Opinion ID: 614511
Heading Depth: 2
Heading Rank: 2

Heading: Southgate was a sham partnership.

Text: We are also persuaded that the district court was correct to determine that Southgate was a sham partnership that must be disregarded for federal-income-tax purposes. [53] As the Supreme Court explained in Comm'r v. Culbertson , whether a partnership will be respected for tax purposes depends on whether the parties in good faith and acting with a business purpose genuinely `intended to join together for the purpose of carrying on the business and sharing in the profits and losses.' [54] This determination is made in light of all the relevant facts and circumstances, including the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent. [55] Because so many abusive tax-avoidance schemes are designed to exploit the Code's partnership provisions, [56] our scrutiny of a taxpayer's choice to use the partnership form is especially stringent. [57] We are not compelled to conclude that a partnership must be respected for tax purposes merely because the taxpayer can point to the existence of some business purpose or objective reality in addition to [the partnership's] tax-avoidance objective. [58] Rather, a taxpayer's formation of a partnership must, on balance, display good common sense from an economic standpoint. [59] The fact that a partnership's underlying business activities had economic substance does not, standing alone, immunize the partnership from judicial scrutiny. [60] The parties' selection of the partnership form must have been driven by a genuine business purpose. [61] This is not to say that tax considerations cannot play any role in the decision to operate as a partnership. [62] It is only to say that tax considerations cannot be the only reason for a partnership's formation. [63] If there was not a legitimate, profit-motivated reason to operate as a partnership, then the partnership will be disregarded for tax purposes even if it engaged in transactions that had economic substance. [64] In this case, an application of Culbertson 's totality-of-the-facts-and-circumstances test demonstrates that the Southgate partnership was a sham that need not be respected for tax purposes. Montgomery, Beal, and Cinda did not intend to come together to jointly conduct the business of collecting on the NPLs. The structure of the GNMA basis-build underscores their lack of such an intent. The parties also lacked any genuine business purpose for their decision to form Southgate.