## Facts

- A rancher operated a Hereford cattle business and, after his elderly partner’s withdrawal, bought the remaining herd subject to a condition that he resell an undivided half interest to his four sons at the same per-head price.
- He purchased the herd for $99,440 and shortly thereafter sold a one-half interest to his sons, who gave him promissory notes later replaced by a larger note when additional properties were included.
- The note was satisfied through a pricing credit, gifts from the father, and proceeds from a loan to a business styled “Culbertson & Sons.”
- The father and sons claimed an oral partnership and filed partnership returns for 1940–1941 allocating income among them; the sons were aged 24, 22, 18, and 16.
- During the period, the eldest son worked as ranch foreman (with a salary); the second son graduated college and entered the Army; the younger sons attended school in winter and worked on the ranch in summer.
- The Commissioner determined that all 1940–1941 income from the ranching operation was taxable to the father.

## Issues

1. Under federal income tax law, when should income from a claimed family partnership be taxed solely to the parent rather than allocated among family members.
2. Whether individuals who contribute neither capital nor services during the tax year can be treated as “carrying on business in partnership” for tax purposes.
3. Whether an intent or expectation to contribute capital or services in the future can establish partner status for the relevant tax year.
4. What standard governs determining whether a claimed family partnership is genuine for income-tax purposes.

## Decision

- The Supreme Court vacated the judgment of the court of appeals and remanded to the Tax Court.
- The Court rejected the view that mere expectation of future contributions suffices to treat a person as a partner for the tax year at issue.
- The Court held that persons who contribute neither capital nor services during the tax year cannot be regarded as carrying on business in partnership for that year.
- The Court ruled that the Tax Court used an overly rigid test by treating absence of “original capital” and “vital services” as effectively dispositive, and it required reconsideration under a broader intent-based standard.

## Legal Principles

- Income is taxed to the person who earns it; partnership allocations cannot defeat that rule where alleged partners do not participate in earning the income during the tax year.
- Individuals who contribute neither capital nor services during the relevant tax year are not “carrying on business in partnership” for that year.
- An intent to provide money, goods, labor, or skill at some future time does not satisfy the requirement for partner status in the present tax year.
- The controlling inquiry is whether, considering all facts, the parties in good faith and with a business purpose intended to join together in the present conduct of the enterprise.
- Relevant factors include the agreement, conduct in carrying it out, statements, testimony of disinterested persons, relationships, abilities, capital contributions, actual control of income, and the purposes for which income is used; no single factor is controlling.
- Lack of “original capital” or “vital services” is probative but not a conclusive bar to recognizing a family partnership for tax purposes.

## Conclusion

The Court required a fact-intensive determination of whether the family members genuinely intended, in good faith and for a business purpose, to join together in the present conduct of the ranching enterprise, and it remanded for application of that standard rather than a mechanical focus on “original capital” or “vital services.”


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