Tax Avoidance as a Legitimate Business Purpose

31 Pages Posted: 20 Feb 2008 Last revised: 12 Sep 2015

See all articles by Karen C. Burke

Karen C. Burke

University of Florida Levin College of Law

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. ยง 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

Burke, Karen C., Tax Avoidance as a Legitimate Business Purpose (February 2008). San Diego Legal Studies Paper No. 08-012, Available at SSRN: or

Karen C. Burke (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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