While the three options presented in this week discussion are all unreasonable when liquidating a
partnership or settling the interest for the death of a partner. c I would recommend option 3 is the
best option choice, asking Carol to find an outside buyer for her portion of the partnership will
require Carol to recognize the gain/loss associated with the sale of a capital asset. c Accordingly, the
third-party buyer will assume the share of partnership forward. c Section 751 states she can exclude
unrealized receivables and inventory items. The gain/loss is the difference between the sale
proceeds and the partner’s (Carol’s) interest. According to The CPA Journal (2021), “IRC Section 751,
the selling partner (Carol) is required to recognize ordinary income to the extent of any gain
attributable to IRC section 751 property (or “hot assets”). “Hot assets are defined to include
unrealized receivables (e.g., rights to payment under either goods or services contracts) and
inventory items. Only the excess, if any, of the purchase price over the amount characterized as
ordinary income or loss is treated as capital gain.”
The course textbook reads: “When one partner sells his or her partnership interest, the sale usually
has no more impact on the partnership than the sale of corporate stock by one shareholder has on
the corporation. Only the partner and the purchaser of the interest are affected. However, the
partnership itself is affected if the partnership interest sold is sufficiently large that, under Sec 708,
its sale terminates the partnership for tax purposes (Anderson & Rupert, 2023).”
If Carol becomes deceased, then her partnership interest can be sold to one or more existing
partners or to an outsider. Sometimes a deceased partner’s successor-in-interest exists (the party
that succeeds the rights of the deceased partner’s interest) from the partnership to receive
payments from the partnership not to exceed the deceased partner’s interest in the business. The
partnership can make payments in exchange for the partner’s interest in partnership property and
other payments (Anderson & Rupert, 2023). Carol can retire without Amy and Bob having to sell the
marina, or take out a loan in order to purchase Carol’s share of the business. But, what will this do
to their partnership? This will depend on the partnership agreement that was, hopefully, established
at the conception of the partnership. If Carol leaves, the partnership may be dissolved without
ending the business. However, a new partnership agreement will need to be created to include the
buyer of Carol’s interest in the business. Additionally, the partnership agreement should have laid
out a plan for this type of situation. There are a few tax consequences that Carol may face should
she choose to sell. Per IRC § 741, “in the case of a sale or exchange of an interest in a partnership,
gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as
gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751
(relating to unrealized receivables and inventory items” (LII, n.d.). When it comes to any liabilities
that the marina has, Carol will be relieved of these when she sells to a new partner. So, the sale
amount to the new partner will include cash given, FMV of noncash property, and Carol’s share of
the liabilities.
Legal Information Institute. (n.d.). 26 U.S. Code § 741 - recognition and character of gain or loss on
sale or exchange. Legal Information Institute. Retrieved March 23, 2023, from
https://www.law.cornell.edu/uscode/text/26/741
Anderson, K., Hulse, D., Rupert, T. (2023). Prentice Hall Federal Taxation 2023: Corporations,
Partnerships, Estates, and Trusts. c
The CPA Journal. (2021, February). Tax treatment of liquidations of partnership interests. Retrieved
from: https://www.cpajournal.com
