## Facts

- Carriage Square, Inc., a California real estate development corporation, served as the sole general partner of a limited partnership, Sonoma Development Company (Sonoma).
- Five family trusts were formed in 1969 and became Sonoma’s limited partners; each trust contributed $1,000 and had liability limited to its contribution.
- Carriage Square contributed $556 and, under the partnership agreement, was allocated 10% of profits; the trusts were allocated 90% (18% each).
- Sonoma’s real estate development operations were funded primarily through large borrowings rather than the partners’ contributed capital.
- Sonoma obtained credit largely because a nonpartner (the controlling developer and his wife) guaranteed millions of dollars of liabilities to a bank for Sonoma and related entities.
- Carriage Square provided the services necessary to operate Sonoma, used business contacts to secure financing, and bore the primary business risk; the trusts performed no services and bore little entrepreneurial risk.
- The Commissioner determined deficiencies for Carriage Square’s taxable years ending in 1969, 1970, and 1971 and reallocated all of Sonoma’s income to Carriage Square.
- Carriage Square executed Form 872-A consents; the Commissioner relied on them to assess after the normal limitations period.

## Issues

1. Whether Form 872-A consents validly extended the assessment period under I.R.C. § 6501(c)(4) for the years at issue.
2. Whether Sonoma’s income should be included entirely in Carriage Square’s gross income under I.R.C. § 61 because (a) § 704(e)(1) did not apply and/or (b) the trusts were not bona fide partners for federal tax purposes.

## Decision

- The Tax Court held the Form 872-A consents were valid and extended the statute of limitations under § 6501(c)(4).
- The court held § 704(e)(1) was inapplicable because Sonoma was not a partnership in which capital was a material income-producing factor in the relevant sense.
- The court held the parties did not, in good faith and with a business purpose, intend that the trusts join together as partners in conducting Sonoma’s business.
- The court sustained the Commissioner’s determination that all of Sonoma’s income was taxable to Carriage Square under § 61 and upheld the deficiencies.

## Legal Principles

- A Form 872-A consent, when properly executed, can extend the period for assessment under I.R.C. § 6501(c)(4) until terminated by specified events.
- Under I.R.C. § 704(e)(1), a family member or trust is recognized as a partner based on ownership of a capital interest only if capital is a material income-producing factor; nominal contributions and risk insulation weigh against recognition where income is chiefly produced by services and credit.
- Borrowed funds may be considered in assessing the role of capital, but where borrowing capacity is attributable to nonpartner guarantees and the limited partners do not bear meaningful economic risk, borrowed capital does not support treating limited partners as income-earning partners.
- Under the Culbertson good-faith partnership test, tax recognition depends on whether parties truly intended, with a business purpose, to join together in the present conduct of the enterprise; allocations that do not reflect economic reality may be disregarded and income attributed to the controlling party.

## Conclusion

The Tax Court found the deficiencies timely because Form 872-A extended the assessment period and held that the limited-partner trusts were not recognized as partners for federal income tax purposes; accordingly, all income from the purported partnership was included in the corporate general partner’s gross income.


Carriage Square, Inc. v. Commissioner, 69 T.C. 119 (1977)