Structuring Redemptions of Partnership and LLC Interests: Issues Unique to Liquidating Distributions

Transfer of ownership of partnership interests by a departing partner is often accomplished via redemption of the partner's interest by the partnership rather than selling the interest to a third party. Redemptions can result in significantly different tax treatment than a sale for the departing partner, the partnership, and the remaining partners.

Redemption transactions often provide more flexibility than a sale regarding tax consequences to the departing partner. For example, redeeming partners may be exempt from Section 751 "hot asset" rules in certain situations where a partnership holds inventory.

Redeeming partners also have an advantage in the treatment of installment sale-type transactions. The redemption rules generally allow the redeeming partner to recover full basis before recognizing any gain, unlike standard installment sale rules that require pro rata recognition.

Additionally, there may be positive/upward partnership basis adjustments under Section 734(b) upon a redemption, assuming that a Section 754 election is in effect. However, there may also be a mandatory downward partnership basis adjustment under Section 734(b) in some situations. Counsel must know about these basis-adjustment situations.

Listen as our panel provides tax counsel and advisers with specific and practical guidance in navigating the tax rules that apply to the redemption of LLC or partnership interests. The panel will discuss common pitfalls and uncertainties under the new tax law and outline best practices in structuring transactions.

1. Redemption transactions and Section 736(b) payments
2. Treatment of Section 751 "hot assets" in redemption transactions
3. Section 736(a) payments to general partners
4. Installment sale treatment of partnership redemptions
5. Liquidating distributions of property rather than cash
6. Section 754 elections in effect or not in effect
7. Stuffing allocations before redemption
8. Disguised sale risks

The panel will review these and other challenging issues:

• Distinguishing between redemption and a sale of a partnership interest by the redeeming partner to another partner(s)
• Under what circumstances would a redemption be disadvantageous to the partnership or the remaining partners?
• How do the basis adjustment rules that apply when a Section 754 election is in effect function in redemption as opposed to a sale of a partnership interest?
• Applying the Section 751 "hot asset" rules to the redeeming partner
• Differences in the character of gain or loss between redemption and other sale transactions
• Filing considerations when a partner is redeemed
• How Section 736(b) applies to payments to the redeeming partner
• Treatment of distributions of partnership property (including cash) and deemed cash distributions arising from a reduction in partnership liability allocations under Section 752

Learning Objectives

After completing this course, you will be able to:

• Recognize scenarios where redeeming a partner's interest may create tax disadvantages to the remaining partners or the partnership
• Identify tax considerations in structuring redemption transactions with payments over multiple years
• Discern the difference in the application of a Section 754 election to redemption as opposed to a sale
• Determine the impact of Section 736(b) rules on structuring payments to a redeeming partner

• 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 at mid-level within the organization, preparing complex income tax forms and schedules for partnerships and pass throughs; supervisory authority over other preparers/accountants. Knowledge and understanding of partnership structures, dissolution and related taxation; Familiarity with sale and redemption of a departing partners interest, characterizing gain and loss determined upon a transfer, and the Net Investment Income Tax.

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).