Category: Partnerships & LLCs Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com When a partner's interest is redeemed by the partnership, there is an issue as to whether any money or property received by the retiring partner is in respect of the partner's interest in partnership property; or, in the alternative, such amounts represent a distribution of partnership profits. In the former case, the partner would typically recognize capital gain or loss (but, see Section 751 as we discussed); in the latter case, the partner recognizes income or loss in accordance with the character of income at the partnership level, frequently ordinary. Payment with respect to partnership profits are referred to as Section 736(a) amounts and payments for the partner's interest are referred to as Section 736(b) amounts. The tax position of the redeemed partner is contrary to that of the remaining partners. Accordingly, the Service typically respects arms-length agreements with respect to whether payments to a retiring partner represent partnership profits or payment for the partner's interest. Regulation Section 1.736-1(b)(1). I am assuming that none of the partners are related or have any reason to make an arrangement which is other than arms-length. If that is not the case, call me. It seems to me essential that the redemption agreement explicitly deal with the characterization issue. I suggest using language similar to the following. Caution: I am not an attorney. This language should be reviewed by an attorney. The parties (i.e. the retiring partner, the remaining partners, and the partnership), as a result of arms-length negotiation, agree that the gross fair market value of the retiring partner's interest is "X" dollars. In accordance with Treasury Regulation Section 1.736-1(b)(1), the parties further agree to treat for all federal (and state???) income tax purposes "X" dollars of partnership cash distributions to the retiring partner as payments made in exchange for the interest of such retiring partner in partnership property within the meaning of that phrase as set forth in Internal Revenue Code Section 736(b)(1). |
