Lucas v. Earl1 plus Burnet v. Leininger2 plus Helvering v. Clifford3 and Helvering v. Horst,4 as viewed by many judges who decided family-partnership cases5 in the light of Commissioner of Internal Revenue v. Tower6 and Lusthaus v. Commissioner of Internal Revenue,7 added up to the sort of conclusion that would have defeated the taxpayers here. But judicial arithmetic, especially in tax matters, can be tricky, as some "inferior" judges learned8 when they read the subsequent unanimous opinion in Commissioner of Internal Revenue v. Culbertson.9 This court, after so reading, said, in Slifka v. Commissioner of Internal Revenue, 2 Cir., 182 F.2d 345, 346, that the test in cases such as this is "whether an association, or joint venture, which satisfies all formal requirements and may be valid as between the parties, has been created to promote the conduct of their business in any other way than by reducing taxes. That this makes motive a test of tax liability is true enough;10 but it is equally true that it makes it so only when the reduction of taxes is the sole motive. That does not mean that `business' may not be so conducted as best to keep down taxes; but it does mean that keeping down taxes is not of itself `business'." With Culbertson in mind, this court again in Levin v. Commissioner of Internal Revenue, 2 Cir., 199 F.2d 692, remanded to the Tax Court, for further findings, a case in which that court had held against the taxpayer on the erroneous assumption that, absent active participation in the business, there could be no partnership taxwise.

Those decisions of our court, together with Sommers v. Commissioner of Internal Revenue, 2 Cir., 195 F.2d 680, serve as our guides here. For Judge Van Fossan rested his basic conclusion — i.e., that the "women" did not "earn the income" — on his determination that, under the contracts, they "contributed nothing." We consider that determination mistaken, for these reasons:

As between the partnership and these women, the contracts legally obligated each of the women to bear a risk of loss up to $5,000. There is evidence (1) that each had enough assets to meet such a liability and (2) that, when they executed the contracts, a real and substantial risk of loss existed;11 and the judge found nothing to the contrary. Thus, under "local law," as between the women and the partnership, the women and the partnership became parties to a new, separate and distinct arrangement known as a "joint venture." That venture concerned not many future enterprises but only the sale of a limited quantity of sugar syrup; consequently, it was by its nature to have a short duration; and its chief element was a commitment to a considerable financial risk, since it called for little capital or skill in its operations. True, the partnership, in addition to its sharing in the risk, contributed some necessary capital for a brief interval, and it performed some slight necessary services. But, bearing in mind that the partnership did not contribute to the joint venture its compensation for its selling services,12 those facts do not negative the important fact that the women, under their contracts, assumed a part of that financial hazard which constituted the major factor in the joint undertaking. It follows that — if one does not peer behind the contracts — these women did contribute something substantial.

It will not do to say that such a contribution must invariably take the form of tangible property; for, under Culbertson, an intangible — such as a promissory note, an endorsement of a note, a guaranty, or an indemnity against loss — will suffice.13 Significantly, the Commissioner so recognized in not seeking to deny the reality of the contribution of Viola Hollriegel, an employee of the old partnership who was in no way related to any of the partners. Indeed, the Commissioner's attitude toward taxability to her of her share of the profits goes to show that, if the other women similarly had had no familial ties to any of the partners, the profits allotted to those women could not have been treated as anything but part of their taxable incomes, respectively. So that the crucial question comes to this: Where there were family relationships, are the contracts to be deemed tax-evading devices?

As one shifts from a non-tax to a tax "universe of discourse," "reality" often becomes a "sham," a "subterfuge," or "a camouflage";14 cream is regarded as skim milk masquerading; a giant shows up as a windmill.15 On that account, in the context of "tax law," with its distinctive perspective, frequently depriving men's acts of the accent of reality, many husband-wife arrangements justify raised eyebrows. But the Culbertson case (as we have interpreted it in our decisions above cited) teaches that such skepticism will not transform a family partnership or joint venture, legally valid in other contexts, into a legal sham vis a vis taxes, unless the Tax Court, considering the entire situation, makes an explicit finding of a lack of "good faith."

The government insists that Burnet v. Leininger, 1931, 285 U.S. 136, 52 S. Ct. 345, 346, 76 L. Ed. 665, must control the decision here. We do not agree. There the taxpayer entered into a contract with his wife purporting to constitute her his equal "partner" in his interest in an active partnership of which he had been a member for the 22 previous years, and she agreed to assume liability for one-half the losses he might bear as a member of that existing partnership. His other partners did not consent to this arrangement, and no recognition of her status appeared on the books of the 22-year-old partnership which continued to pay the husband the same percentage of profits as theretofore and made no payments to the wife. The wife contributed nothing whatever to the previous partnership and took no part in the conduct of its business; there was created no new, separate, joint venture between husband and wife; there was never any formal accounting between them. On these facts, the Supreme Court sustained the Board of Tax Appeals which had held the husband taxable on the whole of the income earned as his share of the old partnership. The Supreme Court said: "Upon the facts as found, the agreement with Mrs. Leininger cannot be taken to have amounted to more than an equitable assignment of one-half of what her husband should receive from the partnership, she in turn agreeing to make good to him one-half of the losses he might sustain by reason of his membership in the firm. * * * (The) right of the wife was derived from the agreement with her husband and rested upon the distributive share which he had, and continued to have, as a member of the partnership." Notably, had the husband incurred a loss, he alone could have held his wife liable, whereas in the case at bar, the obligation of each woman ran not to her husband alone but to the partnership. Moreover, here the heart of the specific joint venture was the taking of risk of loss in which the women shared; there was no like fact in the Leininger case, nor there did the evidence show that the wife was financially able to make good any loss, i. e., that she gave any collectible obligation as consideration for the assignment to her. Cf. Rupple v. Kuhl, 7 Cir., 177 F.2d 823, 826. Finally, and above all, the Supreme Court had not yet required, as it later did in Culbertson, that there be an explicit finding, as a fact,16 of lack of good faith intention before an apparently valid joint venture agreement could be ignored.

The judge here made no such finding. Had he done so, basing it on all the elements of the situation (including, among other things, the fact that the women had not read the contracts they signed) and resting his finding in part on a testimonial inference resulting from his observation of the demeanor17 of the witnesses who testified orally, we would have affirmed.

As it is, we think we must not infer such an implied finding nor contrive an express one of our own. If this case had arisen before Culbertson's advent, we might have done one or the other. For we might have surmised that, had there been losses, the women never would have been asked to live up to their obligations, and that the contracts served solely as paper covers for a tax-reducing scheme benefitting the partnership's members. But we live in the post-Culbertson era and have noted the warning that the ordinary judicial eyes have not the "gimlet" quality, possessed by the Tax Court only, to "pierce" the family-partnership "guise" and thus to differentiate "between the real thing and the imitation".18 Some commentators have criticized Culbertson as requiring sheer ritualism of the Tax Court. But we have not the privilege of criticism: We must obey a Supreme Court decision.

Even so, we need not and shall not here close the door to Tax Court compliance with the Culbertson requirement. "In order that injustice may not be done"19 to the government, and following the practice, particularly in a case of this type, adopted by the Supreme Court (and by us20), we reverse and remand for the purpose of permitting the judge, if he believes the evidence so warrants, to make a further finding relative to the issue of good faith.

Reversed and remanded.

CLARK, Circuit Judge (dissenting).

Judge Van Fossan's findings and conclusions, strongly buttressed by the evidence, in my view not only justify, but require, affirmance here. The scheme disclosed is in all salient essentials that of Burnet v. Leininger, 285 U.S. 136, 52 S. Ct. 345, 76 L. Ed. 665, and should receive the same treatment taxwise. I do not understand that case to have been overruled by C. I. R. v. Culbertson, 337 U.S. 733, 69 S. Ct. 1210, 93 L. Ed. 1659, nor do I see any close application of Culbertson principles required or appropriate here. The Supreme Court there, in stressing the necessity of determinations of fact as to the nature of the partnership before it, simply emphasized that an actual working partnership which carried on business to produce income was not to be denied the tax status of a partnership merely because the individual members were also members of a family. Here the wives are not even claimed to be members of the income-producing partnership. They received only assignments from partners — usually their husbands, in one case a sister — of a percentage of potential profits under agreements of sub-"venture" of such formality that they did not even bother to read the solemnly prepared documents. To the actual partnership and to the production of its income, they contributed nothing — neither services, nor expertise or business know-how, nor capital. All this is of course conceded. But the contention for exemption of the assigned shares of partnership income from taxation to the partners is based upon assumption of some of the partners' risks. Even as to this there is very little of actuality. Their named risk (up to $5,000) was small in terms of the total adventure; actual loss, as distinguished from merely diminished profits, was unlikely; and it does strain credulity to believe that the husbands, the benefactors of the wives initially, would have lacked like generosity had the time ever arisen for enforcement of the portentously stated, though limited, obligations. But be that as it may, I believe that on the basis of the fully conceded facts the partners who produced the income must pay the tax upon it before it passes to other hands. Burnet v. Leininger, supra; Lucas v. Earl, 281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731; and the other Supreme Court cases cited in the opinion.

To appreciate how deeply we have become mired in semantic difficulties, one should consider the nature of the finding which the Tax Court is now called upon to make. Since the ladies had not even read their agreements and thus had no "faith" — either "good," "bad," or otherwise — as to them, I do not apprehend that Judge Van Fossan will encounter particular difficulty in finding the lack of good faith for which my brothers are looking. But I do dislike the dumping of this unanalyzed and potentially misleading concept on the judge's desk without more attempt to disclose what it means. In the Culbertson context, as we have seen, the question whether the members of a family are actually acting in good faith in the partnership relation to produce the taxable income has meaning and significance. Here, whatever the concept may mean, it cannot, from the nature of things, have a like correspondence with business reality. We know the steps the parties took and what happened. So what can "good faith" mean more than that the parties knew and intended to do what they did? That they may actually have known either less law or more law than appears on the surface surely cannot give them either greater or less tax immunity. Even the one matter of possible doubt indicated above — how far the ladies might really have to dig into their savings, or husbands' benefactions, in the unlikely event of loss — sets no problem; for a commitment of this supplementary and limited character, under the authorities cited, does not free partnership income from taxation to the partners, whatever the high-sounding titles of venture or subventure given to the situation. Thus the stress in all the opinions in the Culbertson case to discover whether there was a "real" or a "true" partnership, or a "genuine union for partnership business purposes," or an arrangement putting all involved "in the same business boat" becomes quite meaningless when the attempt is made to transfer the search for actual intent to the present circumstances. Obviously these ladies were never in the same business boat with the actual partners, and no search for that kind of reality is necessary or even in point. There is no occasion to call these arrangements sham or unintended; they are just an inadequate basis for holding the production of income not taxable to those who produce it.

Thus, while I can see how the concept of "good faith" can be bandied back and forth on the conceded facts to support practically any result, I do not perceive how it is or can be anything more than a conclusory label indicating a decision otherwise made. But the holding herein, thus importing to the application of the label a truly functional vitality, seems to me not only legally erroneous for the reasons stated, but practically unfortunate in the invitation and hope extended to beleaguered taxpayers. One need not retreat into a "specialized talk-world" or "think-world" to realize that here is now expression of judicial purpose to validate a simple, but extraordinarily streamlined, method of tax "reduction" or evasion, of infinite adjustability and adaptability, operable by any taxpayer, be he partner or no, and for the benefit of any of "his sisters and his cousins and his aunts," not to speak of those closer, and with stated risk-limits well below the $5,000 here employed if such seem desirable. Reversal here, however tied to some ritual of fact-finding unrelated to business realities, will inevitably stimulate that hope. Nor do I believe a reviewing court well-advised in upsetting a reasoned, reasonable, and straightforward decision of the tribunal charged with primary responsibility unless it can offer a more direct and understandable concept of the measure of a taxpayer's obligation than is here proffered. I would affirm.