## Facts

- Countryside Limited Partnership owned appreciated real estate.
- Two limited partners held roughly 95% of the partnership interests and had zero or near-zero outside basis.
- A cash redemption would have produced gain to the extent distributions exceeded the partners’ bases under I.R.C. § 731.
- Countryside borrowed funds and used the cash to acquire privately placed promissory notes issued by an AIG affiliate.
- Through a tiered partnership structure, Countryside distributed interests in a lower-tier entity holding the notes to redeem the two partners’ interests.
- For purposes of the motion, the parties treated the transaction as if Countryside had directly distributed the AIG notes to the redeemed partners.
- The AIG notes were not publicly traded and were not listed on an established securities market.
- The IRS issued a deficiency notice asserting the distribution generated gain by treating the notes as “marketable securities” or as cash equivalents under § 731(c) and related regulations.
- The case came to the Tax Court on the taxpayers’ motion for partial summary judgment limited to whether the distribution itself triggered gain recognition.

## Issues

1. Whether the AIG notes (or the distributed lower-tier partnership interests holding them) were “marketable securities” treated as money under I.R.C. § 731(c), causing gain recognition on the redemption distribution.
2. Whether the Commissioner could recharacterize the distribution as a cash (or marketable-securities) distribution under Treas. Reg. § 1.731-2(h), the partnership anti-abuse rule, or step-transaction/economic-substance doctrines for purposes of § 731 gain recognition.

## Decision

- The Tax Court granted the taxpayers’ motion for partial summary judgment.
- The court held the redemption distribution did not trigger gain recognition under § 731 on the record presented.
- The court rejected treating the privately placed AIG notes as “marketable securities” under § 731(c) for this issue.
- The court declined to recharacterize the distribution as cash or marketable securities under Treas. Reg. § 1.731-2(h), partnership anti-abuse principles, or step-transaction/economic-substance doctrines for purposes of the § 731 gain-recognition question.
- The court expressly left unresolved other tax consequences, including basis-related issues.

## Legal Principles

- Under I.R.C. § 731(a), a partner generally recognizes no gain on a partnership distribution of property other than money, except to the extent money exceeds the partner’s adjusted basis in the partnership interest.
- I.R.C. § 731(c) treats “marketable securities” as money to the extent of fair market value, but only if the distributed instrument fits the statutory and regulatory definition.
- Non-publicly traded, privately placed debt instruments are not “marketable securities” under § 731(c) merely because they are issued by a highly creditworthy obligor or may be relatively liquid in practice.
- Treas. Reg. § 1.731-2(h) (anti-abuse recharacterization) cannot be applied beyond its scope to convert a property distribution into a deemed cash or marketable-securities distribution when the transaction does not fall within the regulation’s contemplated circumstances.
- General anti-abuse doctrines (including step-transaction and economic-substance theories) do not, without a sufficient statutory or regulatory hook on the record presented, supply gain recognition where § 731(c)’s explicit triggers are not met, particularly in a summary-judgment posture confined to the distribution-level gain question.

## Conclusion

The Tax Court held that a complete redemption distribution funded through privately placed, non-publicly traded AIG notes did not cause gain recognition under I.R.C. § 731 because the instruments were not “marketable securities” within § 731(c) and the Commissioner could not recharacterize the distribution as cash or marketable securities for that limited issue.


Countryside Ltd. P’ship v. Comm’r, 95 T.C.M. (CCH) 1006 (T.C. 2008)