T.C. Memo. 2008-3



                UNITED STATES TAX COURT



 COUNTRYSIDE LIMITED PARTNERSHIP, CLP HOLDINGS, INC.,
          TAX MATTERS PARTNER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3162-05.                Filed January 2, 2008.



     CS, a limited partnership, owned real property R,
which CS sold in April of year 2. W and C were members
of CS. In late year 1, CS redeemed W’s and C’s
interests in CS by distributing to them its 99-percent
interest in a (newly formed) L.L.C., CLPP, which held a
99-percent interest in a second (newly formed) L.L.C.,
MP. MP owned four privately issued promissory notes in
the aggregate principal amount of $11.9 million
purchased with (1) an $8.55 million bank loan to CS,
the proceeds of which were contributed by it to CLPP,
which then contributed $8.5 million to MP, and (2) a
$3.4 million bank loan directly to MP. The notes were
neither listed nor traded on an established financial
market. On the distribution to W and C, each was
relieved of his share of CS’s liabilities, although
each retained, indirectly, his share of MP’s
liabilities. W and C reported no recognized gain on
account of the distribution. CS elected to step up its
basis in R.

     Respondent alleges: (1) CLPP, MP, and all of the
late year 1 transactions should be disregarded as
                              - 2 -

     without economic substance and there was, in substance,
     a cash distribution of over $11 million from CS to W
     and C or, alternatively, a distribution of “marketable
     securities”, as defined in sec. 731(c)(2), I.R.C., that
     constituted money for purposes of sec. 731(a)(1),
     I.R.C., and (2) CS is not entitled to step up its basis
     in R.

          W (a participating partner) moves for partial
     summary judgment on the issue of whether he and C are
     required to recognize gain on the year 1 distribution
     to them (i.e., whether they are deemed to have received
     money), and he concedes, for purposes of the motion,
     that CLPP and MP may be disregarded, which results in a
     deemed distribution of the notes from CS to W and C.

          The issue for decision is whether the deemed
     distribution of the notes from CS to W and C
     constituted, in substance, a distribution of cash or,
     alternatively, of “marketable securities”.

          1. Held: Because the deemed distribution of the
     notes to W and C (1) accomplished a legitimate business
     purpose (to enable W and C to convert their shares of
     CS’s equity in property R into interest-bearing
     promissory notes) and (2) resulted in a change in their
     economic position, the transactions which enabled them
     to accomplish that result in a tax efficient manner may
     not be disregarded for lack of economic substance.

          2. Held, further, respondent has failed to
     demonstrate that there is a genuine issue of material
     fact regarding the status of the notes as nonmarketable
     securities.

          3. Held, further, CS’s deemed distribution of the
     notes to W and C resulted in nonrecognition of gain to
     them under secs. 731(a)(1) and 752, I.R.C.



     Richard A. Levine and Elliot Pisem, for petitioner and
participating partner.

     Jill A. Frisch, Barry J. Laterman, and Elizabeth P. Flores,

for respondent.
                                - 3 -

                         MEMORANDUM OPINION


     HALPERN, Judge:    This case is a partnership-level action

based upon a petition filed pursuant to section 6226.1   The

petition was filed in response to respondent’s notice of final

partnership administrative adjustment (the FPAA) dated October 8,

2004.    The case is before us on a motion for partial summary

judgment (the motion) by a participating partner, Arthur M. Winn

(participating partner or Mr. Winn), who until December 26, 2000,

was a limited partner in Countryside Limited Partnership

(Countryside).    Respondent objects.

     The FPAA alleges that a distribution by Countryside to Mr.

Winn and to Lawrence H. Curtis (Mr. Curtis), another limited

partner, on December 26, 2000, in liquidation of their

partnership interests in Countryside resulted in $12,055,192 of

capital gain to Mr. Winn and Mr. Curtis, cumulatively, for that

year.    The FPAA also seeks to (1) deny to Countryside a basis

step-up, pursuant to section 734(b)(1)(B), for its property

remaining after the distribution to Mr. Winn and Mr. Curtis, (2)

require a basis reduction pursuant to section 743(b)(2) for

certain notes held by an L.L.C. in which Countryside, through

another L.L.C., owned a 98-percent interest, or, alternatively,

disregard both L.L.C.s, and (3) impose underpayment penalties

under section 6662.

     1
        Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the year at issue, 2000, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 4 -

     The motion asks that we grant partial summary judgment that

(1) Countryside’s liquidating distribution to Mr. Winn and Mr.

Curtis in 2000 did not result in “a taxable event that gave rise

to * * * [income recognized to] Countryside or any of its

partners during 2000” and (2) “there is no adjustment to income,

gain, loss, deduction, or credit of Countryside or any of its

partners for 2000 arising from Countryside.”

     A hearing on the motion (the hearing) was held in

Washington, D.C., on August 15, 2006.

                              Background

Summary Judgment

     A summary judgment is appropriate “if the pleadings, answers

to interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law.”   Rule 121(b).   A

summary adjudication may be made upon part of the issues in

controversy.   Rule 121(a).   In response to a motion for summary

judgment or partial summary judgment, “an adverse party may not

rest upon the mere allegations or denials of such party’s

pleading, but such party’s response, by affidavits or as

otherwise provided in this Rule, must set forth specific facts

showing that there is a genuine issue for trial.”   Rule 121(d).

Facts on Which We Rely
     On or about September 10, 1993, Countryside was formed as a

Massachusetts limited partnership to acquire, finance, own,
                                 - 5 -

develop, rehabilitate, construct, lease, operate, and otherwise

deal with real estate.   Sometime thereafter, Countryside

acquired, owned, and operated a 448-unit residential property in

Manchester, New Hampshire (the Manchester property).

     As of January 1, 2000, the partnership interests in

Countryside were held as follows:

          General Partners                Interest (%)

          CLP Holdings, Inc.1                   1.0
          Lawrence H. Curtis                    0.5
          William W. Wollinger                  0.5

          Limited Partners

          Arthur M. Winn                       74.2
          Lawrence H. Curtis                   19.3
          William W. Wollinger                  4.5

            Total                             100.0
               1
                  During 2000, Mr. Winn and Mr. Curtis were the
          sole shareholders and directors of CLP Holdings, Inc.

     On or about June 29, 2000, (1) Mr. Winn transferred a 5-

percent interest in Countryside to Mr. Curtis in exchange for

services performed by Mr. Curtis for Mr. Winn, and (2) both Mr.

Curtis and William W. Wollinger (Mr. Wollinger) ceased to be

general partners of Countryside as each’s 0.5-percent general

partnership interest was converted into a 0.5-percent limited

partnership interest.    As a result of those changes, and through

December 25, 2000, the partnership interests in Countryside were

held as follows:
                                   - 6 -

            General Partner                Interest (%)

            CLP Holdings, Inc.                   1.0

            Limited Partners

            Arthur M. Winn                      69.2
            Lawrence H. Curtis                  24.8
            William W. Wollinger                 5.0

              Total                            100.0


     On or about September 18, 2000, WMC Realty Corp., by its

president, Mr. Winn, formed CLP Promisee L.L.C. (CLPP) under

Massachusetts law for the following stated purposes: (1) to

engage in the business of making investments in and owning

private bonds, notes, leases, debentures, and other nonmarketable

securities, (2) to make loans or issue and/or borrow, invest, and

lend money, (3) to acquire real or personal property necessary to

carry out such purposes, (4) to enter into contracts relating to

the same, (5) to engage in any activities directly or indirectly

related or incidental to such purposes, and (6) for any other

purpose permitted under law.     Also, on September 18, 2000, AMW

Realty Corp., by its president, Mr. Winn, formed Manchester

Promisee L.L.C. (MP) under Massachusetts law for the same stated

purposes.

     On October 27, 2000, WMC Realty Corp. contributed $86,364 in

cash to CLPP in exchange for a 1-percent interest in CLPP, and

AMW Realty Corp. contributed $85,859 in cash to MP in exchange

for a 1-percent interest in MP.
                               - 7 -

     Sometime in or about October 2000, Countryside borrowed

$8.55 million from Columbus Bank & Trust Co. (CB&T), and, on

October 30, 2000, (1) Countryside contributed that entire amount

in cash to CLPP in exchange for a 99-percent interest in CLPP,

and (2) CLPP contributed $8.5 million in cash to MP in exchange

for a 99-percent interest in MP.   Therefore, on or about October

30, 2000, Countryside was a 99-percent shareholder in CLPP, and

CLPP was a 99-percent shareholder in MP.

     On or about October 30, 2000, MP borrowed $3.4 million from

CB&T.   Both CB&T’s $8.55 million loan to Countryside and its $3.4

million loan to MP were guaranteed by Mr. Winn, and the loan to

Countryside was secured by the Manchester property.   Both loans

provided interest at an annual rate equal to the London Interbank

Offering Rate (LIBOR) plus 175 basis points.   The due date was

May 1, 2001, for the $8.55 million loan to Countryside and

November 1, 2003, for the $3.4 million loan to MP.

     On or about October 31, 2000, MP used the $8.5 million

received from CLPP and the $3.4 million borrowed from CB&T to

purchase four privately issued notes from AIG Matched Funding

Corp. (AIG) in the aggregate principal amount of $11.9 million

(the AIG notes).   The AIG notes were for principal amounts of

$6.2 million, $2.6 million, $2.3 million, and $800,000.   Each

note became due on October 31, 2010, although the holder of each

note possessed a right of redemption exercisable, in whole or in

part, on the fifth interest payment date (April 30, 2003).    Each

note provided for interest at an annual rate equal to LIBOR minus
                                 - 8 -

55 basis points, before the fifth interest payment date, and

LIBOR minus 35 basis points thereafter.   The AIG notes were

neither listed nor traded on an established financial market.

     Paragraph 11(b) of the “further provisions” of each note

provided, in part, as follows:

     (i) * * * upon the affirmative vote * * *, of the
     holders of not less than 50 percent in aggregate
     principal amount of the Notes then Outstanding * * * or
     * * * with the written consent of the owners of not
     less than 50 percent in aggregate principal amount of
     the Notes then Outstanding * * * the Issuer and the
     Guarantor may modify, amend or supplement the terms of
     the Notes, in any way * * * provided, however, that no
     such action may, without the affirmative vote of
     holders of 100 percent in aggregate principal amount
     Outstanding of the Notes, * * * change the due date for
     the payment of principal or interest on the Notes
     * * * .

As of October 30, 2000, MP assigned to CB&T a security interest

in two of the AIG notes, in the principal amounts of $2.6 million

and $800,000, as collateral for its $3.4 million loan from CB&T.

Pursuant to the terms of the assignment, MP deposited with CB&T

all of its right, title, and interest in the assigned AIG notes

and all payments under those notes.2

     On December 26, 2000, Countryside distributed its 99-percent

interest in CLPP to Mr. Winn and Mr. Curtis in complete

liquidation of their respective partnership interests in

Countryside (the liquidating distribution).   As a result of the

liquidating distribution, CLP Holdings, Inc., became a 16.7-




     2
        See app. A for a diagram of the statement of facts to
this point.
                                 - 9 -

percent general partner, and Mr. Wollinger became an 83.3-percent

limited partner in Countryside.

     On or about January 26, 2001, Countryside and Stone Ends

Apartments L.L.C. (Stone Ends) executed a purchase and sale

agreement for Countryside’s sale to Stone Ends of the Manchester

property.   That agreement was the culmination of negotiations

between Countryside and Stone Ends that began with an unsolicited

inquiry, in May or June 2000, from a representative of Stone

Ends.   The sale of the Manchester property closed on or about

April 19, 2001, and, on that date or soon thereafter, Countryside

repaid to CB&T the $8.55 million loan plus accrued interest.

     The AIG notes were redeemed from MP by AIG on or about April

30, 2003.

     CB&T’s $3.4 million loan to MP was repaid in full on or

about January 5, 2004.

Respondent’s Motion To Compel Production of Documents

     Respondent has moved the Court to compel petitioner (CLP

Holdings, Inc.) to produce certain documents (the motion to

compel production) as follows:

          1. Provide all explanatory or promotional
     materials related to the proposed and/or actual
     transactions including but not limited to:

                 (a) educational, instructional, and
            informational material;

                 (b) schematics, diagrams, and charts;

                 (c) economic, financial, and tax analyses;

                 (d) documents discussing potential risks
            and/or benefits associated with the proposed
                               - 10 -

          transaction, including financial risks, tax risks,
          audit risks;

               (e) all other documents relating directly or
          indirectly to the tax and/or financial
          consequences of participating in the transaction.

          2. Provide all legal, tax, accounting, financial
     or economic opinions secured or received in connection
     with the transaction.

     Petitioner objects, principally on the grounds of privilege,

but has provided to both respondent and the Court a privilege log

and a revised privilege log.   The revised privilege log lists 20

documents, all of which were (1) either addressed to, received

from, or copied to an attorney or C.P.A., (2) described as

“advice regarding tax law,” and (3) withheld from respondent on

the basis of a claimed privilege described, in each case, as

“attorney-client; Work Product; §7525.”3   In his response to

petitioner’s objection to the motion to compel production,

respondent does not dispute petitioner’s description of the

documents as “advice regarding tax law”.   Rather, he alleges that

petitioner failed to sustain its claim that those documents are

privileged, and he requests that we “order the documents produced

or [,] alternatively, inspect the documents ‘in camera’ to

determine whether the asserted privilege or protection applies.”

     The Court has not ruled upon the motion to compel

production.



     3
        Sec. 7525(a)(1) provides a limited privilege, equivalent
to the attorney-client privilege, to communications regarding tax
advice between a taxpayer and “any federally authorized tax
practitioner”.
                                - 11 -

                              Discussion

I.   Internal Revenue Code Provisions and Regulations

      A.   Code Provisions

            1.   Nonrecognition of Gain Issue4

      4
        In his objection to the motion, respondent states:
“Petitioner’s request that the Court determine that no income or
gain should be recognized by * * * Mr. Curtis and Mr. Winn is
inappropriate * * * [because] the Court does not have
jurisdiction over the resulting net tax effect on the partners”,
citing secs. 6226(f) and 6231(a)(3), which, in effect, limit our
jurisdiction in a partnership proceeding to the determination of
partnership items as defined in regulations. In his response,
participating partner argues that, under the applicable
partnership regulations, the amount and character of the
liquidating distribution and Mr. Winn’s and Mr. Curtis’s bases
for their partnership interests in Countryside are partnership
items. He concludes that, because we may make determinations
with respect to the amount and character of the liquidating
distribution and Mr. Winn’s and Mr. Curtis’s bases in
Countryside, it necessarily follows that we may determine whether
the liquidating distribution resulted in gain recognized to them.
Participating partner also points out that respondent’s
jurisdictional argument is somewhat disingenuous in the light of
the fact that the “Explanation of Items” included in the FPAA
increases 2000 capital gain to Mr. Winn and Mr. Curtis by
$12,055,192. Also, we have examined Exhibit A attached to that
explanation, which makes clear that respondent views the
liquidating distribution as a distribution of $12,055,192 to Mr.
Winn and Mr. Curtis, and he views each as having a zero basis in
Countryside, thereby attributing that amount of alleged gain to
them.

     We agree with participating partner on this question of
jurisdiction. Although sec. 301.6231(a)(5)-1T(b), Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987),
ambiguously provides that “[a] partner’s basis in his interest in
the partnership is an affected item to the extent it is not a
partnership item”, in this case, where Mr. Winn’s and Mr.
Curtis’s bases in Countryside are entirely determined by
partnership items, i.e., contributions to the partnership and
partnership-level operating losses, distributions, and
liabilities (see apps. B and C to this report and sec.
301.6231(a)(3)-1(a)(1)(i) and (v), (4)(i) and (ii), Proced. &
Admin. Regs.), it is appropriate to determine those bases in a
partnership proceeding. Moreover, as discussed infra, the
determinative issue in deciding whether Mr. Winn and Mr. Curtis
                                                   (continued...)
                               - 12 -

     The issue of whether any gain should have been recognized to

Countryside, Mr. Winn, and/or Mr. Curtis as a result of the

December 26, 2000, distribution of Countryside’s 99-percent

interest in CLPP is governed, in the first instance, by sections

731 through 733 and section 752.

     Section 731(a)(1) provides, in pertinent part, that, in the

case of a partnership distribution to a partner, gain shall not

be recognized to the recipient partner “except to the extent that

any money distributed exceeds the adjusted basis of such

partner’s interest in the partnership immediately before the

distribution”.   Section 731(b) provides:   “No gain or loss shall

be recognized to a partnership on a distribution to a partner of

property, including money.”5   Section 731(c)(1) provides that,

for purposes of section 731(a)(1), the term “money” includes

“marketable securities”, which are to be taken into account at

fair market value as of the distribution date.   Section

731(c)(2)(A) defines the term “marketable securities” to mean

“financial instruments * * * which are, as of the date of

distribution, actively traded (within the meaning of section


     4
      (...continued)
have gain recognized to them on the liquidating distribution is
whether that distribution constituted, in substance, a
distribution to Mr. Winn and Mr. Curtis of either money or
“marketable securities”, which are treated as money under sec.
731(c)(1). That issue involves a partnership item pursuant to
secs. 301.6231(a)(3)-1(a)(4)(ii) and (c)(3)(ii) and (iv), Proced.
& Admin. Regs. Therefore, we have jurisdiction to decide the
nonrecognition of gain issue.
     5
        Respondent does not allege that Countryside recognized
gain as a result of the liquidating distribution.
                              - 13 -

1092(d)(1)).”6   Section 731(c)(2)(B)(ii) and (v) includes in the

meaning of the term “marketable securities” (1) “any financial

instrument which, pursuant to its terms or any other arrangement,

is readily convertible into, or exchangeable for, money or

marketable securities”, and (2) “interests in any entity if

substantially all of the assets of such entity consist (directly

or indirectly) of marketable securities”.   The term

“substantially all” means 90 percent or more by value.   Sec.

1.731-2(c)(3)(i), Income Tax Regs.

     Section 732(b) provides that the basis of property (other

than money) distributed by a partnership to a partner in

liquidation of the latter’s interest shall be an amount equal to

the partner’s adjusted basis in such partner’s interest reduced

by any money distributed in the same transaction.

     Section 752(a) provides that any increase in a partner’s

share of the liabilities of a partnership shall be considered as

a contribution of money by the partner to the partnership, and

section 752(b) provides that any decrease in a partner’s share of

the liabilities of a partnership shall be considered as a

distribution of money to the partner by the partnership.

Pursuant to section 733, in the case of a nonliquidating

distribution, any such decrease will, first, reduce the partner’s

basis in the partnership (but not below zero).   To the extent

such decrease exceeds the partner’s basis in the partnership,

     6
        See sec. 1.1092(d)-1(a), Income Tax Regs. (“Actively
traded personal property includes any personal property for which
there is an established financial market.”).
                               - 14 -

gain is recognized to the partner pursuant to section 731(a)(1).

If a transaction gives rise to both an increase and a decrease in

the partner’s share of partnership liabilities or the partner’s

individual liabilities, only the net decrease is treated as a

distribution of money to the partner by the partnership.    Sec.

1.752-1(f), Income Tax Regs.

          2.   Basis Issues
     As 

, the FPAA seeks to deny Countryside a basis

step-up for its property remaining after the distribution to Mr.

Winn and Mr. Curtis,7 and it also challenges the recognition of

MP as holder of the AIG notes with a basis equal to the purchase

price of the notes.   Although those basis issues are not

addressed in the motion, respondent describes them as “integrally

related to the section 731 and section 752 issues”, and he cites

the totality of the transactions 

, and the

elections giving rise to the basis results, as constituting “an

abusive tax avoidance result” (i.e., the indefinite or, possibly,

permanent nonrecognition of the gain on the sale of Countryside’s

assets), which should not be given effect.   Because respondent’s

position in opposition to the motion relies, in part, upon the

alleged abusiveness of the combination of gain not being

recognized to Mr. Winn and Mr. Curtis, the basis step-up of

     7
        Schedule L, Balance Sheets per Books, included in
Countryside’s 2000 Form 1065, U.S. Return of Partnership Income,
on lines 9a and 11, reflects an $11,450,498 “step-up” in
Countryside’s bases for its “Buildings and other depreciable
assets” and its land ($11,655,277 total yearend basis increase
less $204,779 attributable to amounts expended for depreciable
property during 2000).
                                - 15 -

Countryside’s post-distribution assets, and the failure of MP to

“step down” its basis in the AIG notes, all occurring in 2000, we

shall summarize the basis adjustments required or authorized

under the Code provisions governing liquidating distributions by

a partnership.

     In pertinent part, section 754 provides that, if a

partnership files an election under regulations prescribed by the

Secretary, the basis of partnership property is adjusted, in the

case of a distribution of property, in the manner provided in

section 734.   Under section 734(b)(1)(B), in the case of a

distribution in liquidation of a partner’s interest, a

partnership that has a section 754 election in effect shall

increase the adjusted basis of partnership property by the excess

of the adjusted basis of the distributed property to the

partnership immediately before the distribution over the basis of

the distributed property to the distributee, as determined under

section 732(b).   Section 734(b)(1)(B) shall not apply, however,

if the distributed property is an interest in another partnership

with respect to which a section 754 election is not in effect.

Sec. 734(b) (last sentence).8

     8
        Respondent’s counsel acknowledges that CLPP had a sec.
754 election in effect at the time of Countryside’s distribution
of CLPP to Mr. Winn and Mr. Curtis on Dec. 26, 2000. In the
light of that election, participating partner takes the position
that the last sentence of sec. 734(b) does not apply to that
distribution and that, therefore, Countryside is entitled to the
reported basis step-up under sec. 734(b)(1)(B) and, as a result,
to reduced gain on the 2001 sale of the Manchester property.
Those issues of basis step-up and reduced gain are at issue for
taxable year 2001 in Countryside Ltd. Pship. v. Commissioner,
                                                   (continued...)
                              - 16 -

     Section 743(b) applies to a transfer, by sale or exchange,

of an interest in a partnership that has a section 754 election

in effect, and section 761(e) provides that any distribution by a

partnership of an interest in a partnership shall be treated as

an exchange for purposes of section 743.   Pursuant to section

743(b)(2) the distributed lower tier partnership must decrease

the adjusted basis of its partnership assets by the excess of the

transferee partner’s proportionate share of the adjusted basis of

the partnership property over the basis of the transferee

partner’s interest in the partnership.9

     B.   Regulations

          1.   The Subchapter K Antiabuse Regulations10
     Section 1.701-2, Income Tax Regs., constitutes a two-part

antiabuse rule directed at partnerships.   The two parts are

generally referred to as the “abuse-of-Subchapter-K” rule and the

“abuse-of-entity-treatment” rule.   See 1 McKee et al., Federal


     8
      (...continued)
docket No. 22023-05, which has been continued pending the outcome
of this case, although respondent raises the basis step-up issue
in this case as well.
     9
        The sec. 743(b)(2) basis step-down for CLPP’s assets
(primarily, its limited partnership interest in MP) is reflected
in CLPP’s 2000 Form 1065. Because MP did not make a sec. 754
election, it did not step down its basis for its assets
(primarily, the AIG notes). Therefore, MP did not report any
gain (almost all of which would have been taxable to Mr. Winn and
Mr. Curtis as the 99-percent limited partners in CLPP) on the
redemption of those notes in 2003.
     10
        Subch. K, ch. 1, subtit. A of the Internal Revenue Code
(subch. K), is entitled "Partners and Partnerships"; it sets
forth the rules for the income taxation of partners and
partnerships.
                                 - 17 -

Taxation of Partnerships and Partners, par. 1.05[1], at 1-14 (4th

ed. 2007).     Only the first part of the rule (section 1.701-2(a)

through (d), Income Tax Regs.) is pertinent to this case.

     Section 1.701-2(a), Income Tax Regs., is entitled “Intent of

subchapter K”.     It states:   “Subchapter K is intended to permit

taxpayers to conduct joint business * * * activities through a

flexible economic arrangement without incurring an entity-level

tax.”     It further states that there are three requirements

“[i]mplicit in the intent of subchapter K”: (1) “The partnership

must be bona fide”, and the transaction(s) in question “must be

entered into for a substantial business purpose”, (2) the

transaction(s) must not violate substance over form principles,

and (3) the tax consequences under subchapter K “must accurately

reflect the partners’ economic agreement and clearly reflect the

partner’s income” unless any departure from that standard is

“clearly contemplated” by the applicable provision of subchapter

K or the regulations thereunder.

        Section 1.701-2(b), Income Tax Regs., entitled “Application

of subchapter K rules”, provides, in pertinent part:

        [I]f a partnership is formed or availed of in
        connection with a transaction a principal purpose of
        which is to reduce substantially the present value of
        the partners’ aggregate federal tax liability in a
        manner that is inconsistent with the intent of
        subchapter K, the Commissioner can recast the
        transaction for federal tax purposes, as appropriate to
        achieve tax results that are consistent with the intent
        of subchapter K * * * . Thus, even though the
        transaction may fall within the literal words of a
        particular statutory * * * provision, the Commissioner
        can determine * * * that to achieve tax results that
        are consistent with the intent of subchapter K * * *
                                  - 18 -

      [t]he claimed tax treatment should * * * be adjusted or
      modified.

      Section 1.701-2(c), Income Tax Regs., applies a facts and

circumstances test in order to determine whether “a partnership

was formed or availed of with a principal purpose to reduce

substantially the present value of the partners’ aggregate

federal tax liability in a manner inconsistent with the intent of

subchapter K”, and section 1.701-2(d), Income Tax Regs., contains

11 examples intended to “illustrate the principles of paragraphs

(a), (b), and (c)”.

           2.   The Section 731 Antiabuse Regulation

      Section 1.731-2(h), Income Tax Regs., provides in pertinent

part:

      [I]f a principal purpose of a transaction is to achieve a
      tax result that is inconsistent with the purpose of section
      731(c) and this section, the Commissioner can recast the
      transaction for Federal tax purposes as appropriate to
      achieve tax results that are consistent with the purpose of
      section 731(c) and this section. * * *

The regulation invokes a facts and circumstances test and

provides three examples.

distributions of a

partnership’s marketable securities to partners, and the third

permits a series of distributions of “multiple properties” to be

treated as “part of a single distribution”.

II.   Arguments of the Parties
      A.   Participating Partner

      Attached to the motion are exhibits containing computations

for Mr. Winn and Mr. Curtis that, for each, show (1) his share of

Countryside’s liabilities and his adjusted basis in his
                               - 19 -

Countryside interest as of January 1, 2000, (2) the changes in

both his share of those liabilities and that basis between

January 1 and the December 26, 2000, liquidating distribution,

and (3) the effect of the liquidating distribution on his share

of those liabilities.

     Participating partner represents that Mr. Winn’s adjusted

basis in his interest in Countryside immediately before the

liquidating distribution to him was $19,937,590, and the amount

of money considered distributed to him pursuant to section 752(b)

in connection with the liquidating distribution (i.e., the net
decrease in Mr. Winn’s share of Countryside’s and MP’s

liabilities resulting from the liquidating distribution) was

$19,656,762.11   Because the net decrease in Mr. Winn’s share of

those liabilities resulting from the liquidating distribution

($19,656,762) was less than his adjusted basis for his interest

in Countryside immediately before that distribution

($19,937,590), Mr. Winn argues that, pursuant to section

731(a)(1) (which limits the gain recognized to a partner on any

distribution from a partnership to the amount of money

distributed in excess of the partner’s adjusted basis in the

partnership at the time of the distribution), he realized no gain

on the liquidating distribution.

     11
        The exhibit states that the liquidating distribution
relieved Mr. Winn of $22,142,736 of Countryside’s liabilities in
existence as of Dec. 26, 2000, but that Mr. Winn’s retained
liability representing his share of CLPP’s share of MP’s $3.4
million (plus interest) liability to CB&T was $2,485,974,
resulting in net relief from liabilities for Mr. Winn of
$19,656,762.
                              - 20 -

     Participating partner submits corresponding computations and

makes the same argument with respect to Mr. Curtis; i.e., because

the net decrease in Mr. Curtis’s share of Countryside’s and MP’s

liabilities resulting from the liquidating distribution (computed

to be $7,473,190) was less than his adjusted basis for his

interest in Countryside immediately before that distribution

(computed to be $7,760,895), pursuant to section 731(a), no gain

was recognized to Mr. Curtis on the liquidating distribution.12

     Participating partner’s position that neither Mr. Winn nor

Mr. Curtis recognized gain on the liquidating distribution is

dependent upon his argument that the AIG notes were not

“marketable securities”, as defined in section 731(c)(2).13    In

support of that argument, participating partner has submitted two

affidavits.   The first is the affidavit of Leslie J. Nanberg (Mr.

Nanberg), a registered investment adviser in Massachusetts and a


     12
        Participating partner’s computations for Mr. Winn and
Mr. Curtis are reproduced as apps. B and C.
     13
        Because the AIG notes constituted more than 90 percent
of MP’s assets, by value, and CLPP’s indirect interest (through
MP) in those assets constituted more than 90 percent of CLPP’s
assets, by value, on the date of the liquidating distribution,
Countryside’s liquidating distribution to Mr. Winn and Mr. Curtis
of a 99-percent interest in CLPP would be treated as a
distribution of money, for purposes of sec. 731(a), should the
AIG notes be considered marketable securities. See sec.
731(c)(2)(B)(v); sec. 1.731-2(c)(3)(i), Income Tax Regs.
Therefore, the status of the AIG notes as nonmarketable
securities (and, therefore, as property other than money for
purposes of sec. 731(a)) is crucial to participating partner’s
position, whether or not we disregard the separate existence of
CLPP and MP for Federal income tax purposes and treat the
liquidating distribution as a distribution of the AIG notes
themselves, an assumed scenario that participating partner
concedes for purposes of the motion.
                               - 21 -

principal in an investment advisory firm (the Nanberg affidavit).

Mr. Nanberg professes to be knowledgeable “regarding the trading

markets that may exist for various financial instruments and * *

* whether or not price quotations therefore [sic] are readily

available”.   Mr. Nanberg, after finding that the AIG notes “were

not listed or traded on an established financial market” and that

“no such market existed for the * * * [AIG] Notes on Dec. 26,

2000, or at any time thereafter,” concludes that the AIG notes

“were neither liquid nor easily offset on Dec. 26, 2000 or at any

time thereafter.”   The second is the affidavit of Samuel Ross

(Mr. Ross) who, in 2000, was the treasurer of AMW Realty Corp.

(the 1-percent general partner in MP) and was personally involved

in the negotiation and MP’s acquisition of the AIG notes.    Mr.

Ross states that “[a]ll terms of the transaction in which * * *

[MP] acquired the * * * [AIG] Notes are contained * * * [in the

notes themselves and in the related documentation]”, and “[t]here

was no agreement, understanding, or arrangement, written or oral,

binding or non-binding, between * * * [MP and AIG] that modifies

the terms of * * * [those] documents.”

     Participating partner argues that respondent’s reliance upon

the partnership antiabuse rules contained in the regulations is

misplaced.    He argues that the purpose of respondent’s reliance

upon section 1.701-2, Income Tax Regs., is unclear; but that, if

it is cited in support of respondent’s argument that MP must

reduce the basis for its assets or, alternatively, that

Countryside may not increase the basis for its assets as a result
                               - 22 -

of the liquidating distribution, that regulation has no bearing

on the motion, which is addressed solely to the nonrecognition of

gain issue.    Participating partner further argues that no matter

how respondent recasts the liquidating distribution pursuant to

section 1.701-2, Income Tax Regs. (i.e., as distributions of

interests in CLPP, MP, or of the AIG notes themselves),

respondent has not demonstrated an ability to overcome the facts

established by participating partner, which demonstrate that (1)

Mr. Winn and Mr. Curtis received nonmarketable securities, and

(2) the net decrease in their respective shares of Countryside’s

and MP’s liabilities did not exceed their respective bases in

Countryside.    Participating partner also dismisses section 1.731-

2(h), Income Tax Regs., as inapplicable on the ground that it is

applicable only to circumstances “involving changes in

partnership allocations with respect to marketable securities and

distributions of nonmarketable securities by a partnership that

also owns marketable securities,” which, in substance, constitute

a manipulation by a partner of “the inherent flexibility of the

partnership form to acquire an increased interest in marketable

securities from a partnership without effecting a transaction in

the form of a distribution [of marketable securities].”

Participating partner reasons that “the provision should not have

any application to a partnership [Countryside] that owns no

marketable securities at all, either directly or indirectly.”

     Participating partner also argues that the cases respondent

cites involving the disallowance of deductions arising out of
                                - 23 -

transactions that lacked business purpose or economic substance

are inapposite.   That is because none of those cases constitutes

authority for disregarding Mr. Winn’s and Mr. Curtis’s share of

MP’s $3.4 million debt obligation to CB&T, which must be

respected for purposes of applying sections 731(a)(1) and 752 to

the liquidating distribution.

     Lastly, participating partner argues that respondent has

failed to raise any genuine issue of material fact as to whether

(1) the AIG notes constituted nonmarketable securities and (2)

Mr. Winn’s and Mr. Curtis’s respective bases for their interests

in Countryside exceeded the amount of money they are deemed to

have received by virtue of the net decrease in their respective

shares of Countryside’s liabilities.      In this regard,

participating partner states that respondent’s “theories,

assertions, and arguments” (e.g., that there may have been some

informal “arrangement” among Mr. Winn, Mr. Curtis, and AIG

whereby the AIG notes were readily convertible into, or

exchangeable for, money or marketable securities) are

insufficient to defeat the motion.       In support of that statement,

participating partner cites the admonition in Rule 121(d) that

“an adverse party may not rest upon the mere allegations or

denials of such party’s pleading” but, instead, “by affidavits or

as otherwise provided in this Rule, must set forth specific facts

showing that there is a genuine issue for trial.”
                                - 24 -

     B.    Respondent

     Respondent views the liquidating distribution, Countryside’s

sale of the Manchester property in 2001, and the redemption of

the AIG notes from MP in 2003 as giving rise to a series of

“integrally related” transactions pursuant to which “Winn and

Curtis effectively control [by means of their continued

ownership, through CLPP, of MP] their share of the proceeds from

the sale of * * * [the Manchester property], but have permanently

sheltered it from tax.”     Respondent seeks to deny, to Mr. Winn

and Mr. Curtis, any deferral, beyond 2000, of their gain

attributable to the 2001 sale of the Manchester property.     Thus,

he takes the position that the liquidating distribution

constituted a distribution of money to Mr. Winn and Mr. Curtis;

i.e., it was a distribution of money under (1) section 731(c)

and/or (2) the antiabuse rule of section 1.731-2(h), Income Tax

Regs.     In addition, respondent disregards MP’s $3.4 million

liability to CB&T and Mr. Winn’s and Mr. Curtis’s respective

shares of that liability as offsets, under section 752(a), to the

deemed distributions of money to them under section 752(b) (i.e.,

as offsets to the decrease in their share of Countryside’s

liabilities arising from the liquidating distribution).

Consistently, respondent also disregards the $3.4 million of AIG

notes purchased by MP.

     Respondent’s position with respect to the impact of the

liquidating distribution on Mr. Winn’s and Mr. Curtis’s 2000
                              - 25 -

Federal tax liabilities is summarized in paragraphs 23(h) and (q)

of his amendment to answer as follows:

                                         Mr. Winn     Mr. Curtis
Sec. 752(b) deemed
  distribution of money1               $14,892,855    $4,402,714
Sec. 731(c)
  distribution of money
  (cash/securities)2                     6,345,394     2,274,191
Total distribution of money             21,238,249     6,676,905
Basis3                                 (12,879,151)   (3,798,080)
  Total gain4                            8,359,098     2,878,825
     1
        Respondent treats as a distribution of money to Mr. Winn
and Mr. Curtis, under sec. 752(b), only the relief from
Countryside’s liabilities existing as of Jan. 1, 2000. He
disregards the additional liabilities triggered by the CB&T loans
of $8.55 million to Countryside and $3.4 million to MP, Mr.
Winn’s and Mr. Curtis’s relief from the former, and the
modification of their respective shares of Countryside’s
liabilities resulting from Mr. Winn’s transfer of a 5-percent
limited partnership interest in Countryside to Mr. Curtis, all of
which are taken into account by participating partner on exhibits
attached to the motion. See apps. B and C.
     2
        These amounts are apparently derived from line 23
(Distributions of property other than money) of Mr. Winn’s and
Mr. Curtis’s Schedules K-1, Partner’s Share of Income, Credits,
Deductions, etc., attached to Countryside’s 2000 return.
     3
        Respondent treats as Mr. Winn’s and Mr. Curtis’s bases in
Countryside on the date of the liquidating distribution their
bases as of Jan. 1, 2000, thereby disregarding the basis
modifications resulting from the CB&T loans to Countryside and
MP, Mr. Winn’s transfer of a 5-percent limited partnership
interest in Countryside to Mr. Curtis, Countryside’s cash
distributions to Mr. Winn and Mr. Curtis during 2000, and
Countryside’s 2000 loss, all of which are taken into account by
participating partner. See apps. B and C.
     4
        The total alleged gain to both Mr. Winn and Mr. Curtis is
$11,237,923. That amount differs from both the gain to Mr. Winn
and Mr. Curtis alleged in the FPAA ($12,055,192), which
respondent conceded at the hearing is incorrect, and the revised
alleged gain to Mr. Winn and Mr. Curtis, which respondent’s
counsel stated at the hearing is $11,427,993. There is no
explanation in the record for the discrepancy between the first
and third amounts of alleged gain to Mr. Winn and Mr. Curtis.
                              - 26 -

     At the hearing, respondent’s counsel conceded that the

amounts and computations set forth on the exhibits attached to

the motion (appendixes B and C) are arithmetically correct, but

respondent disputes participating partner’s computational results

on the basis of respondent’s disregard, for Federal income tax

purposes, of the CB&T loans, Mr. Winn’s transfer of a 5-percent

interest in Countryside to Mr. Curtis, and the formation and

separate existence of CLPP and MP.     Respondent views those

transactions, culminating with the liquidating distribution, as

“designed to circumvent the provisions of Subchapter K and [as],

in substance, * * * equivalent to a distribution of cash to Winn

and Curtis.”   He further alleges that “[t]he entire series of

transactions is a sham and should be disregarded for federal

income tax purposes * * * [and] recast * * * in accordance with

its substance”, which, in respondent’s view, is a distribution of

cash or a cash equivalent to Mr. Winn and Mr. Curtis.14

     14
        In the FPAA, the only transaction alleged to constitute
a “sham”, lacking in “economic substance”, is the formation and
distribution of CLPP and MP, an allegation that participating
partner concedes for purposes of the motion. In the amended
answer, however, respondent treats as “sham”, and disregards for
lack of “business purpose” and “economic effect”, not only the
distribution to Mr. Winn and Mr. Curtis of CLPP and MP, but also
the CB&T loans to Countryside and MP and the latter’s purchase of
the AIG notes, with the result that that “series of transactions”
is to be treated as “equivalent to a distribution of cash to Winn
and Curtis.” Respondent does not, in the amended answer,
identify the source of the roughly $8.5 million distribution of
money (“Cash/Securities”) that he considers Countryside to have
distributed to Mr. Winn and Mr. Curtis ($6,345,394 to Mr. Winn
and $2,274,191 to Mr. Curtis). At the hearing, however,
respondent’s counsel acknowledged that the source of that money
is the $8.55 million Countryside borrowed from CB&T. She would
not, however, acknowledge the reality for tax purposes of the
                                                   (continued...)
                              - 27 -

     Respondent relies upon (1) caselaw employing the so-called

economic substance doctrine and (2) the subchapter K “anti-abuse”

regulations (sections 1.701-2 and 1.731-2(h), Income Tax Regs.),

in order to deny the application of the provisions of subchapter

K and the regulations thereunder that are relied upon by

participating partner, despite literal compliance therewith.

Respondent’s argument that the post January 1, 2000, transactions

lacked “economic substance” is premised on the fact that, because

the interest rate on the CB&T loans to CLPP and MP was 230 basis

points higher than the rate of interest earned on the AIG notes

(the interest detriment), those transactions made “no economic

sense”.

     Respondent also opposes the motion on the ground that there

are material issues of fact regarding the true nature of the

economic arrangement among the partners in Countryside and the

circumstances surrounding the sale of the Manchester property to

Stone Ends.   He also alleges that there are material issues of

fact regarding the marketability of the AIG notes, i.e., whether

there existed an “arrangement” with AIG whereby the notes were

“readily convertible” into cash, see sec. 731(c)(2)(B)(ii), and

whether CLPP and MP should be disregarded for Federal income tax


     14
      (...continued)
$3.4 million MP borrowed from CB&T because, as she explained,
that part of the transaction is “more abusive”. She stated:
“Well, the 3.4 is worse than the 8.5 because the 3.4 is down in
Manchester, [it is] associated with a note that is pledged to the
bank * * *, the interest differential is * * * [against the
partnership], and that’s basically all that is in that
partnership.”
                              - 28 -

purposes.   The latter inquiry is relevant solely to the basis

issues15 because, as 

, participating partner concedes

that both CLPP and MP may be disregarded for purposes of the

motion; i.e., for purposes of the nonrecognition of gain issue.16

     Lastly, respondent asserts that, because issues of (1)

economic substance and (2) tax avoidance motives on the part of

the partners in Countryside in structuring the liquidating

distribution are relevant to our decision on the motion, summary

judgment is precluded until we have resolved respondent’s motion


     15
        For example, if both CLPP and MP are disregarded, Mr.
Winn and Mr. Curtis are deemed to have received the AIG notes
directly as distributions in liquidation of their interests in
Countryside, and, assuming those notes are not treated as money
under sec. 731(c)(1)(A), each’s resulting basis in his notes is
determined from his partnership basis reduced by the amount of
his relief from Countryside’s liabilities on the distribution
date. See secs. 732(b) and 752(b). Stated numerically,
according to his computations, Mr. Winn’s basis for his share of
the AIG notes would be $280,828 ($19,937,590 - $19,656,762) and
Mr. Curtis’s basis for his share of those notes would be $287,705
($7,760,895 - $7,473,190). See apps. B and C. Alternatively, if
only CLPP is disregarded, then MP’s failure to make a sec. 754
election negates any basis step-up to Countryside for the
Manchester property. See sec. 734(b) (last sentence).
     16
        Respondent asks that, in this case, we address the
validity for Federal income tax purposes of CLPP and MP because,
assuming we decide that Mr. Curtis and Mr. Winn are not required
to recognize gain in 2000, thereby forcing respondent to attempt
to attribute taxable gain to them upon the redemption of the AIG
notes in 2003, his success in that effort may depend upon whether
Mr. Winn and Mr. Curtis are deemed, for Federal income tax
purposes, to have received (1) membership interests in CLPP or MP
or (2) the AIG notes themselves in 2000. Respondent fears that,
if he first raises the L.L.C. validity issue in litigation
limited to the 2003 taxable year, he may be whipsawed by a claim
that 2000 was the proper year for which to raise that issue. In
the light of participating partner’s concession, there is no need
to address the L.L.C. validity issue in deciding the motion, and
we will be able to address respondent’s fear of being whipsawed
when we resolve any remaining issues in this case.
                                - 29 -

to compel production.    Respondent reasons that the documents

sought may be relevant to those issues and that it would be

“unfair” to grant the motion without first deciding respondent’s

motion to compel production.

III.   Analysis

       A.   Impact of Respondent’s Motion To Compel Production

       We first address respondent’s argument that we are precluded

from granting partial summary judgment to participating partner

until we have decided respondent’s motion to compel production.

       As 

, petitioner’s revised privilege log describes

all of the documents listed therein and sought by respondent as

“advice regarding the tax law.”     Respondent does not object to

that description of the documents, and he is willing to assume

arguendo that the only reason for the motion to compel production

“is to secure discovery regarding a tax avoidance motive”.

Participating partner concedes, however, that the liquidating

distribution was structured to defer tax by distributing to Mr.

Winn and Mr. Curtis property rather than cash.     Indeed, he

concedes that tax avoidance (or, as participating partner’s

counsel would prefer to describe it, “tax planning”) was the sole

motivation for the formation of CLPP and MP, the CB&T loans, and

the purchase of the AIG notes, all steps taken to ensure that, in

redemption of their partnership interests, Mr. Winn and Mr.

Curtis received only property, and no cash.     In the light of

those concessions, we cannot see how respondent can continue to
                                 - 30 -

argue that there exists an issue as to the existence of a

predominant tax avoidance motive.

     In support of that argument, respondent notes that, in two

complaints filed in the Court of Federal Claims on behalf of CLPP

and MP, respectively, it is alleged that both CLPP and MP and the

transactions in which they engaged “had economic substance and

business purpose and did not have a principal purpose to reduce

substantially the present value of * * * [Countryside’s]

partners’ aggregate tax liabilities in a manner inconsistent with

the intent of subchapter K.”17    We also note that, in a case in

this Court involving Countryside’s 2001 taxable year, Countryside

Ltd. Pship. v. Commissioner, docket No. 22023-05 (docket No.

22023-05), respondent denies Countryside’s $11,450,498 basis

step-up for the Manchester property, pursuant to section

734(b)(1)(B), which results in his increasing Countryside’s gain

on its 2001 sale of that property by like amount.    Respondent’s

position in docket No. 22023-05 is premised, in part, upon his

disregard, for Federal income tax purposes, of CLPP, which had

made a section 754 election, and the failure of MP to make such

an election.   See sec. 734(b) (last sentence).   In defending the

basis step-up and resulting smaller gain on the sale of the

Manchester property, petitioner in docket No. 22023-05 alleges

that the FPAA “arbitrarily and erroneously determines that the


     17
        Both of those complaints involve challenges to
respondent’s adjustments to (1) the bases of the members in CLPP
for their membership interests therein and (2) MP’s bases for its
assets.
                                 - 31 -

formation of CLP Promisee was a sham and lacked economic

substance * * * [and] that CLP Promisee should be disregarded and

all transactions engaged in by CLP Promisee treated as engaged in

directly by Countryside”.

     In both the Court of Federal Claims actions and in docket

No. 22023-05, the issue of whether CLPP and/or MP should be

disregarded for lack of economic substance and/or business

purpose relates solely to the basis issues, not to the issue

involved in the motion; i.e., whether the liquidating

distribution resulted in the receipt by Mr. Winn and Mr. Curtis

of money, thereby causing taxable gain to be recognized to them.

Participating partner has, for purposes of that issue,

unequivocally conceded both that CLPP and MP may be disregarded

and that their formation and utilization to borrow money and

purchase the AIG notes were tax-motivated steps undertaken as

part of a plan to defer tax by distributing property rather than

cash.     In the light of those concessions, we reject respondent’s

argument that we are precluded from granting partial summary

judgment to participating partner before deciding respondent’s

motion to compel production.

     B.     Economic Substance

             1.   Introduction

        We view the statement in respondent’s amendment to answer

that, pursuant to the liquidating distribution, Mr. Winn and Mr.

Curtis each received an “I.R.C. § 731(c) distribution of money

(Cash/Securities)” as respondent’s allegation that the AIG notes
                               - 32 -

constituted marketable securities as defined in section 731(c)(2)

or, alternatively, that, even if they were nonmarketable, the

lack of economic substance surrounding their purchase and

distribution negates the ability of Mr. Winn and Mr. Curtis to

achieve nonrecognition of gain under sections 731(a)(1) and

752(a) and (b).18   That alternative argument (lack of economic

substance) is reiterated by respondent in opposing the motion.

We will first address what we consider to be respondent’s

alternative argument that, even if the AIG notes constituted

nonmarketable securities, the liquidating distribution must be

considered, in substance, a distribution of cash to Mr. Winn and

Mr. Curtis resulting in their recognition of gain.

          2.   Application of Goldstein v. Commissioner
     Respondent seeks to disregard the CB&T loans and the

purchase and (because CLPP and MP are to be disregarded for

purposes of the motion) deemed distribution of the AIG notes

directly to Mr. Winn and Mr. Curtis.    In support of that

position, respondent points to the interest detriment, which,

combined with transaction costs, necessarily resulted in an

arrangement that could not generate a profit to Countryside, and

which, therefore, was without business purpose.    The principal

authority upon which respondent relies is Goldstein v.

     18
        At this point, we use the term “economic substance”
without attaching to it a precise meaning but only to encompass
the various grounds advanced by respondent for disregarding the
tax results claimed by participating partner, e.g., lack of
“business purpose or economic effect”, a “series of transactions
* * * [amounting to] a sham”, a “transaction * * * [that] makes
no economic sense”.
                              - 33 -

Commissioner, 

(2d Cir. 1966), affg. 

(1965).

     In the Goldstein case, the taxpayer (Mrs. Goldstein, the

wife in a joint return filing) won over $140,000 in the Irish

Sweepstakes.   In an effort to mitigate the tax impact of having

to report all her winnings in the year of receipt, her advisers

constructed a plan pursuant to which, before the end of that

year, she borrowed $945,000 from two banks, purchased $1 million

face amount Treasury 1.5-percent notes, and prepaid 4 percent

interest for 1.5 years on one bank loan and for approximately

2.75 years on the other.   The total interest prepayment was over

$81,000, which the Goldsteins claimed as a deduction in the year

of payment under section 163(a).   We denied the deduction on the

ground that “there was no genuine indebtedness established

between * * * [Mrs. Goldstein] and * * * [the banks].”    Goldstein

v. Commissioner, 

.   The Court of Appeals for the

Second Circuit affirmed, but on a different basis.   It agreed

with the dissenting opinion in this Court that the bank loans

were “‘indistinguishable from any other legitimate loan

transaction contracted for the purchase of Government

securities’”, Goldstein v. 

(quoting
Goldstein v. Commissioner, 

(Fay, J., dissenting)),

and it found that we were in error in concluding that those loans

“were ‘shams’ which created no genuine indebtedness”

It agreed, however, with our finding that Mrs. Goldstein entered

into the two bank loans “without any realistic expectation of
                               - 34 -

economic profit and ‘solely’ in order to secure a large interest

deduction * * * [to offset her sweepstakes winnings].”

   The court found that Congress intended to limit interest

deductions under section 163(a) to interest on debt incurred for

“purposive activity”, and it held that that section did not

permit a deduction for the interest paid by Mrs. Goldstein where

the sole purpose of her borrowings was to generate tax deductible

interest.

       Because Countryside, like Mrs. Goldstein, could not

realistically profit from investing in the AIG notes at a lower

rate of return than it was required to pay on the loans used to

make that investment, respondent considers the facts in the

Goldstein case “analogous” and the result controlling of the

result herein.    Participating partner responds:    “Goldstein,

properly understood, stands for the limited proposition that,

when a taxpayer * * * [borrows] for the sole purpose of claiming

a tax deduction for the interest expense, the interest is not

deductible.”    He notes that the Court of Appeals for the Second

Circuit respected the debt as bona fide, while disallowing the

interest deduction for lack of any “purposive activity” in

incurring the debt.    He concludes:    “There is no basis for

contending that a similar ‘purposive activity’ concept is present

in Code section 752, and there is thus no basis for attempting to

extrapolate from Goldstein to the present case.”      We interpret

participating partner’s argument to be that, because neither

business purpose nor economic substance considerations affect the
                             - 35 -

validity of Countryside’s debt to CB&T (which, pursuant to

participating partner’s concession that CLPP and MP may be

disregarded, includes MP’s $3.4 million debt to CB&T), that debt

must be accepted as bona fide for purposes of sections 731(a)(1)

and 752.

     Respondent’s reliance on Goldstein founders on the fact that

Countryside, rather than Mr. Winn and Mr. Curtis, occupies Mrs.

Goldstein’s position (paying more interest on the borrowings than

was received on the investment purchased with those borrowings).

The comparable issue in this case would be whether Countryside is

entitled to deduct the interest paid on the loans from CB&T.

Respondent has not raised an interest deductibility issue in this

case, and there is nothing, on that score, for us to resolve.

     The Goldstein case, however, does support respondent’s

argument that literal compliance with the conditions for the

application of a particular Code section (in the Goldstein case,

section 163(a); in this case, sections 731(a)(1) and 752) does

not mandate application of the section where the transaction

giving rise to that application fails to comport with Congress’s

purpose in enacting the section.   The question before the Court

of Appeals in Goldstein was, at heart, one of statutory
construction, i.e., determining whether, despite the broad scope

of section 163(a), Congress intended to allow an interest

deduction for interest paid on funds borrowed “for no purposive

reason * * * other than * * * securing * * * [a tax] deduction”.

Goldstein v. 

.   Courts commonly
                               - 36 -

consider legislative purpose in construing tax (and other)

statutes.   See 2A Singer, Sutherland Statutory Construction, sec.

48:3, at 549 (7th ed. 2007).   While the precise language of both

sections 731(a) and 752 suggests that there is little uncertainty

in their application, we cannot lose sight of the fact that both

sections are part of a large and complex system of rules for

taxing partners and partnerships; viz, subchapter K.   The purpose

of subchapter K, as set forth in the income tax regulations, is

“to permit taxpayers to conduct joint business (including

investment) activities through a flexible economic arrangement

without incurring an entity-level tax.”   Sec. 1.701-2(a), Income

Tax Regs.   Undoubtedly, sections 731(a) and 752 must be construed

in the light of the purpose of subchapter K.   In the analogous

situation of determining whether a transaction fits within the

corporate reorganization provisions of the income tax, the

Supreme Court, in Gregory v. Helvering, 

, 469 (1935),

famously said:

     The legal right of a taxpayer to decrease the amount of
     what otherwise would be his taxes, or altogether avoid
     them, by means which the law permits, cannot be
     doubted. * * * But the question for determination is
     whether what was done, apart from the tax motive, was
     the thing which the statute intended. * * *

     Participating partner has failed to convince us that, in

considering the application of sections 731(a) and 752 to the

facts before us, an inquiry is not warranted into whether

Countryside, Mr. Winn, and/or Mr. Curtis engaged in any

“purposive activity” other than tax avoidance.   Indeed, we have

held that there are circumstances in which the lack of “purposive
                              - 37 -

activity” or economic substance will defeat the application of

the provisions of subchapter K.   See, e.g., Wilkinson v.

Commissioner, 

, 10-13 (1967) (in which we (1)

disregarded, as without “economic significance”, the assignment

of an installment sale obligation to a partnership owned by the

obligees just before the obligees’ liquidation of the corporate

obligor, in which they were majority shareholders, (2) deemed

section 721, which would have protected the obligees from tax on

the deferred gain upon a bona fide assignment of the obligation

to the partnership, to be inapplicable, and (3) held that the

obligees were taxable on the deferred gain upon their liquidation

of the corporate obligor); Santa Monica Pictures, L.L.C. v.

Commissioner, T.C. Memo. 2005-104 (special allocation rules of

section 704(c) and carryover basis rules of section 723 deemed

inapplicable to shift built-in losses to the taxpayer in a

transaction lacking economic substance).   The question is whether

there are circumstances present in this case that negate the

application of sections 731(a)(1) and 752(a) and (b) to provide

nonrecognition of gain to Mr. Winn and Mr. Curtis on the

liquidating distribution.

          3.   Did the Transactions in Question Lack Economic
               Substance?

          a.   Introduction

     As 

, participating partner concedes that the

liquidating distribution was structured to defer tax by

distributing to Mr. Winn and Mr. Curtis property rather than cash

and that tax avoidance was the sole motivation for the formation
                              - 38 -

of CLPP and MP, the CB&T loans, and the purchase of the AIG

notes, all in furtherance of that plan.   Because participating

partner also concedes that the L.L.C.s may be disregarded for

purposes of the motion, the question before us is whether the

CB&T loans and the deemed purchase and distribution of the AIG

notes by Countryside also must be disregarded for lack of

economic substance with the result that the liquidating

distribution must be treated as equivalent to a cash distribution

to Mr. Winn and Mr. Curtis (despite its literal qualification for

nonrecognition of gain under section 731(a)(1)).

           b.   The Caselaw

     In section 

we set forth the seminal language

from Gregory v. 

at 469, requiring an inquiry

into what is now generally is referred to as “economic substance”

in order to determine whether to give effect to the

reorganization provisions of the income tax.   We shall make a

like inquiry into the economic substance of the liquidating

distribution in order to determine whether to give effect to the

provisions of subchapter K here in issue; viz, sections 731(a)

and 752.   That the so-called economic substance doctrine embodies

the foregoing principle of Gregory v. 

, was
recently made clear by the Court of Appeals for the Federal

Circuit in Coltec Indus. Inc. v. United States, 

,

1353-1354 (Fed. Cir. 2006), which states:

          The economic substance doctrine represents a
     judicial effort to enforce the statutory purpose of the
     tax code. From its inception, the economic substance
     doctrine has been used to prevent taxpayers from
                             - 39 -

     subverting the legislative purpose of the tax code by
     engaging in transactions that are fictitious or lack
     economic reality simply to reap a tax benefit. In this
     regard, the economic substance doctrine is not unlike
     other canons of construction that are employed in
     circumstances where the literal terms of a statute can
     undermine the ultimate purpose of the statute. * * *

The Court also observed that cases applying the economic

substance doctrine “recognize that there is a material difference

between structuring a real transaction in a particular way to

provide a tax benefit (which is legitimate), and creating a

transaction, without a business purpose, in order to create a tax

benefit (which is illegitimate).”

     The Court of Appeals for the District of Columbia Circuit,

the court to which an appeal of this case most likely would

lie,19 also recognized the foregoing distinction in Boca

Investerings Pship. v. United States, 

, 631 (D.C.

Cir. 2003), phrasing it in terms of the need for a legitimate

business purpose:

          The business purpose doctrine * * * establishes
     that while taxpayers are allowed to structure their
     business transactions in such a way as to minimize
     their tax, these transactions must have a legitimate
     non-tax avoidance business purpose to be recognized as
     legitimate for tax purposes. * * *

See also ASA Investerings Pship. v. Commissioner, 

,
512 (D.C. Cir. 2000) (in “sham transaction” cases, “the existence

of formal business activity is a given but the inquiry turns on

     19
        Because petitioner states in its petition that
Countryside had no principal place of business when the petition
was filed, barring stipulation to the contrary, the venue for
appeal would appear to be the Court of Appeals for the District
of Columbia Circuit. See sec. 7482(b)(1) (flush language) and
(2).
                               - 40 -

the existence of a nontax business motive”), affg. T.C. Memo.

1998-305.    But cf. ACM Pship. v. Commissioner, 

, 248

n.31 (3d Cir. 1998) (“where a transaction objectively affects the

taxpayer’s net economic position * * * it will not be disregarded

merely because it was motivated by tax considerations”), affg. in

part and revg. in part T.C. Memo. 1997-115; N. Ind. Pub. Serv.

Co. v. Commissioner, 

, 512 (7th Cir. 1997) (the cases

allowing “the Commissioner to disregard transactions which are

designed to manipulate the Tax Code so as to create artificial

tax deductions * * * do not allow the Commissioner to disregard

economic transactions * * * which result in actual, non-tax-

related changes in economic position”), affg. 

(1995).20

            c.   Analysis

     In this case, the transactions that respondent seeks to

disregard, the CB&T loans and the deemed purchase of the AIG

notes by Countryside and their distribution to its majority-in-

interest partners, Mr. Winn and Mr. Curtis, were the means

     20
        The last four cited cases illustrate that the economic
substance doctrine has two prongs, an objective prong and a
subjective prong. The objective prong requires that the
transaction change the taxpayer’s economic position; the
subjective prong requires that the taxpayer have a nontax
business purpose for entering into the transaction. Although
there is apparently some dispute as to the manner in which the
various Courts of Appeals apply the two prongs, see, e.g.,
Stratton, “Government, Tax Bar Disagree Over Impact of Coltec”,

(Nov. 2, 2006), it appears that the Court of
Appeals for the District of Columbia Circuit has applied them
disjunctively; i.e., a transaction will satisfy the economic
substance doctrine if it satisfies either the objective or
subjective prong of the test, see Horn v. Commissioner, 

, 1237-1238 (D.C. Cir. 1992), revg. T.C. Memo. 1988-570.
                                - 41 -

employed by Mr. Winn and Mr. Curtis, and agreed to by

Countryside, to allow Mr. Winn and Mr. Curtis to withdraw from

the partnership before the anticipated sale of the Manchester

property to Stone Ends.     While the employed means were designed

to avoid recognition of gain to Mr. Winn and Mr. Curtis, those

means served a genuine, nontax, business purpose; viz, to convert

Mr. Winn’s and Mr. Curtis’s investments in Countryside into 10-

year promissory notes, two economically distinct forms of

investment.21

     The Court of Appeals for the Second Circuit considered an

analogous set of facts in Chisholm v. Commissioner, 

(2d Cir. 1935), revg. 

(1934).     In Chisholm, the

taxpayer and the four other shareholders of a corporation granted

a 30-day option to buy their shares in the corporation to a

third-party corporation that, during the option period, gave the

optionors its nonbinding commitment to exercise the option before

it expired.     The optionors were advised that, by forming a

partnership to sell the shares, they might postpone and,

possibly, escape the taxes that would otherwise become due on the

exercise of the option and their sale of the shares.     For that

reason, they transferred the shares to a newly formed


     21
        While CLP Holdings, Inc., and Mr. Wollinger,
Countryside’s remaining partners, enjoyed 100 percent of the
benefits associated with Countryside’s ownership of the
Manchester property following Mr. Winn’s and Mr. Curtis’s
withdrawals as partners, they also bore 100 percent of the
burdens associated with that ownership. In other words, their
economic positions also changed as a result of the liquidating
distribution.
                                 - 42 -

partnership, which sold the shares to the corporate buyer upon

the latter’s exercise of the option and continued to hold and

reinvest the proceeds of sale on behalf of its partners.       Writing

for the court, Judge Learned Hand noted that the case was “on all

fours” with a previous decision of the court, Helvering v.

Walbridge, 

(2d Cir. 1934) (holding that, when

partners transfer property to a partnership that then sells the

property, taxation of any pretransfer appreciation in the

property’s value must await dissolution of the partnership)

except for the fact that, in Chisholm, the partnership “was

formed confessedly to escape taxation.”      Chisholm v.

at 15.     Citing Gregory v. Helvering, 

(1935), Judge Hand observed that the Supreme Court “was

solicitous to reaffirm the doctrine that a man’s motive to avoid

taxation will not establish his liability if the transaction does

not do so without it”, and he concluded:     “The question always is

whether the transaction under scrutiny is in fact what it appears

to be in form”.

that “purpose may be the

touchstone, but the purpose which counts is one which defeats or

contradicts the apparent transaction, not the purpose to escape

taxation which the apparent, but not the whole, transaction would

realize.”

the taxpayer’s purpose, “to

form an enduring firm which should continue to hold the joint

principal and * * * invest and reinvest it”, was a legitimate

business purpose.

for the taxpayer.
                              - 43 -

     In another analogous case, Hobby v. Commissioner, 

(1943), in order to avoid anticipated redemptions of certain

preferred shares of stock and taxation of the resulting gain at

short-term capital gain rates, the taxpayer sold the shares to

friends before the scheduled redemptions, and he reported long-

term capital gains on the sales.    The taxpayer’s friends paid for

the shares with borrowed funds.    The taxpayer incurred no

liability for repayment of those loans.    The Commissioner sought

to disregard the taxpayer’s stock sales as tax-motivated and

determined that the taxpayer’s gain was a short-term gain on the

redemption of the shares.   Citing Chisholm v. 

, we noted that the taxpayer’s “primary purpose to realize

the gain was a legitimate business purpose, even though it also

had a collateral favorable tax effect”, and held for the

taxpayer.   Hobby v. 

at 985.   Citing Hobby, we

reached the same result in Beard v. Commissioner, 

(1945), a case involving facts virtually identical to those in

Hobby.   In Beard v. 

at 758, by making the

following observation, we echoed Judge Hand’s admonition in

Chisholm v. 

at 15, that the issue “always is
whether the transaction under scrutiny is in fact what it appears

to be in form”: “The Commissioner is * * * required to tax * * *

[the taxpayer] in accordance with what occurred, and he is not

permitted to distort the transaction by giving it an artificial

character upon which a larger tax could be imposed if it were

true.”
                              - 44 -

     In this case, what “occurred” was a distribution of

nonmarketable22 notes in redemption of limited partnership

interests.   Countryside undertook the distribution in order to

eliminate Mr. Winn and Mr. Curtis as limited partners.   Mr. Winn

and Mr. Curtis agreed to the redemption in order to convert their

interests in Countryside into interest-bearing promissory notes.

All of the parties to the transaction had legitimate business

purposes, and the manner in which those parties accomplished

those purposes cannot be disregarded and converted by respondent

into a transaction (an exchange of Mr. Winn’s and Mr. Curtis’s

interests in Countryside for cash) that never occurred simply

because the transaction that did occur was tax motivated or, as

we stated in Hobby v. 

at 98523 “had a


     22
        As 

, we interpret respondent’s alternative
argument (i.e., alternative to his argument that the AIG notes
were marketable) to be that, even if the AIG notes were
nonmarketable, nonrecognition of gain under secs. 731(a)(1) and
752 is not achievable because of the lack of economic substance.
     23
        While we have not undertaken an exhaustive analysis of
all cases in which the Commissioner has invoked the economic
substance doctrine, we have not found any case applying that
doctrine in the manner sought by respondent herein. For example,
in Coltec Indus. Inc. v. United States, 

(Fed. Cir.
2006), Boca Investerings Pship. v. United States, 

(D.C. Cir. 2003), and ACM Pship. v. Commissioner, 

(3d Cir. 1998), affg. in part and revg. in part T.C. Memo. 1997-
115, the tax-motivated transaction and/or the resulting favorable
tax impact on the taxpayer were simply disregarded. In Del
Commercial Props., Inc. v. Commissioner, 

(D.C. Cir.
2001), affg. T.C. Memo. 1999-411, and H.J. Heinz Co. v. United
States, 

(2007), the transaction that, in fact,
did occur was recast for tax purposes by disregarding only the
tax-motivated steps. In Gregory v. Helvering, 

(1935), and Goldstein v. Commissioner, 

(2d Cir.
1966), affg. 

(1965), the transaction that did occur
                                                   (continued...)
                              - 45 -

collateral favorable tax effect.”     Moreover, that transaction

changed Mr. Winn’s and Mr. Curtis’s economic positions, thereby

satisfying both prongs of the economic substance doctrine.    See

supra note 20.   Likewise, the transaction changed the economic

positions of Countryside and its remaining partners, CLP

Holdings, Inc., and Mr. Wollinger, who, through Countryside,

increased their collective percentage ownership in the Manchester

property to 100 percent.

     Respondent points to the interest detriment as his principal

justification for (1) disregarding, for lack of economic

substance, the transactions culminating in the liquidating

distribution and (2) substituting a deemed taxable distribution

of cash to Mr. Winn and Mr. Curtis.    But, as 

, the

ultimate transaction (the distribution to Mr. Winn and Mr. Curtis

of the AIG notes) did accomplish a legitimate economic or

business purpose and altered Mr. Winn’s and Mr. Curtis’s economic

positions, as well as the economic positions of Countryside and

its remaining members, which gave it economic substance.    The

interest detriment suffered by Countryside was an added, and very

minor, cost of the transaction by which Mr. Winn’s and Mr.

Curtis’s interests in the partnership were eliminated.24

     23
      (...continued)
was acknowledged to have occurred, but the sought-after tax
result was denied as contrary to legislative intent.
     24
        As 

note 14, respondent considers MP’s $3.4
million borrowing to be “more abusive” than Countryside’s $8.55
million borrowing. Although we find neither borrowing to be
“abusive”, we surmise that, whereas the $8.55 million borrowing
                                                   (continued...)
                             - 46 -

     Morever, none of respondent’s arguments that a decision on

the motion is either unwarranted or premature in the absence of

additional fact finding are persuasive.

     Respondent argues that Mr. Winn’s continuing guaranties to

CB&T and to Federal Home Loan Mortgage Corporation, issued in

connection with the CB&T loans to Countryside and MP,25 and his

     24
      (...continued)
was needed to provide funds for the AIG notes that were to
constitute the nontaxable distribution to Mr. Winn and Mr. Curtis
of their equity in the Manchester property, MP’s $3.4 million
borrowing, and Mr. Winn’s and Mr. Curtis’s assumption of
virtually all of the obligation to repay it by virtue of their
continuing ownership (through CLPP) of MP, served only to work a
reduction in the amount of money deemed distributed to them under
secs. 731(a) and 752(b) on account of the liquidating
distribution. Without that borrowing, and Mr. Winn’s and Mr.
Curtis’s subsequent assumption of almost all of the obligation to
repay it, they would have been deemed on account of the
liquidating distribution (and their concomitant relief from
Countryside’s liabilities) to have received distributions of
money from Countryside ($19,805,893 for Mr. Winn and $7,526,666
for Mr. Curtis) in excess of their respective bases in
Countryside ($17,600,747 for Mr. Winn and $6,923,414 for Mr.
Curtis). See apps. B and C. A gain would thus have been
recognized to each under sec. 731(a) ($2,205,146 for Mr. Winn and
$603,530 for Mr. Curtis). Apparently, in order to avoid that
gain, Mr. Winn and Mr. Curtis arranged with Countryside for a
distribution of encumbered property (in effect, almost $3.4
million of equally encumbered AIG notes), which reduced the
amount of money deemed distributed to them under secs. 731(a) and
752(b). While presumably a step taken for tax avoidance reasons,
it was part of a transaction that resulted in a change in the
form of Mr. Winn’s and Mr. Curtis’s investments (from limited
partners to interest-bearing note holders), which, for the
reasons stated herein, we view as imbued with economic substance.
Moreover, from Countryside’s standpoint, the $3.4 million
borrowing, at least in terms of cashflow, was not at all
“abusive” because the accrued interest (and, hence, the entire
interest detriment) with respect to that borrowing became the
indirect obligation of Mr. Winn and Mr. Curtis upon the
liquidating distribution. See apps. B and C.
     25
        In October 2000, Mr. Winn guaranteed Countryside’s
repayment to CB&T of a $3 million standby letter of credit with
                                                   (continued...)
                              - 47 -

and Mr. Curtis’s indirect interest in Stone Ends, acquired before

the closing of Stone Ends’ purchase of the Manchester property,26

show that they (and Mr. Winn in particular) maintained a

“continuing economic interest” in the Manchester property after

it was purchased by Stone Ends, which distinguishes this case

from both Chisholm v. Commissioner, 

(2d Cir. 1935),
and Hobby v. Commissioner, 

(1943).    Respondent also

argues that Mr. Winn “was apparently confident that the sale of

the [Manchester] property * * * would occur” (and that,

therefore, Countryside would receive the funds needed to repay

the CB&T loans) when he executed the various guaranties of

Countryside’s and MP’s debt to CB&T in 2000.    Respondent

concludes:   “Further discovery on whether there was an agreement

regarding the sale of * * * [the Manchester property], before the

date of the purchase agreement, should be permitted.”

     We do not agree that Mr. Winn’s and Mr. Curtis’s “continuing

economic interest” in the Manchester property after the 2001

purchase of the property by Stone Ends in any way compromises the

status of Chisholm and Hobby as supporting authorities for

     25
      (...continued)
respect to which Federal Home Loan Mortgage Corp. (FHLMC) was
made the beneficiary. FHLMC required the letter of credit in
connection with CB&T’s $8.55 million loan to Countryside in order
to protect its position as party to a credit enhancement
agreement with Countryside.
     26
        In order to provide Stone Ends with sufficient capital
to consummate its purchase of the Manchester property from
Countryside, an L.L.C. that was 98 percent owned by Mr. Winn and
Mr. Curtis family trusts acquired a 24.22-percent membership
interest in Stone Ends on Mar. 28, 2001, in exchange for a
capital contribution of $2,337,703.
                              - 48 -

participating partner’s position.   That continuing interest does

not alter the controlling fact that, in 2000, Mr. Winn and Mr.

Curtis disposed of their partnership interests in Countryside in

exchange for nonmarketable securities.27   Moreover, the fact that

Stone Ends required an additional infusion of capital in 2001

before it could purchase the Manchester property from Countryside

at the agreed-upon purchase price negates the idea, suggested by

respondent, that there was a “done deal” for the sale of that

property to Stone Ends in 2000, even assuming that the parties

had reached an informal agreement regarding the terms and

conditions of sale during that year.   See Chisholm v.

at 15 (agreement to exercise option “was

legally a nullity” since it did not correspond to the terms of

the option contract requiring payment, and not merely a promise

to pay, for exercise).   Under the circumstances, we do not see

how respondent’s position could be enhanced by additional

discovery regarding the existence of an informal agreement for

the sale of the Manchester property in 2000.

     27
        Respondent also attempts to distinguish Hobby v.
Commissioner, 

(1943), on the basis of our emphasizing
in Hobby that the taxpayer did not cosign or guarantee the loans
to his friends that enabled them to purchase his shares, whereas
Mr. Winn did guarantee the loans used to purchase the AIG notes.
In Hobby, however, the taxpayer received cash for his shares, and
it was important to find that that cash came from the purchasers,
not the redeeming corporation, a finding that would have been
compromised if, in substance, the taxpayer had financed the
purchase of his own shares; i.e., had, in effect, used his
friends as conduits to deliver his shares to the redeeming
corporation in exchange for cash. In this case, Mr. Winn’s
guaranties helped to finance Countryside’s (and MP’s) acquisition
of nonmarketable securities, his receipt of which does not
trigger taxable gain under sec. 731(a)(1).
                             - 49 -

     Nor do we agree with respondent that there is a need for

additional discovery of Mr. Winn, Mr. Curtis, their associates,

and others “regarding the purpose and effect” of the transactions

at issue and the reason for Mr. Winn’s transfer of a 5-percent

interest in Countryside to Mr. Curtis.   There is no dispute that

the purpose of the transactions at issue was to enable Mr. Winn

and Mr. Curtis to exchange their limited partnership interests in

Countryside for the AIG notes, and the means selected to

accomplish that goal were concededly tax motivated.   Moreover,

Mr. Winn’s transfer of a 5-percent interest in Countryside to Mr.

Curtis has no bearing on the tax results to Mr. Winn and Mr.

Curtis on the exchange of their interests in Countryside for the

AIG notes because, as participating partner points out, even if

that transfer had not taken place, their tax bases in Countryside

still would have exceeded their net liability relief under

section 752(a) and (b), resulting in no gain to either under

section 731(a)(1).

     In short, respondent, in finding a lack of economic

substance, has erroneously focused on the tax-motivated means

instead of the business-oriented end.    The transaction requiring

economic substance is Countryside’s redemption of Mr. Winn’s and

Mr. Curtis’s partnership interests therein.   That the redemption

of a partnership interest in exchange for bona fide promissory

notes issued by an independent third party can serve a legitimate

business purpose is beyond cavil.   The question is whether such a

redemption may be respected for tax purposes if the means
                                - 50 -

undertaken to accomplish it are chosen for their tax advantage.

On the facts before us, we conclude that the answer is yes.

          d.    Conclusion

     Respondent’s proposed adjustment may not be sustained, and

the application of sections 731(a)(1) and 752 may not be

rejected, on the ground that the liquidating distribution lacked

economic substance.

     C.   Marketability of the AIG Notes

           1.   Introduction

     As 

, participating partner has submitted two

affidavits in support of his position that the AIG notes were not

“marketable securities” within the meaning of section 731(c)(2).

The first is the Nanberg affidavit, in which Mr. Nanberg, a

registered investment adviser, concludes that the AIG notes “were

not listed or traded on an established financial market and no

such market existed for the * * * Notes on December 26, 2000, or

at any time thereafter.”     On that basis, participating partner

argues that the AIG notes do not constitute “marketable

securities” under the general definition of that term in section

731(c)(2)(A).   The second affidavit is the Ross affidavit, which

was submitted in response to respondent’s argument that an issue

of fact exists as to whether the AIG notes constituted marketable

securities under section 731(c)(2)(B)(ii).     That section provides

that the term “marketable securities” includes any financial

instrument that “pursuant to its terms or any other arrangement,

is readily convertible into, or exchangeable for, money or
                                - 51 -

marketable securities”.    In his affidavit, Mr. Ross states that

all of the relevant terms of the transaction in which MP acquired

the AIG notes are contained in the notes themselves or in related

documentation (which is attached to the affidavit), and that no

“agreement, understanding, or arrangement” existed that would

have modified the terms of the referenced documentation.

     Respondent “agrees and would stipulate that the [AIG] Notes

* * * were not traded on an established securities market.”      We

interpret that statement as respondent’s concession that the AIG

notes did not constitute marketable securities on the ground that

they were “actively traded (within the meaning of section

1092(d)(1)).”    See sec. 731(c)(2)(A); sec. 1.1092(d)-1(a), Income

Tax Regs.    Therefore, the issue regarding the marketability of

the AIG notes is whether, pursuant to any term of those notes (or

the related documentation) or any “arrangement” between MP and

CB&T, those notes were readily convertible into money or

marketable securities, thereby causing the notes to be

“marketable securities” under section 731(c)(2)(B)(ii).

            2.   Written Terms and Conditions of the AIG Notes

     During the hearing, respondent’s counsel argued that there

is a factual issue regarding the marketability of the AIG notes

because (1) under paragraph 11(a) and (b) of the “further

provisions”, the notes are renegotiable upon the agreement of all

holders and (2) there is only one holder (MP or, for purposes of

the motion, Countryside), so unanimous agreement “shouldn’t be

too much of a problem”.    Respondent’s counsel was referring
                              - 52 -

specifically to paragraph 11(b), which provides that the due date

for payment of principal or interest may be changed only upon

“the affirmative vote of holders of 100 percent in aggregate

principal amount Outstanding of the Notes”.   Under paragraph

11(b), that vote by the holders would merely enable the parties

(the debtor, the issuer, and the guarantor) to renegotiate

(“modify, amend or supplement”) the payment due date.    During the

hearing, respondent’s counsel acknowledged that, if the mere

right to renegotiate the terms of a note renders it marketable,

all promissory notes that did not specifically prohibit

renegotiation would have to be considered marketable.    Morever,

respondent’s posthearing memorandum of law does not reiterate his

reliance on paragraph 11(b) as grounds for treating the AIG notes

as marketable securities.   Rather, he stresses the likelihood

that AIG would, in fact, accommodate any request by participating

partner to modify or restructure the terms of the AIG notes.     On

the basis of his posthearing submissions, we interpret

respondent’s position to be that the right to seek to renegotiate

the terms of the AIG notes does not, in and of itself, render the

AIG notes marketable under section 731(c)(2)(B)(ii) but, rather,

indicates the presence (or, at least the possibility, requiring

further factual inquiry) of an “arrangement” to modify the notes

in accordance with participating partner’s desires, including the

desire to “readily exchange the AIG * * * notes for cash.”
                                - 53 -

          3.     Existence of an Arrangement To Convert the AIG
                 Notes to Cash at the Holder’s Request

     During the hearing, the Court, citing Rule 121(d),

admonished respondent’s counsel that her objection to the motion

was not accompanied by affidavits, nor had she moved for

additional discovery regarding the existence of a prohibited

“arrangement”.    Subsequently, respondent’s counsel attempted to

obtain an affidavit from Kurt Nelson (Mr. Nelson), a vice

president at AIG during 2000-2002, who was personally involved in

the transactions pursuant to which MP purchased the AIG notes and

a related company, AMWLHC Bostonian Promisee L.L.C. (BP),

purchased $19 million in promissory notes from AIG (the BP-AIG

notes).   The affidavit sought by respondent’s counsel was to

state that, if requested by a client, “it would be AIG’s

practice” to (1) renegotiate the terms of its notes, “provided it

was in AIG’s own economic or client-relationship interest”, and

(2) “provide a bid to * * * [purchase its notes] provided the

purchase did not affect AIG’s own cash management needs.”    Mr.

Nelson refused to sign the requested affidavit and, instead,

executed an essentially identical affidavit with the important

exception that he would represent only that AIG “would consider”

renegotiating or modifying the terms of the AIG notes or

providing a bid to repurchase the notes.

     As evidence of an “arrangement” to permit the AIG notes to

be “readily convertible” into cash, respondent cites

correspondence among representatives and employees of AIG and

associates of Mr. Winn establishing that AIG was willing to
                             - 54 -

structure the BP-AIG notes in accordance with instructions

received from the prospective client’s representative, and that,

after issuance, AIG was willing to modify those notes in

accordance with the purchaser’s wishes, even at a possible

financial loss.

     We do not agree that any of the documents respondent refers

to constitute evidence of an “arrangement” that would render the

AIG notes marketable under section 731(c)(2)(B)(ii).

     AIG’s willingness to “consider” a modification or repurchase

of the AIG notes does not constitute evidence of an “arrangement”

to convert the AIG notes into cash or marketable securities at

MP’s request, as it would be no more than standard business

practice for a bank or financial institution to at least consider

a customer’s request to modify the terms of its notes.   Morever,

respondent’s counsel has made no representations to the Court

that she is able to get Mr. Nelson or anyone else on behalf of

AIG to testify that it was AIG’s “practice” to renegotiate the

terms of or to repurchase its notes.

     Nor did AIG’s willingness to structure and, subsequently,

restructure the BP-AIG notes in accordance with the customer’s

wishes at a probable overall loss (on account of transaction

costs) indicate that the parties were not operating at arm’s

length then or later in connection with the AIG notes.   An e-mail

from Mr. Nelson makes clear that that willingness (and, in

particular, the willingness to modify the note terms) was a
                              - 55 -

business decision in that he hoped it would assure the customer’s

purchase of a second note from AIG.28

     Lastly, respondent suggests that a factual issue as to the

marketability of the AIG notes is indicated by AIG’s willingness

to allow the BP-AIG notes (and, therefore, by implication, the

AIG notes) to secure a collateralized bank line of credit.   Here

again, the line of credit and the collateral therefor, including

the pledge of the BP-AIG notes, were all transactions negotiated

between parties operating at arm’s length.   There is no evidence

of any prior arrangement between BP and AIG that the BP-AIG notes

would be used to secure the line of credit, and, even if there

had been, we do not agree that such an arrangement would have

justified treating the BP-AIG notes (and, by implication, the AIG

notes) as marketable securities.   It is common to use property,

including a personal residence, to secure a bank loan or line of

credit, but that fact does not lead to the conclusion that such

property “is readily convertible into, or exchangeable for, money

or marketable securities” within the meaning of section

731(c)(2)(B)(ii).

          4.   Conclusion

     Respondent has failed to satisfy the conditions of Rule

121(d) by submitting affidavits or otherwise setting forth facts

to show there is a genuine issue of material fact that would cast

doubt upon the status of AIG notes as nonmarketable.

     28
        The e-mail states: “I realize that they could go
elsewhere for the 2nd note, but I think AIG should get some
points for accommodating the revisions to the previous note.”
                              - 56 -

     D.   Applicability of Rule 121(e)

     On October 31, 2006, we filed respondent’s motion, pursuant

to Rule 121(d), to submit supplemental affidavits.    In paragraph

5 of her declaration submitted in support of that motion,

respondent’s counsel states that “because the facts are in

control of Petitioner, Participating Partner and third parties,

Respondent is unable to present additional facts to support its

opposition to * * * [the motion].”     In the body of that motion,

respondent argues that the foregoing “Paragraph 5 * * * like

Paragraph 38 of * * * [a prior declaration submitted by

respondent’s counsel] sets forth reasons supporting why

Participating Partner’s Motion for Partial Summary Judgment

should be denied”.   In support of his argument, respondent cites

Rule 121(e), which provides as follows:

          (e) When Affidavits Are Unavailable: If it
     appears from the affidavits of a party opposing the
     motion that such party cannot for reasons stated
     present by affidavit facts essential to justify such
     party’s opposition, then the Court may deny the motion
     or may order a continuance to permit affidavits to be
     obtained or other steps to be taken or may make such
     other order as is just. If it appears from the
     affidavits of a party opposing the motion that such
     party’s only legally available method of contravening
     the facts set forth in the supporting affidavits of the
     moving party is through cross-examination of such
     affiants or the testimony of third parties from whom
     affidavits cannot be secured, then such a showing may
     be deemed sufficient to establish that the facts set
     forth in such supporting affidavits are genuinely
     disputed.

     By order dated April 18, 2007, we denied respondent’s motion

to file supplemental affidavits because of (1) respondent’s

inability (both past and prospective) to obtain the affidavit
                                - 57 -

requested of Mr. Nelson and (2) the fact that counsel’s

declaration did “not contain any relevant facts and is

essentially an untimely presentation of additional argument in

opposition to Participating Partner’s Motion for Partial Summary

Judgment.”   We now address respondent’s suggestion, in connection

with that motion, that Rule 121(e) provides grounds for the

denial of the instant motion.

     In her prior declaration, respondent’s counsel alleges the

existence of “discoverable facts sufficient to raise or further

support the existence of * * * material issues of fact”.   She

argues that “[d]iscovery from and cross examination of” Mr. Winn,

his partners and employees, AIG, and Stone Ends are “necessary to

secure complete information regarding the purpose and effect of

the transaction * * * the reason for the 5-percent transfer

between Winn and Curtis * * * [and] whether there was an

agreement regarding the sale of * * * [the Manchester property]

prior to the date of the purchase agreement and at the time of

the transaction in dispute.”

     As 

, (1) participating partner concedes that

the “purpose” of the transactions at issue was tax minimization,

a concession that does not result in a denial of the motion; (2)

the 5-percent transfer from Mr. Winn to Mr. Curtis does not

affect the tax results of the transactions at issue and is,

therefore, not material; and (3) there would be no adverse impact

upon participating partner’s position were we to find that there

was an informal (unwritten) agreement, in 2000, regarding the
                                 - 58 -

terms of the 2001 sale of the Manchester property to Stone Ends.

Moreover, regarding the “effect of the transaction”, we note that

respondent has already undertaken extensive discovery, and it is

sheer speculation on the part of respondent’s counsel that, by

additional discovery or (in a Perry Mason moment) by cross-

examination, she will be able to elicit an admission from any of

the potential witnesses that there was a binding “arrangement” to

allow the holder readily to convert the AIG notes into cash or

marketable securities.     Indeed, both the Ross affidavit and the

fact that the AIG notes were held for 2-1/2 years before

redemption on the fifth interest payment date, in accordance with

their terms, clearly indicate that that was not the case.        Under

the circumstances, respondent has not persuaded us that he will

be able to raise, through additional discovery, cross-

examination, or otherwise, a genuine issue of material fact

regarding the marketability of the AIG notes.         Therefore, we find

no basis for denying the motion or ordering a continuance

pursuant to Rule 121(e).

     E.     Applicability of the Antiabuse Regulations

             1.   Section 1.701-2, Income Tax Regs.

     The first of the three requirements “[i]mplicit in the

intent of subchapter K” is that “[t]he partnership must be bona

fide” and the transactions in question “must be entered into for

a substantial business purpose.”     Sec. 1.701-2(a), Income Tax

Regs.     Respondent does not dispute that Countryside is a bona

fide partnership, and we have found herein that the transactions
                              - 59 -

in question were undertaken for a “substantial business purpose”;

i.e., to enable Mr. Winn and Mr. Curtis to withdraw their

investments in Countryside by exchanging their limited

partnership interests for the AIG notes.   We have also found that

the transactions in question satisfied the second requirement;

i.e., that they not violate substance over form principles.

and in substance, Mr. Winn and Mr. Curtis are deemed

to have exchanged interests in a real estate partnership for

promissory notes.   Therefore, the remaining issue is whether the

transactions in question satisfy the third requirement; i.e.,

that the tax consequences under subchapter K clearly reflect

income and, if not, that the departure from that standard be

“clearly contemplated” by the applicable provisions of subchapter

K (in this case, sections 731(a)(1) and 752).

gain to Mr. Winn and Mr. Curtis

on the deemed receipt of the AIG notes in exchange for their

interests in Countryside, takes the position that their reporting

of no gain on that transaction did not clearly reflect their

income.   Under section 1.701-2(b), Income Tax Regs., in cases in

which there is not a clear reflection of income, the Commissioner

may “recast the transaction for federal tax purposes” if the

partnership has been “formed or availed of in * * * a transaction

a principal purpose of which is to reduce substantially the

present value of the partners’ aggregate federal tax liability in

a manner that is inconsistent with the intent of subchapter K”.

Because we find that the transaction (1) was imbued with economic
                              - 60 -

substance and (2) did, in fact, result in Mr. Winn’s and Mr.

Curtis’s receipt of nonmarketable securities, we find that their

reporting of no gain on the receipt of the AIG notes, pursuant to

section 731(a)(1), clearly reflected their income from that

transaction.   Therefore, petitioner’s reporting of the

liquidating distribution as a distribution of property other than

money may not be “adjusted or modified” pursuant to section

1.701-2(b)(5), Income Tax Regs.29
          2.   Section 1.731-2(h), Income Tax Regs.

     Participating partner argues, on the basis of the

illustrative examples contained in section 1.731-2(h), Income Tax

Regs., that “the provision should not have any application to a

partnership that owns no marketable securities at all, either

directly or indirectly”.   Respondent describes that argument as

expressing “the untenable position” that section 1.731-2(h),

Income Tax Regs., does not apply “to situations where

partnerships create purportedly nonmarketable securities to



     29
        It may be that the totality of the actions taken by
Countryside, including the formation of CLPP and MP, the sec. 754
elections by Countryside and CLPP, and the absence of a sec. 754
election by MP, present grounds for concluding that there was not
a proper reflection of income thereby invoking the application of
sec. 1.701-2, Income Tax Regs. (and/or the economic substance
doctrine), in order to determine whether to deny a basis step-up
for Countryside’s assets (i.e., the Manchester property) and/or
either disregard CLPP and MP as sham entities or require a basis
step-down for the AIG notes held by MP. See sec. 1.701-2(d),
Example (8), Income Tax Regs. But the issues concerning
Countryside’s basis in the Manchester property or the holder’s
(or deemed holder’s) basis in the AIG notes pursuant to the
interaction among secs. 734(b), 743(b), and 754 are not germane
to the motion. Therefore, we do not address those issues.
                              - 61 -

distribute in lieu of marketable securities, or cash, to avoid

section 731(c).”

     We interpret respondent’s statement as expressing tacit

agreement with participating partner that if, in fact, the AIG

notes were not marketable securities, as defined in section

731(c)(2), then section 1.731-2(h), Income Tax Regs., is

inapplicable to Countryside’s deemed distribution of the AIG

notes to Mr. Winn and Mr. Curtis.   Because we have concluded that

the AIG notes did not constitute marketable securities, we assume

that respondent would concede that section 1.731-2(h), Income Tax

Regs., is inapplicable to the distribution of those notes.

     In any event, we agree with participating partner that each

of the three examples contained in section 1.731-2(h), Income Tax

Regs., the first of which involves a change in partnership

allocations or distribution rights with respect to marketable

securities, the second, a distribution of substantially all of

the partnership assets other than marketable securities, and the

third, a distribution of multiple properties to one or more

partners at different times, involves circumstances that are not

present in this case.   We also note that, in the preamble to the

final regulations under section 731(c), the Commissioner, in

response to a taxpayer request that there be “examples

illustrating abusive transactions intended to be covered by * * *

§ 1.731-2(h)”, stated that “the text of the regulations

adequately describes several situations that would be considered

abusive * * *, and * * * additional examples are unnecessary.”
                              - 62 -

T.D. 8707, 1997-1 C.B. 128, 130.   Thus, the examples contained in

the regulation, which are the only portion of the text of the

regulation describing “situations that would be considered

abusive”, presumably illustrate the universe of circumstances

considered abusive for purposes of section 731(c).30

      Countryside’s deemed distribution of the AIG notes to Mr.

Winn and Mr. Curtis was not part of an abusive transaction as

described in section 1.731-2(h), Income Tax Regs.

IV.   Conclusion
      We conclude that the liquidating distribution, conceded by

participating partner (for purposes of the motion) to be a

distribution of the AIG notes, constituted a distribution of

nonmarketable securities resulting in nonrecognition of gain to




      30
        In a recent article, Gall & Franklin, “Partnership
Distributions of Marketable Securities”, 117 Tax Notes 687, 710
(Nov. 12, 2007), the authors conclude that neither the examples
in the legislative history of sec. 731(c)(7) (which authorizes
regulations “necessary or appropriate to carry out the purposes
of * * * [sec. 731(c)], including regulations to prevent the
avoidance of such purposes”) nor the examples in the antiabuse
regulation itself “involve the extension of the rules of section
731(c) to treat an asset that is not a marketable security as a
marketable security.”
                              - 63 -

the recipients, Mr. Winn and Mr. Curtis, pursuant to sections

731(a)(1) and 752.   Therefore, we shall grant the motion.31


                                    An order granting participating

                               partner’s motion for partial summary

                               judgment will be issued.




     31
        If all of respondent’s arguments in this case, docket
No. 22023-05, and the Court of Federal Claims actions instituted
by CLPP and MP were to be sustained, the overall effect would be
to tax the gain realized on the sale of the Manchester property
three times: First, in 2000, to Mr. Winn and Mr. Curtis on the
liquidating distribution, a second time, in 2001, to Countryside
on the sale of the Manchester property, and a third time, in
2003, on AIG’s redemption of the AIG notes from MP. We suspect
that respondent’s position in these actions is intended to
completely offset what respondent considers to be participating
partner’s and petitioner’s goal of deferring indefinitely any tax
on that gain and to avoid any possibility of being whipsawed. In
addressing the motion, we decide only that the gain is not
recognized to Mr. Winn and Mr. Curtis in 2000 upon their receipt
of a 99-percent limited partnership interest in CLPP or,
alternatively, upon their deemed receipt of the AIG notes.
  - 64 -

APPENDIX A
                                                                       - 65 -

                                                                   APPENDIX B
                               Computation of Winn’s Share of Countryside LP (Countryside) Liabilities
                      and Winn’s Basis in His Countryside Interest Immediately Before the 12/26/00 Distribution

I.    Computation of Winn’s share of Countryside liabilities and Winn’s basis in his Countryside interest as of 1/1/00

         A.   As of 1/1/00, Winn’s share of Countryside liabilities was $14,892,855.                 See (1) below.

         B.   As of 1/1/00, Winn’s basis in his Countryside interest was $12,879,151.                 See (2) below.

                  Basis at start       Contributions/(distributions)   Taxable income/(loss)   Increase/(decrease) in share   Basis at end
          Year      of period              of money during period            for period1        of liabilities for period       of period

          1993            -0-                      $742                      ($34,939)                 $13,044,133            $13,009,936

          1994        $13,009,936                   -0-                      (427,037)                   2,956,835             15,539,734

          1995         15,539,734                   -0-                      (366,595)                      27,937             15,201,076

          1996         15,201,076                   -0-                      (156,275)                    (326,417)            14,718,384

          1997         14,718,384                (122,509)                   (234,813)                     (70,092)            14,290,970

          1998         14,290,970                 (37,500)                    (32,357)                    (231,673)            13,989,440

          1999         13,989,440                (111,469)                   (490,952)                    (507,868)            12,879,151 (2)

              Total                                                                                      14,892,855 (1)
               1
                  For 1993 through 2000, there was no partnership tax-exempt income and no nondeductible partnership expenditures as
          described in sec. 705(a)(1)(B) and (2)(B).

II.   Events from 1/1/00 until immediately before the 12/26/00 distribution affecting Winn’s share of Countryside
      liabilities and Winn’s basis in his Countryside interest

         A.   Winn’s share of Countryside liabilities immediately before the 12/26/00 distribution

              $14,892,855             Winn’s share of liabilities as of 1/1/00
               (1,003,562)            Decrease in share of liabilities attributable to transfer of a 5-percent interest.           See (1)
below.
                  5,916,600           Winn’s share of the Countryside-CB&T $8,550,000 liability. See (2) below.
                  2,336,843           Winn’s share of MP’s $3,445,506 of liabilities. See (3) below.
                 22,142,736           Winn’s share of Countryside liabilities immediately before the 12/26/00 distribution
                                (1)   On 6/29/00, Winn transferred a 5-percent interest in Countryside to Countryside
                                      partner Curtis. This transfer decreased Winn’s percentage interest
                                      in Countryside from 74.2 percent to 69.2 percent. The transfer resulted in a
                                      $1,003,562 decrease in Winn’s share of Countryside liabilities, computed as Winn’s
                                      $14,892,855 share of Countryside liabilities as of Jan. 1, 2000, multiplied by 5/74.2.

                                (2)   In October 2000, Countryside borrowed $8,550,000 from Columbus Bank & Trust Co. (CB&T).
                                      Winn’s 69.2-percent share of this liability was $5,916,600.

                                (3)   In October 2000, Manchester Promisee L.L.C. (MP) borrowed $3,400,000 from CB&T. In addition,
                                      on 12/26/00, MP had accrued $45,506 of unpaid interest expense. Immediately before
                                      the 12/26/00 distribution, Countryside owned 99 percent of CLP Promisee L.L.C. (CLPP)
                                      which, in turn, owned 99 percent of MP. Therefore, Countryside’s share of MP’s
                                      liabilities was $3,376,940. Winn’s share of Countryside’s share of this liability
                                      was $2,336,843, computed as $3,445,506 x 99% x 99% x 69.2%.
                                                           - 66 -
       B.   Winn’s basis in his interest in Countryside immediately before the 12/26/00 distribution

            $12,879,151     Winn’s basis as of 1/1/00
              7,249,881     Net increase in Winn’s share of liabilities. See (1) below.
                (59,942)    Money distributed to Winn. See (2) below.
               (131,500)    Winn’s share of Countryside’s loss. See (3) below.
             19,937,590     Winn’s basis in his Countryside interest immediately before the 12/26/00 distribution
                      (1)   As calculated in II.A., Winn’s share of Countryside liabilities increased
                            from $14,892,855 as of 1/1/00 to $22,142,736 immediately before the 12/26/00
                            distribution, a net increase of $7,249,881.

                      (2)   Winn received a distribution during that period of $59,942 in money per Schedule K-1.

                      (3)   Winn’s share of taxable income/(loss) for that period was ($131,500) per Schedule K-1.

III.   Effect of distribution to Winn in redemption of his interest in Countryside

       A.   The 12/26/00 distribution to Winn in redemption of his interest in Countryside reduced Winn’s share of
            liabilities as follows:

            $22,142,736     Winn’s total share of liabilities before the 12/26/00 redemption
             (2,485,974)    Winn’s continued liability. See (1) and (2) below.
             19,656,762     Net decrease in Winn’s share of liabilities
                      (1)   Under sec. 1.752-1(f), Income Tax Regs., only the net decrease in a partner’s share
                            of liabilities is treated as a distribution of money to the partner.

                      (2)   Countryside distributed a 72.88-percent interest in CLPP to Winn in redemption of
                            his interest in Countryside. As a result, Winn was relieved of his $22,142,736
                            share of Countryside liabilities, but Winn retained a liability representing his
                            share of CLPP’s share of MP’s liabilities. Winn’s share of these liabilities was
                            $2,485,974, computed as $3,445,506 x 99% x 72.88%. Thus, the net decrease in Winn’s
                            share of liabilities was $19,656,762.
       B.   Because the $19,656,762 decrease in liabilities was less than Winn’s $19,937,590 basis in his interest in
            Countryside, Winn recognized no gain on the distribution in redemption. See (1) below.
                      (1)   Under sec. 731(a), no gain is recognized upon a distribution to a partner except
                            to the extent that any money distributed exceeds the adjusted basis of such partner’s
                            interest in the partnership immediately before the distribution.
                                                                      - 67 -

                                                                    APPENDIX C
                              Computation of Curtis’s Share of Countryside LP (Countryside) Liabilities
                     and Curtis’s Basis in His Countryside Interest Immediately Before the 12/26/00 Distribution

I.    Computation of Curtis’s share of Countryside liabilities and Curtis’s basis in his Countryside interest as of 1/1/00

        A.   As of 1/1/00, Curtis’s share of Countryside liabilities was $4,402,714.               See (1) below.

        B.   As of 1/1/00, Curtis’s basis in his Countryside interest was $3,798,080.               See (2) below.

                Basis at start      Contributions/(distributions)   Taxable income/(loss)   Increase/(decrease) in share   Basis at end
                  of period             of money during period            for period1         of liabilities for period      of period
         Year

         1993           -0-                      $198                      ($9,325)                  $3,546,894            $3,537,767

         1994        $3,537,767                  -0-                      (113,954)                     869,828             4,293,641

         1995         4,293,641                  -0-                       (97,825)                      13,449             4,209,265

         1996         4,209,265                  -0-                       (41,702)                    (115,511)            4,052,052

         1997         4,052,052                (60,000)                    (62,658)                     (71,564)            3,857,830

         1998         3,857,830                (30,000)                    (8,634)                      (30,695)            3,788,501

         1999         3,788,501                (49,725)                   (131,009)                     190,313             3,798,080 (2)

             Total                                                                                    4,402,714 (1)
              1
                 For 1993 through 2000, there was no partnership tax-exempt income and no nondeductible partnership expenditures as
         described in sec. 705(a)(1)(B) and (2)(B).

II.    Events from 1/1/00 until immediately before the 12/26/00 distribution affecting Curtis’s share of Countryside
         liabilities and Curtis’s basis in his Countryside interest

        A.   Curtis’s share of Countryside liabilities immediately before the 12/26/00 distribution

             $4,402,714           Curtis’s   share of   liabilities as of 1/1/00
              1,003,562           Increase   in share   of liabilities attributable to transfer of a 5-percent interest. See (1) below.
              2,120,400           Curtis’s   share of   the Countryside-CB&T $8,550,000 liability. See (2) below.
                837,481           Curtis’s   share of   the MP’s $3,445,506 of liabilities. See (3) below.
              8,364,157           Curtis’s   share of   Countryside liabilities immediately before the 12/26/00 distribution
                          (1)     On 6/29/00, Curtis acquired a 5-percent interest in Countryside from Countryside
                                  partner Winn. This transfer increased Curtis’s percentage interest
                                  in Countryside from 19.8 percent to 24.8 percent. The transfer resulted in a
                                  $1,003,562, increase in Curtis’s share of Countryside liabilities, computed as Winn’s
                                  $14,892,855 share of Countryside liabilities as of Jan. 1, 2000, multiplied by 5/74.2.

                          (2)     In October 2000, Countryside borrowed $8,550,000 from Columbus Bank & Trust Co. (CB&T).
                                  Curtis’s 24.8-percent share of this liability was $2,120,400.

                          (3)     In October 2000, Manchester Promisee L.L.C. (MP) borrowed $3,400,000 from CB&T. In addition,
                                  on 12/26/00, MP had accrued $45,506 of unpaid interest expense. Immediately before
                                  the 12/26/00 distribution, Countryside owned 99 percent of CLP Promisee L.L.C. (CLPP)
                                  which, in turn, owned 99 percent of MP. Therefore, Countryside’s share of MP’s
                                  liabilities was $3,376,940. Curtis’s share of Countryside’s share of this liability
                                                             - 68 -
                           was $837,481, computed as $3,445,506 x 99% x 99% x 24.8%.
       B.   Curtis’s basis in his interest in Countryside immediately before the 12/26/00 distribution

            $3,798,080     Curtis’s basis as of 1/1/00
             3,961,443     Net increase in Curtis’s share of liabilities. See (1) below.
               (21,482)    Money distributed to Curtis. See (2) below.
                22,854     Curtis’s share of Countryside’s income. See (3) below.
             7,760,895     Curtis’s basis in his Countryside interest immediately before the 12/26/00 distribution
                     (1)   As calculated in II.A., Curtis’s share of Countryside liabilities increased
                           from $4,402,714 as of 1/1/00 to $8,364,157 immediately before the 12/26/00 distribution,
                           a net increase of $3,961,443.

                     (2)   Curtis received a distribution during that period of $21,482 in money per Schedule K-1.

                     (3)   Curtis’s share of taxable income/(loss) for that period was ($22,854) per Schedule K-1.


III.   Effect of distribution to Curtis in redemption of his interest in Countryside

       A.   The 12/26/00 distribution to Curtis in redemption of his interest in Countryside reduced Curtis’s share of
            liabilities as follows:

            $8,364,157     Curtis’s total share of liabilities, before the 12/26/00 redemption
              (890,967)    Curtis’s continued liability. See (1) and (2) below.
             7,473,190     Net decrease in Curtis’s share of liabilities
                     (1)   Under sec. 1.752-1(f), Income Tax Regs., only the net decrease in a partner’s share
                           of liabilities is treated as a distribution of money to the partner.

                     (2)   Countryside distributed a 26.12-percent interest in CLPP to Curtis in redemption of
                           his interest in Countryside. As a result, Curtis was relieved of his $8,364,157 share
                           of Countryside liabilities, but Curtis retained a liability representing his share of
                           CLPP’s share of MP’s liabilities. Curtis’s share of these liabilities was $890,967,
                           computed as $3,445,506 x 99% x 26.12%. Thus, the net decrease in Curtis’s share of
                           liabilities was $7,473,190.

       B.   Because the $7,473,190 decrease in liabilities was less than Curtis’s $7,760,895 basis in his interest in
            Countryside, Curtis recognized no gain on the distribution in redemption. See (1) below.
                     (1)   Under sec. 731(a), no gain is recognized upon a distribution to a partner except
                           to the extent that any money distributed exceeds the adjusted basis of such partner’s
                           interest in the partnership immediately before the distribution.