W. H. Neil and Aileen W. Neil, Petitioners, v. Commissioner of Internal Revenue, Respondent, 269 F.2d 563 (5th Cir. 1959)

The appeal in these consolidated cases from decisions of the Tax Court entered on July 30, 1958, involves deficiencies in income taxes aggregating about $78,000 and penalties aggregating about $12,000 for the years 1949-1953, both inclusive.

The principal question presented for determination is whether there is includable in W. H. Neil's income all the income from the partnership interest standing in his name, or whether such income is taxable one-third to him and one-third to each of his two sisters. Subordinate questions, whose determination depends upon the answer to the first question are: whether petitioners are liable for penalties and the amount of such penalties for failing to file declarations of income tax; and whether the assessment against Neil of the deficiencies for 1949 are barred by limitation.

The Tax Court's lengthy and argumentative statement of the case, labelled, "Findings of Fact", is not published, and to endeavor to separate its findings of fact from its conclusions of law would be a difficult and unrewarding, if not impossible task. It will be necessary, therefore, for us to state from the record and set out in the margin the undisputed facts¹  as taxpayer's allegations, the documentary PAGE CONTAINED FOOTNOTES evidence, and the brief but undisputed testimony of his three witnesses establish them to be.

On this record, which contains not a single fact in contradiction of the testimony of petitioner and his witnesses or of the instrument signed by Neil and his sisters in 1949, petitioner contended below and contends here that in the tax years in question the one-half undivided interest in the Leonard partnership, which stood in W. H. Neil's name, was beneficially owned in equal shares by him and his two sisters, and the income therefrom was taxable to each of the three equally.

The Tax Court recognizing that the evidence was all one way and that there was no question of veracity in the case but only of the sufficiency, the legal effect, of the facts testified to, foreshadowed and keynoted the conclusion at which it did arrive by stating:

"We do not doubt that there was some intent and understanding that the petitioner's two sisters were to derive some benefit from this enterprise provided it turned out to be successful, but this is not to say that they became partners." (Emphasis supplied.)

Turning, then, to a discussion of the instrument under which all of the income in question here was received and returned for taxes,²  the court, in the face of the language of the instrument and of conclusive testimony to the contrary as to its purpose and effect, stated that it did not think that the execution of that instrument was effective to make the sisters partners in the Leonard partnership or members of a sub-partnership with their brother. Continuing the same wishful thinking in the same vein, in express contradiction of the fact that the instrument was drawn as a result of Neil's discovery of the way the tax returns had been mishandled and for the purpose of assuring that this would not again occur, the Tax Court came up with this complete misinterpretation:

"As we read this instrument, it does not purport to make the sisters members of any partnership. It merely provides that `all net sums' received by the petitioner shall be divided equally between the petitioner and his sisters. We incline to the belief that the language used was intended to mean that after Jan. 1, 1949, the sisters were to share in the petitioner's distributive share of the income of the Leonard Partnership. But even if it be construed as broad enough to cover any distribution after Jan. 1, 1949, the use of the term `net' must be given effect, and we think it means that the sum in which the sisters would share is the net sum, after deduction of any capital invested by the petitioner and after payment of any liability he had incurred as a partner. Accordingly, we do not construe this contract as vesting in the sisters any interest in the capital invested in the partnership. Thus, even under this agreement, the sisters may not be considered as partners since they did not have any capital invested in the venture."

Of the petitioners' argument, that the instrument of January 1, 1949, was the reduction to writing of a previous existing express oral trust, that such trust when declared in writing was one for the benefit of the three signers and that under Sec. 167(a) (1) of the Code, 26 U.S. C.A. § 167(a) (1), a ratable share of the trust income was annually taxable to each of the three signers, the Tax Court, completely ignoring that for the tax years the trust was acknowledged in writing, said:

"The principal weakness of this argument is that there is no basis in the evidence for the view that there was an oral trust for the benefit of the petitioner's sisters when the truck leasing operation was started."

Stating that until 1949 the evidence indicated that petitioner treated the investment as his own, the court went on to say that neither in the original arrangement nor by the instrument of January 1, 1949, were the terms and circumstances sufficient to place Neil's Leonard partnership interest in trust for the benefit of himself and his sisters, and, following the same assumptive reasoning, the court thus arrived at this sweeping conclusion of law:

"Upon careful consideration of all the evidence, we find no basis, under either the partnership or trust provisions of the Code, for treating as income of the petitioner's sisters any part of the income derived by him from his investment in the truck leasing business. It is our opinion that insofar as the agreement of Jan. 1, 1949 deals with the income from the Leonard partnership, it was no more than an anticipatory assignment by the petitioner of his income from that venture."

Here taxpayers, urging upon us that the Tax Court, with its misconception of the undisputed facts and upon assumptions which were expressly rejected and condemned in Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, at pages 737-746, 69 S. Ct. 1210, at pages 1211-1216, 93 L. Ed. 1659, and with its gaze fore-shortened by its intense pre-occupation with its erroneous views on the partnership question and its predetermined view that the case was one merely of anticipatory assignment of income, was unable to see and decide the case as it really is, attack the conclusions of the Tax Court as wholly erroneous and as resulting from such complete misapprehension of the nature and effect of the evidence, that they do not reflect or represent the truth and right of the case. Sanders v. Leech, 5 Cir., 158 F.2d 486, 487; United States v. United States Gypsum Co., 333 U.S. 364, at page 395, 68 S. Ct. 525, at page 541, 92 L. Ed. 746. We agree with the taxpayers that this is so.

Notwithstanding the fact that the opinion in the Culbertson case, supra, carefully pointed out the errors into which the Tax Court had fallen, that court, as appears in its action in the second appearance of the Culbertson case, Culbertson v. C. I. R., 5 Cir., 194 F.2d 581, and in the wrecks of its other decisions on the shores of this and other appellate courts, has been reluctant to recognize and turn away from them. Some of the explanation is to be found in the unwillingness of the Tax Court to recognize and apply the tax law of partnership as it is established in the Culbertson decision and the multitude of cases, collected in Shepherd's Notes to that case, citing and following it, and by Sec. 3797(a) (2) I.R.C.1939, 26 U.S.C.A. § 3797(a) (2) and § 340(a) of the Internal Revenue Act of 1951, which declares:

"A person shall be recognized as a partner for income tax purposes if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by gift or purchase from any other person."

There is no principle in tax law which requires or permits the trier of facts to set up a special concept of partnership for tax purposes or to treat the facts in a tax case differently from the way they should be treated in any other kind of litigation. Indeed, the decisions are to the contrary.³ 

Another explanation is to be found in the use by the Tax Court of the brilliant figure of speech in Lucas v. Earl, 281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731, not as a guide to a true determination of the question posed but as a shibboleth in all transactions between members of a family, whether through partnerships or by trusts, an approach which the Supreme Court in the Culbertson case, after having held that it is not essential that a member of a family partnership contribute either vital services or original capital, condemned in these words:

"The fact that transfers to members of the family group may be mere camouflage does not, however, mean that they invariably are." (Emphasis supplied.) [337 U.S. 733, 69 S. Ct. 1216.]

Since the Culbertson case from this court was affirmed in principle in the Supreme Court, this and other courts have taken pains to consistently declare and apply these now settled principles of tax law. These are that in all cases, whether the claim to income of a member of a family is based upon a claim as a partner or as beneficiary of a trust, the controlling question for decision is not whether the claim is made by a member of a family but under general law, whose was the tree that produced the fruit, whose the services or property which produced the income. Cf. Blair v. Commissioner, 300 U.S. 5, 57 S. Ct. 330, 81 L. Ed. 465; Dyer v. Commissioner, 2 Cir., 211 F.2d 500.

We have recently carefully pointed this out in West v. Commissioner, 5 Cir., 214 F.2d 300, 302,⁴  where the Tax Court, by labelling the arrangement under which the income was owned by the beneficiaries of a trust a "spurious family partnership", sought erroneously, as here, to separate the income from its earners, the fruit from the tree.

It is certainly true that if in the tax years in question the sisters in this case had no title or interest with Neil in the venture, they would have no title to, or interest in, the fruits. It is as certainly true, under the Tax Court's own conclusion, that it was intended from the beginning that the sisters were to derive some benefit from the enterprise, "if it became profitable". Under the undisputed evidence that, as to the tax years in question, giving due weight to all the facts and circumstances, including particularly the 1949 written declaration of trust entered into between the brother and his sisters for the express purpose of correcting the errors of the earlier returns which had incorrectly credited all the income to him, it must be held as matter of law that they had such an interest and that the Tax Court's holding to the contrary was wholly unjustified. In case after case this court and others have insisted on standing to and applying the principle first enunciated in Lucas v. Earl, supra, and clarified in the Culbertson and Blair cases, supra, and if this court remains consistent with the law as its former decisions have declared it, it must so declare here and reverse the judgment of the Tax Court.

The judgment is reversed and the cause is remanded to the Tax Court with directions to find the correct amount of the additions to the tax, if any, under Section 294 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 294.

RIVES, Chief Judge (concurring specially).

The documentary evidence coupled with the undisputed and admittedly credible testimony is clearly sufficient to control the disposition of this case. All of the income in question was derived from a truck lease agreement with Container Corporation of America entered into by O. P. Leonard, Trustee, pursuant to an agreement quoted in the margin.¹  The taxpayer's contribution to that venture consisted entirely of capital and credit: $5,000.00 in cash which he had borrowed from his father, his own agreement to pay "one half of the expenses and cost incurred in said joint adventure," and, doubtless of more importance to Leonard, the letter from the taxpayer's father guaranteeing performance of his obligations.

By January 1, 1949, the O. P. Leonard, Trustee, truck account was enormously prosperous with no unpaid liabilities and no reasonable prospect of becoming insolvent. From his profits the taxpayer had repaid to his father the $5,000.00 loan. As of that date, at the request of taxpayer and his father, an attorney prepared the agreement between the taxpayer and his two sisters which has been quoted in full in footnote 2 to Judge Hutcheson's opinion.

But for the agreement of January 1, 1949, it may be that we could accept as not clearly erroneous the Tax Court's finding that the taxpayer's two sisters were not partners and owned no interest in the venture.² 

That finding is, however, subject to serious factual criticism and, of more importance, it discloses that the Tax Court was laboring under a mistaken conception of the law.

The original agreement of March 1946 was prepared by Jenkins Garrett, Esquire the general counsel for the Leonard interests, at Mr. Leonard's directions without consulting the taxpayer. Mr. Garrett had no recollection of any conversation with the taxpayer's father, and testified: "* * * I have no independent recollection of dealing with anyone other than Mr. O. P. Leonard." Mr. Garrett further testified:

"* * * Mr. O. P. Leonard asked me if it was possible to work out on (sic) arrangement whereby his children and Mr. Neil's children could enter into a business of furnishing trucks to Container Corporation.

* * * * * *

"* * * When he explained his concern or asked the question as to whether or not minors owning the trucks would make any difference, he told me that neither he nor Mr. J. R. Neil, who is the father of W. H. Neil, wanted this for themselves, but wanted it for their children. It was definitely my understanding at that time that the joint venture was for the children of Mr. O. P. Leonard and the children of Mr. J. R. Neil."

Thus, the taxpayer's testimony did not stand alone, as indicated by the Tax Court, but was strongly corroborated by the testimony of Mr. Garrett. True, even Mr. Garrett's testimony is at variance with the agreement which he prepared, but it must be remembered that he was primarily protecting the interest of his own client, Mr. Leonard. Leonard was interested in seeing that the Neils paid $5,000.00 cash into the venture and that the credit of the taxpayer and of his father was pledged. The distribution of the Neils' share of the profit was of no concern to Leonard.

Further, the Tax Court itself states: "We do not doubt that there was some intent and understanding that the petitioner's two sisters were to derive some benefit from his enterprise, provided it turned out to be successful." Thus, the Tax Court concedes that the two sisters were to derive some benefit from the enterprise. The only such benefit which the evidence tends to establish was that the sisters should share equally in the profits with their brother, the taxpayer.

The Tax Court declined to give effect to that understanding because it did not conform to the technical requirements of a common-law partnership, saying: "But this is not to say that they became partners. The sisters were in no way mentioned in the agreement with Leonard. There was quite apparently no obligation on their part to share in losses."

The original agreement of March 1946, heretofore quoted in footnote 1, does not use words appropriate to articles of partnership but repeatedly refers to the truck leasing arrangement as a "joint adventure." Mr. Garrett, the attorney who drew that agreement and also the lease to Container Corporation made a part of the agreement, testified:

"Well, it is merely a lease arrangement akin to a joint ownership of a building which you lease to a tenant. The Container people furnish the drivers and do all the details of it; however, O. P. Leonard as Trustee does handle all the relationships with the representatives of Container Corporation."

Certainly the original agreement was not a common-law partnership in the conduct of which each of the partners acts as the general agent of the others. To the contrary, no one had authority to bind Leonard who was "to have exclusive charge and control of all matters * *." No services whatsoever were required of the taxpayer or of anyone other than Leonard. The $5,000.00 cash having been paid and the credit obligations of the taxpayer and his father not being in default, neither Leonard nor the enterprise could call for more. The taxpayer, whether for himself alone, or for himself and his two sisters, was then entitled to receive one half of "any profit which might be realized from said operation." The sisters, being minor children, could not agree to be responsible for any possible losses. Leonard did not look to them, but was content to rely upon the credit of the taxpayer and his father. The interest in the enterprise in the name of the taxpayer was as truly a property right subject to transfer and assignment, or to being held in trust, as if the business had been incorporated and fifty per cent of its capital stock had been issued in the taxpayer's name. The enterprise was a typical "joint adventure," and was correctly so designated by the experienced counsel who drew the agreement.

In Haley v. Commissioner of Internal Revenue, 5 Cir., 1953, 203 F.2d 815, 818, 819, this Court speaking through the writer said:

"A joint venture has been defined as a `special combination of two or more persons, where in some specific venture a profit is jointly sought without any actual partnership or corporate designation'. Tompkins v. Commissioner, 4 Cir., 97 F.2d 396, 398; Aiken Mills v. United States, 4 Cir., 144 F.2d 23; See also Mertens' Law of Federal Income Taxation, Vol. 6, Sec. 35.05, p. 118. Section 3797(a) (2) of the Internal Revenue Code (beginning with Sec. 1111(a) (3) of the 1932 Act)<sup>2</sup>  has defined the term `Partnership' so as to include a joint venture, as follows:

"`Partnership and partner. The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.'

"2. For legislative history of this section see Report of Committee on Ways & Means on the Revenue Bill of 1932 contained in Seidman's `Legislative History of Federal Income Tax Law,' at p. 501."

The written agreement between the taxpayer and his two sisters became effective January 1, 1949, and the tax years here involved, that is the calendar years 1949 to 1953, inclusive, are all subsequent to that agreement. The Tax Court's construction of that agreement³  seems excessively technical and narrow. The intent of the agreement was obviously to place the two sisters in the same position as if the facts recited in that agreement had been true, that is, as if the $5,000.00 loan from the father (and, though not recited, the extension of the father's credit) had been with the understanding that the taxpayer would treat the business operation as an equal partnership between himself and his two sisters. The instrument of January 1, 1949, was adequate to create a valid trust under the provisions of the Texas Trust Act.⁴ 

The Tax Court's construction of the agreement of January 1, 1949 (footnote 3, supra), is contrary to the undisputed evidence showing the contemporaneous construction of the instrument by the parties thereto, as indeed recited in earlier findings by the Tax Court itself:

"Capital accounts for Maryanne and Nancy were first entered in the accounts of the petitioner by entries dated January 1949. At that time $14,427.44 was charged to the petitioner's capital account and $7,213.72 was credited to each of his sisters. The entries were described as `1/3 distribution of Joint Venture to W. H. Neil, Nancy Neil, & Mary Ann (sic) Neil.' By other journal entries dated December of each of the years 1949, 1950, 1951, and 1952 charges were made on the petitioner's records to `Investment a/c' and credits were made to the petitioner and to each of his sisters of one-third of the amount charged to the investment account. The amounts so charged and credited are the same amounts."⁵ 

The Tax Court was of the opinion, however, that the agreement of January 1, 1949, could not be effective to shift the tax from the taxpayer on the income attributable to the interest standing in his name in the leasing venture under the holdings of Lucas v. Earl, 1930, 281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731, and Burnet v. Leininger, 1932, 285 U.S. 136, 52 S. Ct. 345, 76 L. Ed. 665.

Since the income was derived solely from a capital and credit investment in the joint venture, and since the taxpayer (with the consent of his guarantor) had validly agreed that each of his sisters was the beneficial owner of a one-third interest in that investment, this was more than a mere anticipatory assignment of income condemned in Lucas v. Earl, supra. To employ that case's famous figure of speech, his sisters had a share not only in the fruits but also in the tree on which they grew.

On the surface the facts of the present case seems strikingly similar to those in Burnet v. Leininger, supra,⁶  but the resemblance is purely superficial. Leininger and one Monaghan (or Monaghan's heirs) were active partners in a commonlaw partnership known as Eagle Laundry Company. Leininger undertook to make his wife "a full equal partner with him in his interest in the partnership." [285 U.S. 136, 52 S. Ct. 345.] Of course, as the Supreme Court commented, Leininger's wife could not be made a member of the partnership "without the consent of the other partner or partners, and there is no finding of such consent." In the case at bar, the situation is different. Leonard, taxpayer's co-adventurer, had absolutely no concern with the disposition of the pure property interest in the business which stood in the taxpayer's name. In Burnet v. Leininger the income was produced by "the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business." Here, the Neil interest in the joint venture consisted entirely of an investment of capital and of the credit of the taxpayer and his father, at whose instance the agreement of January 1, 1949, was prepared and executed. The present case is governed by Blair v. Commissioner, 1937, 300 U.S. 5, 11, 57 S. Ct. 330, 81 L. Ed. 465, et seq., rather than by Burnet v. Leininger, supra. In a somewhat similar situation, Judge Lindley speaking for the Seventh Circuit said: "Furthermore, we are dealing with an agreement which made the parties joint venturers and which, thus, amounted to much more than the equitable assignment involved in the Leininger case." Rupple v. Kuhl, 7 Cir., 1949, 177 F.2d 823, 826. In United States v. Atkins, 5 Cir., 1951, 191 F.2d 146, 147, Judge Holmes speaking for this Circuit said:

"This is not a case of the taxpayer assigning fees, wages, salaries, or other income, to be earned by him in the future from work to be performed by him in the future. Atco's income resulted from capital invested in operating partnerships, and from the services performed by managing partners. The taxpayer did not assign income from those operating partnerships: he assigned his share, his entire interest, in those partnerships to a separate partnership (Atco Investment Company), the members of which firm were engaged in a joint venture. See Rupple v. Kuhl, 7 Cir., 177 F.2d 823, 825. Burnet v. Leininger, 285 U.S. 136, 52 S. Ct. 345, 76 L. Ed. 665, distinguished."

See also, West v. Commissioner of Internal Revenue, 5 Cir., 1954, 214 F.2d 300.

Sommers v. Commissioner, 2 Cir., 1952, 195 F.2d 680, 681, involved another "subventure" where the taxpayer's wife had made a substantial contribution to capital. In a per curiam opinion, the Court (Swan, Chief Judge, and Learned Hand and Augustus Hand, Judges) ruled for the taxpayer and agreed with the doctrine laid down in Rupple and Atkins, supra.

Subsequent to January 1, 1949, it is clear that the taxpayer was the beneficial owner of only a one-sixth interest in the "O. P. Leonard, Trustee, Truck Account."

The parties are in agreement that a holding to that effect will dispose of the subordinate issue as to whether the deficiency determined by the Commissioner for the year 1949 is barred by limitations under Section 275(a) of the 1939 Internal Revenue Code, 26 U.S.C.A. § 275(a). Another subordinate question is whether the Tax Court correctly sustained additions to the taxpayer's tax for failure to file declarations of estimated tax under Sections 294(a) (1) (A) and (2) of the 1939 Code. The petitioners ask this Court "to remand the proceedings to the Tax Court with directions to find the correct amount of the additions to the tax, if any, under Section 294 of the Internal Revenue Code of 1939." The concluding sentence of Judge HUTCHESON'S opinion should be read to include such directions.

For the reasons stated, I specially concur.

HUTCHESON, Circuit Judge.

I concur fully in Judge RIVES' excellent concurring opinion.

TUTTLE, Circuit Judge (dissenting).

With deference to the views of my colleagues, I am constrained to dissent.

At the outset it must be remembered that we are dealing here with income which was paid exclusively to the taxpayer as his partnership share of a business in which, according to the written partnership agreement, only he and Leonard, as guardian for Leonard's minor children, were the partners. The taxpayer therefore starts with something of a burden to establish some theory on which part of such income earned by such business and distributed to him as a partner rightfully belongs for income tax purposes to his two sisters.

In considering any theory advanced by the taxpayer, we must bear in mind the basic principle that normally income is taxable to him who earns it. I think it clear beyond any question that this income was earned by Neil as a member of a partnership of which the Tax Court was amply justified to find the sisters were not and never intended to be members.

There are several critical facts in this record that are documentary in form and are thus not dependent on oral testimony for their establishment. These facts, it seems to me add up to enough, if not to require the decision made by the Tax Court, then, at the very least, to warrant it.

A partnership contract was entered into in writing between Leonard, as guardian for his children, and W. H. Neil. The two parties were to invest $5,000 each in a business of acquiring and renting trucks to the Container Corporation of America, a relationship which apparently Neil's father, J. R. Neil, could control. Neil's $5,000 came by way of a loan from his father. The partnership agreement made no mention of Neil's two minor sisters, although it did expressly name Leonard's four minor children as the partners for whom he acted.

This business entity, thus created by the written contract, set up partnership books in which all business transactions were faithfully recorded. There was a capital account set up for Leonard, Guardian, and another for W. H. Neil. Leonard conducted all of the business in accordance with a stipulation in the written agreement. Neil's partnership interest was acquired by his capital contribution plus the fact that his father guaranteed in writing all of his obligations. This guarantee did not mention the sisters.¹ 

It was a highly profitable operation. The money poured in. The $5,000 loan was promptly paid back to Neil's father and Neil loaned his father other sums which he received prior to January 1, 1949.

For all the years from the inception of the business through the last tax year the Leonard partnership filed regular partnership information returns which showed Leonard, guardian for his four named children, and W. H. Neil as the only partners. Through March, 1949, Neil filed his own individual income tax returns in which he reported as personal income to him his one-half of the net profits from the Leonard partnership.

As of January 1, 1949, Neil and his two sisters signed an agreement which expressly recognized that Neil alone was a partner with Leonard. It stated: "William Henry Neil is interested in a certain motor truck rental business with O. P. Leonard, which business is conducted under the general name and style of O. P. Leonard, Trustee."

As we have just stated, this confirms all of the significant writings and acts of the parties up to that moment.

Moreover, even after this contract was signed, Neil signed his income tax return for the year 1948, in which he reported all the income from the Leonard partnership as his own personal income. No amended returns were ever made seeking to change this return.

Thereafter, for the tax years in question, Neil filed partnership returns for W. H. Neil, et al., showing as partners himself and his two sisters. Nowhere did he ever file or cause to be filed a partnership return showing his sisters to be partners in the Leonard partnership.

Now, it seems elemental that under the most liberal treatment ever afforded family partnership situations — certainly under the principles laid down in the Culbertson case, it was within the competence of the Tax Court to find, as it did, that the Leonard partnership consisted of Leonard as guardian for his children and W. H. Neil, and that it did not include the two girls. And this it could find on this documentary record, notwithstanding the oral testimony given at the trial that when Neil, Sr. loaned the money to his son it was understood between them that the sisters were to share equally.

Certainly nothing contained in the agreement of January 1, 1949, printed in full in footnote 2, 269 F.2d 566, made the sisters members of the Leonard partnership. That gambit was tried by a taxpayer in Burnet v. Leininger, 285 U.S. 136, 52 S. Ct. 345, 346, 76 L. Ed. 665. The Supreme Court said that one partner in a two-man firm cannot make his wife a partner with him to split up his share of the partnership income by making a sub-partnership agreement with her to that effect. That is the most that can be said of the effect of this 1949 agreement so far as creating a partnership or joint enterprise is concerned.

But now that litigation has commenced, for the first time Neil says that if the 1949 agreement did not make his sisters partners in the business that earned the income, then it created a trust for their benefit and their share of the income from the trust must be taxable to the sisters. This was also dealt with in the Leininger case. There the court said:

"The respondent urges that the assignment to his wife was of one-half of the `corpus' of his interest and that this `corpus' produced the income in question. The characterization does not aid the contention. That which produced the income was not Mr. Leininger's individual interest in the firm, but the firm enterprise itself, that is, the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business. There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management. If it be assumed that Mrs. Leininger became the beneficial owner of one-half of the income which her husband received from the firm enterprise, it is still true that he, and not she, was the member of the firm and that she had only a derivative interest." Burnet v. Leininger, 285 U.S. 136, 141, 52 S. Ct. 345, 346, 76 L. Ed. 665.

To be sure a donor, father or brother, has the full and complete power to give property to a trustee, even, possibly, himself as trustee² for himself and others, and if properly distributed and properly reported as such, the income from this trust property is taxable to the beneficiaries. Here, however, no such thing happened. No trust res produced the income here dealt with. The Leonard business partnership produced the income. The members of the Leonard firm earned the income and it was only after it was thus earned that this 1949 agreement sought to convey or assign it to the sisters. The language is "so that from and after January 1, 1949, all net sums received by William Henry Neil should be divided into three equal parts and paid to the three signatories to this agreement."

This is not remotely similar to the placing of property in trust for another. No peculiarities of the state law play any part in this particular area. The critical thing here is that there is no trust res which produced the income. The income, as so clearly pointed out in the Leininger case, supra, was produced by the Leonard partnership.

If we come to the oral testimony we find that it does not specifically conflict with the Tax Court's finding that the sisters were not partners in the Leonard business enterprise. There is not a line of testimony, for instance, that either before, or by virtue of the 1949 agreement, the sisters were intended to become partners with Leonard or his children. The course of action of that business clearly negatives the fact that they did. Under the teaching of the Culbertson case cited so feelingly in the court's opinion, such intent and course of dealing are two critical factors to be considered in determining whether a partnership in fact existed. Moreover, the taxpayer in his brief concedes:

"Neither W. H. Neil nor either of his two sisters has ever taken any part in the management or operation of the truck rental business conducted under the provision of the leasing contract. The affairs of that business at all times have been handled exclusively by or under the direction of O. P. Leonard. Moreover, no one of the three of them has ever rendered any service whatever to the truck leasing operation. In fact the two sisters and also W. H. Neil were away from Fort Worth during the greater part of the taxable years involved in this proceeding."

These circumstances are also considered in Culbertson as being of prime significance in determining whether any partnership existed. Here is what the Supreme Court in that case said was the test:

"* * * 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." Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, 742, 69 S. Ct. 1210, 1214, 93 L. Ed. 1659.

With all deference to the views of my colleagues, I think it perfectly clear that the Tax Court, far from ignoring the teachings of the Culbertson case, actually made careful application of them. With as many of the essential factors favoring the existence of a partnership lacking, I think it little short of amazing that this court should criticize a finding by that court on this record that no such partnership here existed.

Even as to the "sub-partnership," if that is what was intended by the document of 1949, no books were set up for at least three years; no contemporaneous entries of any capital account were set up on the part of the two sisters, and Neil still reported his 1948 income as belonging to him exclusively. This, of course, is entirely apart from the basic proposition that a partnership between these three alone would not serve to divide the income for tax purposes, as noted above and as clearly decided in the Leininger case.

I think the decision of the Tax Court was correct. That court could certainly take the view of the facts that the parties themselves took before a tax purpose became apparent. It was not bound to reject the documentary proof in favor of the testimony of the interested parties when even that testimony was not unequivocal as to the true effect of what was done. It was certainly consistent with all that we and the Supreme Court have said in this field. It will be remembered that the history of the Culbertson case is that this court reversed the Tax Court's decision that no partnership existed. We sought to decide that the facts demanded the contrary result. The Supreme Court reversed our decision and remanded the case to the Tax Court to give effect to its formula for deciding the fact question: "As to which of them [the sons] * * * was there a bona fide intent that they be partners in the conduct of the cattle business, either because of service to be performed during those years or because of contributions of capital of which they were the true owners, as we have defined the terms in the Clifford, Horst [Helvering v. Horst, 311 U.S. 112, 61 S. Ct. 144, 85 L. Ed. 75], and Tower cases?"

Some comment is made in the court's opinion relative to the amendment of 1951 to the 1939 Code, which says:

"A person shall be recognized as a partner for income tax purposes if he owns a capital interest in a partnership in which capital is a material income-producing factor whether or not such interest was derived by gift or purchase from any other person."

This, of course, merely changes the meaning of capital contribution as used in the Culbertson case. It is no longer necessary that the capital investment which is one of the indicia of an intent to form a bona fide partnership be capital "originating with the partner." This amendment does not change the requirement that there must be a bona fide intent on the part of the parties to engage as partners in a business enterprise. Here the Tax Court, with ample justification, found that no such intent on the part of the sisters existed. Thus the owning of a capital interest in a partnership does not even under that amendment create a partnership. It merely defines one of the alternative prerequisites: "service or capital," one of which must be coupled with a bona fide intent to engage as partners in a business enterprise to satisfy the Culbertson definition. It is clear that this amendment is only intended to take the "curse" off of family-originated capital which still lingered in the law after Culbertson because of its reference to the definition of capital in the Tower case. Now it is possible for a father to give or lend his son funds with which the latter can engage in a partnership enterprise with the father, if there is in fact a bona fide intent on the part of the pair to carry on a partnership business.³  The circumstances which the court must consider to determine whether there was such an intent are those set out in the above quoted portion of the Culbertson opinion. Here the court gave full consideration to them and, with ample justification, found that no such intent existed as to the sisters.

I think the decision of the Tax Court should be affirmed.