Taxation of Family Partnerships and Family Corporations
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LAW REVIEW
Volume 19 April, 1947 No. 3
tTAXATION OF FAMILY PARTNERSHIPS
AND FAMILY CORPORATIONS
By CHARLES E. WORKS*
Businessmen have used various legal devices to divide their in-
come among the members of their families so as to escape a high sur-
tax bracket and at the same time keep control of the property and
income involved. Of the many devices used, the family partnership
has in recent years been the most popular and has generated much
litigation and comment.'
The U. S. Supreme Court has passed on many methods of splitting
family income for tax purposes but did not pass on the family partner-
ship until 1946.2 In the Lusthaus and Tower cases8 the Court held
that a family partnership need not be recognized for tax purposes, if
it has no substance or reality as a partnership and is merely an attempt
to make a paper reallocation of the family income for tax purposes.
The extent of the doctrine is far from clear. This article will attempt
to offer a few guide posts through the maze of conflicting Federal
tThe statements contained herein are merely the personal opinions of the
author and do not express policies or viewpoints of the Colorado Department of
Revenue.
*Of the Denver Bar, on the Technical Staff of the Colorado Revenue Depart-
ment, and an Instructor in Denver University College of Law. Formerly in charge
of supervising Military Government Courts in the U. S. Zone, Germany; a former
Assistant U. S. Attorney; and a former member of the Colorado House of Repre-
sentatives.
'YALE A. BARKAN, Family Partnerships under the Income Tax (1945) 44 MiCH.
L. REv. 179. Louis A. HELLERSTEIN, Family Partnerships (1945) 17 ROCKY MTN.
L. REv. 197. RANDOLPH PAUL, Parnership in Tax Avoidance (1945) 13 GEO. WASH.
L. REv. 121. GUSTAVE SIMONS, Family Partnerships since the Tower and Lusthaus
Decisions (1946) 82 Journal of Accounting 130. VERNON J. VERNON, Taxation of
Income of Family Partnerships (1945) 59 HARV. L. REv. 209.
Burnet v. Leininger, 285 U. S. 136, 52 Sup. Ct. 345 (1932) is not really a fam-
ily partnership case. It involved a gift by a husband to his wife of half of the
husband's interest in a business partnership. The court taxed the husband on
all the income, as the wife was merely a subpartner receiving part of the part-
nership income derivatively from her husband.
'Commissioner v. Tower, 326 U. S. 703, 66 Sup. Ct. 534 (1946); Lusthaus v.
Commissioner, 327 U. S. 293, 66 Sup. Ct. 539 (1946).
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Taxation of Family Partnerships and Family Corporations
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