Lusthaus v. Commissioner, 327 U.S. 293 (1946)

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Lusthaus v. Commissioner

No. 263

Argued January 10, 1946
Decided February 25, 1946
327 U.S. 293

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE THIRD CIRCUIT

Syllabus

Petitioner owned and operated a retail furniture business with two stores. His wife helped in the stores, when needed, without compensation. She owned property valued at $50,000 or more. Finding himself confronted with prospects of large profits and correspondingly large income taxes, petitioner, in consultation with his accountant and attorney, worked out a plan for a husband-wife partnership. The wife had little to do with the transaction, and testified that, "on the advice of counsel, I did what he told me to do." Petitioner executed a bill of sale by which he purported to sell his wife a half interest in the business for $105,253.81, receiving in return a check for $50,253.81 and eleven notes of $5,000 each. Petitioner borrowed $25,000 from a bank, gave his wife a check for $50,000, on which he paid a gift tax, and, upon receipt of her check, repaid the $25,000 bank loan. The wife executed a partnership agreement undertaking to share profits and losses with her husband. A certificate authorizing the conduct of the business as a partnership was obtained from the State. The wife continued to help out in the stores when she was needed, but petitioner retained full control of the management of the business, the wife was not permitted to draw checks on the business bank account, and neither partner was permitted to sell or assign his interest in the partnership without the other’s consent. At the close of each year, the profits were credited on the books to petitioner and his wife equally, but no withdrawals were permitted unless both partners agreed. The husband drew no salary. During the tax year involved, the net profits exceeded $80,000, from which respondent withdrew about $4,500 and his wife only $59.61. The following year, they withdrew approximately $16,000 and $19,000, respectively, the wife’s withdrawal being used largely to pay off some of the $5,000 notes given as part of her contribution to the partnership capital.

Held: the evidence was sufficient to support a finding by the Tax Court that there was no genuine partnership within the meaning of 26 U.S.C. §§ 181, 182, and a deficiency assessment against petitioner for earnings reported as his wife’s income is sustained for the reasons stated in Commissioner v. Tower, ante, p. 280. P. 297.

149 F.2d 232 affirmed.

The Commissioner of Internal Revenue made a deficiency assessment against petitioner for purported partnership earnings of a husband-wife partnership reported in his wife’s return and not reported by petitioner. The Tax Court sustained the Commissioner on the ground that the wife was not a genuine partner. 3 T.C. 540. The circuit court of appeals affirmed. 149 F.2d 232. This Court granted certiorari. 326 U.S. 702. Affirmed, p. 297.