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Family Partnerships and the Supreme Court

For our discussion this week we are going to look at a court case from all the way back in 1949. This case is going to illustrate the difficulty we sometimes run into with looking up cases and doing tax research. The difficulty is that when court cases get appealed the decision may be changed. Thus a tax court case could be overruled by an appeals court and then you would not want to use that to advise a client. So the case we are looking at has to do with partnerships and specifically family partnerships. The parties in this case who appealed all the way to the Supreme Court with the Culbertsons. They had a profitable ranch they operated. Each family member (Dad, Mom and Sons) was a partner in the family partnership that owned the ranch. From what we have learned about partnerships in chapter 14, that would mean that each partner would report only their share of the partnership income based on the percentage they owned. So instead of Dad and Mom having all of the income, the boys had some as well and as we know you pay a higher rate of tax the higher your income. So by spreading the income around the taxes that needed to be paid is lower. However, the IRS said no and sent Dad and Mom the bill for the taxes that were owed if all the income was attributed to them.

So you need to find the case (you can use Cornell again, Findlaw, Justia - supreme court cases are found a lot more places than lower court cases) and post the citation. Then from the case you need to answer the following:

1. What is the history of the case - which courts decided for the taxpayer and which courts decided for the IRS (commissioner)?

2. The Supreme Court ended the controversy by deciding which way?

3. What were the reasons the Supreme Court gave for deciding the way that they did?

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