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

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.

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

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

Learning Objectives

After completing this course, you will be able to:

• Identify redemptions qualifying for installment sale treatment
• Determine when a partnership may benefit from a Section 754 election
• Decide how state PTE regimes affect redemptions
• Ascertain when a redemption is subject to Section 736(a) versus 736(b)

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).