The opinion
Disney, J., dissenting: Although the majority opinion discusses and is, in effect, based upon a denial of actuality of a partnership, the real question is, of course, whether the petitioners retained, after conveyance to their families, such complete ownership in the assets and husiness that they should be taxed upon the entire income thereof, instead of only in part. In other words, the gist of this problem is: Is this a case of mere assignment of income, so that under Lucas v. Earl, 281 U. S. Ill, and other cases to the same effect, the petitioners must be viewed as still taxable thereon ? The answer depends upon whether or not gifts, completed and to be recognized, were made by them to their families, for that all parties did, with the assets involved, enter into a partnership can hardly be denied, and I understand that the respondent did not so deny. If by the transfers made the petitioners did not merely assign income, error appears in the taxation of the entire amount thereof to the petitioners.
The facts here presented are, in substance, that the petitioners owned a large amount of property. The returns filed ascribed to it a value of $109,464, including equipment at $29,556.69 and assets formerly belonging to a corporation, the Anodizing Co. of Jackson, Inc., of a value of $10,935. (The stock of this corporation had belonged to the four petitioners, but had been transferred to their families, the corporation dissolved, and the assets transferred to the partnership.) All of this property was the subject of gifts to the petitioners’ families. Though the majority opinion takes the view “that in effect all that the wives and children could ever receive was shares of the distributable profits of the business,” the facts show that at the termination of the partnership the entire assets thereof must be distributed to the partners in proportion to their respective interests. This is altogether consistent with the transfers made. The agreement of partnership recites that such transfers had been made, and the interest of each of the transferees was set forth in writing. It is further recited that each contributes his share of the assets as a contribution to the capital of the partnership. It is certain. I think, that the transferors could never deny the gift. Particularly as between members of a family, exactitude in form of gift is not required. Though real estate was involved, it is hornbook law that acknowledgement of an instrument is not necessary as between the parties. Likewise, between the parties general description suffices. G. R. Holcomb Est. Co. v. Burke, 48 Pac. (2d) 669 ; Moayon v. Moayon, 72 S. W. 33 .
Had any of the wives, for instance, in case of divorce, or any of the children, been denied ownership of the interest conveyed to them, I have no doubt at all that any court would sustain their claims ■thereto. Yet, the majority opinion treats the gift as unreal. Such view must be upon the theory that the gift was in some way conditional ; yet, reading the law of gifts, we discover that a gift is none the less complete and real because of conditions attached thereto, if ownership is vested in the donee, even though powers, such as agency and even some reservation of proprietary rights are retained by the grantor over the subject matter of the gift.
The law on the point is reviewed in 38 C. J. S. on Gifts, pp. 815-817, and need not be set forth here. Gifts have been sustained, though reserving stock dividends for life, Smith v. Commissioner, 59 Fed. (2d) 533; Grissom v. Sternberger, 10 Fed. (2d) 764; though reserving possession, Kathryn Lammerding, 40 B. T. A. 589; affd., 121 Fed. (2d) 80; H. B. Garden, 16 B. T. A. 592; though reserving the right to pledge the gift, Bingham v. White, 31 Fed. (2d) 574; Estate of Lorenzo W. Swope, 41 B. T. A. 213; though donor retained legal title in stocks transferred on books of account, Hogle v. Commissioner, 132 Fed. (2d) 66. I can see nothing in the facts here presented which indicates that the donees failed to receive title to absolute gifts, or that there were conditions or qualifications inconsistent with the vesting of title. It is true that the grantors were to exercise broad powers in the management of the partnership business, but all such powers are clearly within the category of agency and management, altogether consistent with title in the donees. Provisions as to inability of a partner to •dispose of his interest, emphasized by the majority opinion, are of no weight, since it is primary law of partnership that it is a voluntary arrangement and a partner may not by sale of his interest impose a stranger upon his partners; and a gift may provide for inalienability by the donee. 38 C. J. S. 816. Thus, it appears that each of the various members of the petitioners’ families had a contractual and enforceable right to a pro rata share of the entire assets conveyed, and not merely to profits of the operation of a partnership.
The majority opinion, however, in effect, denies the bona fldes of the transfers. If the transfers are valid under the law, enforceable, permanent, how can it logically be maintained that they are not bona fide? No secret arrangements or reservations contradictory of the gifts appear or are relied on. The only possible attack upon the transfers must rest upon the conditions specifically and openly set forth in writing. Those conditions are consistent with vested gifts, and do not invalidate them. The idea of mala, fides, therefore, is seen to amount to one that intent to reduce taxes is bad faith. But are we to contradict Gregory v. Helvering, 293 U. S. 465 , and all those cases in which we agree with it, and which in substance inform the taxpayer that he may, by lawful means, minimize his taxes ? Are we to say that intent to reduce taxes, by an absolute gift of property, e. g., by deed of a one-half interest in real estate, destroys such deed for tax purposes? This would be, in my view, unconstitutional interference with one’s right to dispose of his property. A gift of an interest in a business, including its assets, which interest the donor might sell to another, perhaps for a large sum, is logically in no different category than the mere parcel of real estate above suggested. The majority opinion refuses to recognize such gift, obviously merely because of skepticism as to the good faith, of a permanent and irrevocable conveyance. Yet, here we see that in addition to transferring interests in other assets in business, the petitioners had, so far as the Anodizing Co. of Jackson, Inc., is concerned, owned corporate stock, had transferred it to their families, and the assets thereof had, after dissolution, been transferred to the partnership. Such gift of corporate stock is condemned. So far does the majority opinion go in preventing the disposition of property by gift. The gifts were not subject to revocation. This was no temporary reallocation of family income, but a permanent disposition of property. (Is not the element of “temporary” in the language of Helvering v. Clifford, 309 U. S. 331 , negation of the idea that a permanent division of property may be disregarded. If we had here a revocable transfer, directly or indirectly, or one giving in fact no legal or economic benefit to the donees, clearly no completed gift would appear, and therefore no capital contributed to the partnership. But the exact opposite is the fact.)
So far as the majority opinion expressly or impliedly relies upon the idea that state laws as to partnership and compliance therewith in this transaction do not bind, we need only remember that the definition of partnership in section 3797 (a) (2) of the Internal Revenue Code is very broad indeed, and that the arrangement between the petitioners and their families falls well within its ambit. In short, under its language there was here a real and recognizable partnership.
To say this record shows a mere right in the petitioners’ families “to receive whatever profits of the business might be determined by petitioners to be distributable to them,” neglects not only the liability of the members of the families for partnership losses, as provided in the articles of partnership, but their receipt as absolute owners of the entire partnership assets upon termination of partnership. I find it impossible to conceive that such a conveyance of extensive assets is a mere conveyance of the right to income, and therefore prohibited.
The law of gifts, and partnership, the growth of centuries of jurisprudence, is no mere attenuated subtlety or nicety of the conveyancer’s art, but a long traveled road which we might well follow instead of turning aside on a bypath of doubt, uncertainty and deviation from justice. For, if we disregard rules furnishing assistance in determining rights in property and of contract, we appear left with no guide, except our agreement or disagreement that the transaction should be given tax effect. By what other measure shall we then judge? An irrevocable and absolute gift is a very real matter in its financial and economic effect on grantor and grantee, for it transfers property from one to the other. Had it not been for statutory exemptions, a very real gift tax would have been payable by petitioners. Given very real effect in all other branches of law (including gift tax law), why and how then may a gift be considered nil in the law of income taxation?
It is no answer to say that, “taken altogether” or “taken as a whole,” the transaction of gift and partnership was unreal; for the parts of the whole are real — long recognized and effective concepts and rules binding the parties. The “taken altogether” idea is a tacit confession that bad faith, in the sense of tax avoidance, is the basis of decision.
Also, even if it be considered that through the arrangement made the petitioners’ families receive the benefit of income from the petitioners’ services to some extent, it is clear that, in so far as he taxes the petitioners upon the entire income produced both by the property transferred and by petitioners’ services (two of them were inactive), the Commissioner erred, if the petitioners’ families were the owners of property contributing to the production of such income. Believing that they clearly became the owners of such property, I suggest that error has been shown in the determination of deficiency under the principles announced in Helvering v. Taylor, 293 U. S. 507 , in that it is without rational foundation and excessive, unless it is true that there were no gifts made. The petitioners, even though their families get some benefit from their services, may not, with good reason, be taxed upon the entire partnership income, and an error has been committed equally as egregious as might be involved if petitioners escaped some taxation in the process here involved. Where, as here, some services, not from all petitioners, are involved along with large amounts of capital belonging to them and others, it seems to me, there having been not mere conveyance of right to income, but of property contributing at least in large degree thereto, that taxation may with safety follow the long established concepts involved in the law of gifts and of partnership, and impose taxation in accordance with the gifts and, partnership agreement with more assured results than by taking counsel of suspicion to the disregard of salutary principles of law. The result here, it appears to me, makes tax evasion out of what at most is tax avoidance through proper exercise of the individual’s right to make gifts of his property and to enter into contracts therewith. The income from the property here appears inseparable from any to be ascribed to personal services, and in my opinion it is illogic to say that there is prohibited assignment of income. The question, depending as it does upon the validity of gifts, is not one of fact, but of law, if there is no evidence reasonably sustaining the denial of completed gift, as I think plainly appears. I would hold the Commissioner to be in error, and I therefore respectfully dissent.
TrsoN, J., agrees with this dissent.