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Redemptions of Partnership Interests: Sections 736(b) vs. 736(a), Installment Sales, Hot Assets, SALT Caps

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, February 22, 2022

Recorded event now available

This webinar will discuss redemptions of partnership interests for tax advisers working with partnerships and LLCs. Our authoritative panel will explain the tax effects of these dispositions on the partner, the remaining partners, and the partnership, including the application of ordinary versus capital gains tax rates, installment sales, and new considerations resulting from recent legislation and notable cases and rulings.

Description

The acquisition of a partner's interest directly by the partnership is a redemption. Although the partner and partnership may be in the same place economically after a redemption or sale of a partner's interest, the tax consequences can be dramatically different. IRC Section 736 governs the treatment of liquidating payments to retiring and deceased partners. Section 736(b) describes the treatment of gains on these payments other than those covered by Section 736(a). Section 736(a) explains the treatment of distributive shares of income and guaranteed payments to exiting partners.

Like sales of partnership interests, if the partnership's assets include hot assets (inventory and untaxed accounts receivable), a portion of the proceeds is treated as ordinary income. For redemptions, however, only "substantially appreciated" inventory is included. As with sales of partnership interests, redeemed partnership interests are eligible for installment sale treatment. Unlike other sales and aside from hot assets, a partner can recover his basis first before recognizing gain on the redemption of his interest.

Recent changes, including the new BBA centralized partnership audit rules and the states' enactment of pass-through entity tax regimes to circumvent the SALT cap, have further complicated these tax considerations for tax professionals.

Listen as our panel of partnership experts explains the tax consequences of redeeming a partner's interest in an LLC or partnership.

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Outline

  1. Redeeming partnership interests
  2. IRC Sections 736(b) and 736(a)
  3. Goodwill
  4. Section 754 elections
  5. Impact of recent legislation
    1. Partnership audit rules
    2. State PTE taxation regimes
    3. Other
  6. Installment sales
  7. Section 751 property
  8. Notable cases and rulings

Benefits

The panel will cover these and other critical issues:

  • Tax consequences of redemptions on the exiting partner and the partnership
  • Calculating the tax on the redemption when the partnership holds hot assets
  • Structuring redemptions to withstand IRS challenges
  • Making a Section 754 election when a partner's interest is redeemed
  • The effect of the new partnership audit regime on redemptions

Faculty

Fowler, Lynn
Lynn E. Fowler
Partner
Kilpatrick Townsend & Stockton

Mr. Fowler focuses his practice on corporate and business tax law. He specializes in helping clients develop and...  |  Read More

Mandarino, Joseph
Joseph C. Mandarino
Partner
Smith Gambrell & Russell

Mr. Mandarino's practice focuses on corporate, tax and finance law. He is involved with a wide variety of...  |  Read More