Tax Avoidance as a Legitimate Business Purpose
31 Pages Posted: 20 Feb 2008 Last revised: 12 Sep 2015
Date Written: February 2008
In Countryside Limited Partnership v. Commissioner, T.C. Memo 2008-3, the government challenged a purportedly tax-free distribution of nonmarketable securities to partners who wished to withdraw from a real estate partnership shortly before sale of the partnership's depreciated real property. By manipulating the partnership basis adjustment provisions, the Countryside transaction sought to shift and duplicate basis, while potentially deferring indefinitely the withdrawing partners' gain from the real property. Surprisingly, without addressing the larger Countryside transaction, The Tax Court held that the withdrawing partners recognized no gain on the deemed distribution of securities; in granting partial summary judgment on the issue of gain recognition under I.R.C. § 731, the court found that the transaction was imbued with economic substance and was not inconsistent with the intent of Subchapter K.
This article discusses the transaction in a manner that is (hopefully) accessible to readers who are not steeped in Subchapter K. It suggests several alternative ways in which the transaction could be recharacterized to clearly reflect income under traditional judicial doctrines and, specifically, the partnership anti-abuse rule. Unfortunately, the Tax Court failed to send a clear message that such transactions do not work, thereby undermining the effectiveness of the partnership anti-abuse rule. The article suggests that the Countryside decision facilitates massive avoidance of the statutory 25% rate on gain from depreciated real property, and proposes that Congress amend the partnership distribution rules to prevent shifting of basis from capital assets to depreciable real property.
Keywords: countryside, economic substance, tax avoidance, partnership, securities
JEL Classification: K34, G32
Suggested Citation: Suggested Citation