purport to announce a special concept of 'partnership' for tax purposes differing from the concept that rules in ordinary commercial-law cases. The sentence is:

'We see no reason why this general rule should not apply in tax cases where the Government challenges the existence of a partnership for tax purposes.' 327 U.S. t page 287, 66 S.Ct. at page 535, 90 L.Ed. 670, 164 A.L.R. 1135.

The taxability of income under §§ 181 and 182 is not a purely economic problem like the determination under § 22(a) of what is income and to whom it is attributable. The word 'income' has none but an economic significance, and so the application of § 22(a) is properly a matter of economic analysis. Cf. Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731. But §§ 181 and 182 import a concept of a different sort. These sections make taxability turn on the existence of the relation of 'partnership.' The term carries its own meaning, just as does 'negligence' in the Federal Employers' Liability Act, 45 U.S.C.A. § 51 et seq., because such a common-law concept has a content familiar throughout the country to those to whom the law speaks. The basic criteria which determine its applicability have been so well and so long established that they were implicitly incorporated by the Internal Revenue Code's definition of 'partnership.' Congress has thereby stamped a nationwide meaning upon the term which disregards minor local variants or an occasional legal sport. Only in the application to a given case of the criteria thus incorporated do economic data become relevant, and such data are inevitably subject to differing inferences by different triers of fact. It is in the appraisal of facts, therefore, that difficulty arises, and this difficulty is reflected by an appellate court in the degree of respect it accords to the particular tribunal whose appraisal of the facts is before it for review.

That, as I see it, is the crux of the problem that is presented by these family partnerships in their relation to the income tax. Men may put on the habiliments of a partnership whenever it advantages them to be treated as partners underneath, although in fact it may be a case of 'The King has no clothes on' to the sharp eyes of the law. Since there are special temptations to appear as a partnership in order to avoid the hardships of heavy taxation, the tribunal which presumably is gifted with superior discernment in differentiating between the real thing and the imitation-the Tax Court-will naturally be on the alert against being taken in. Therefore, a finding by the Tax Court that that which has the outward appearance of an arrangement to engage in a common enterprise is not in fact such an associated business venture ought to be respected when challenged in another court, unless such a determination is wholly without warrant in fact or, as in this case, the wrong standards for judgment have been applied.

A fair reading of our Tower opinion in its entirety reflects the formulation of the concept of partnership which is set forth at the beginning of its analysis and which the Court now quotes. While recognizing the importance of the question 'who actually owned a share of the capital attributed to the wife on the partnership books,' the Tower opinion states the ultimate issue to be 'whether this husband and wi e really intended to carry on business as a partnership.' 327 U.S. at page 289, 66 S.Ct. at page 537, 90 L.Ed. 670, 164 A.L.R. 1135. To that determination it was of course relevant that no new capital was brought into the business as a result of the formation of the partnership, that the wife drew on income of the partnership only to pay for the type of things she had previously bought for the family, and that the consequence was a mere paper reallocation of income. But these circumstances were not cited as giving the term 'partnership' a content peculiar to the Internal Revenue Code. They were characterized, rather, simply as 'more than ample evidence to support the Tax Court's finding that no genuine union for partnership business purposes was ever intended' and, as a corollary, 'that the husband earned the income.' 327 U.S. at page 292, 66 S.Ct. at page 538, 90 L.Ed. 670, 164 A.L.R. 1135.

Recognition of the importance, in applying §§ 181 and 182, of the appraisal of facts makes manifest why, quite apart from the definition contained in § 3797, a determination by a State court should not, as the Tower opinion pointed out, foreclose a contrary determination by a federal tribunal charged with administration of the tax laws. Such an inconsistency would not mean that the legal standards applied by each were inconsistent; it would be a result simply of the common-place that no finder of fact can see through the eyes of any other finder of fact. See Texas v. Florida, 306 U.S. 398, 411, 59 S.Ct. 563, 570, 83 L.Ed. 817, 121 A.L.R. 1179. Nor would inconsistency be created by a State court's concern for the protection of creditors which lead it to seize upon adoption of the outward form as the vital fact. So, indeed, might the taxing authorities refuse to be precluded from holding the taxpayer to his election to adopt the form of a partnership. Cf. Higgins v. Smith, 308 U.S. 473, 477, 60 S.Ct. 355, 357, 84 L.Ed. 406. The need for guarding against misuse of the outward form of a partnership as a device for obtaining tax advantages is properly satisfied by reliance on the vigilance of the Tax Court, not by distorting the concept of partnership. It is not for this Court, by redefinition or the erection of presumptions, to amend the Internal Revenue Code so as virtually to ban partnerships composed of the members of an intimate family group.

The present case, nevertheless, is not the first manifestation of an impression that the Tower opinion had precisely such an effect. It seems to me important, therefore, to make crystal clear that there is no special concept of 'partnership' for tax purposes, while at the same time recognizing that in view of the temptations to assume a virtue that they have not for the sake of tax savings, men and women may appear in a guise which the gimlet eye of the Tax Court is entitled to pierce. We should leave no doubt in the minds of the Tax Court, of the Courts of Appeals, of the Treasury and of the bar that the essential holding of the Tower case is that there is 'no reason' why the 'general rule' by which the existence of a partnership is determined 'should not apply in tax cases where the Government challenges the existence of a partnership for tax purposes.'

In plain English, if an arrangement among men is not an arrangement which puts them all in the same business boat, then they cannot get into the same boat merely to seek the benefits of §§ 181 and 182. But if they are in the same business boat, although they may have varying rewards and varied responsibilities, they do not cease to be in it when the tax collector appears.