As Carol plans to retire from The Marina, marina owners Bob, Amy,
and Carol have started to discuss what will happen to Carols share of
interest since she no longer wants to be actively involved in the
operations or decision making process of running The Marina. As
they all have interest in The Marina they all must decide together
what to do with Carols share of interest. They have ruled out selling
the business as Bob and Amy wish to continue operations and Carol
is okay with the continued operation of The Marina after she retires.
Taking on additional debt to buy Carol out also is an not an option
because Bob and Amy have no desire to take on additional debt to
buy Carol out.
Bob and Amy have approached Carol with another alternative if she
doesn't want to liquidate her share of interest entirely she can find a
buyer for her share of interest in the business. Carol is considering
this as the better alternative since it will allow The Marina to
continue on without an interruptions into normal business
operations. Bob has done some research and found that the IRS has
laid out some specific guidelines around the sale of interest and the
related transaction. Under IRS guidelines the ownership interest in
The Marina is treated as an asset that can be purchased or sold. Carol
will treat the proceeds from the sale of her interest as the sale of an
asset and will pay a tax on the gain or loss on sale of her ownership
interest; and ownership interest must be sold are fair market value.
Bob and Amy will not be involved in the sale and Carol can sell her
ownership interest to another person, legal entity, partnership, or
corporation as she pleases and after the sale she will notify Bob and
Amy that the sale has been completed. The sale will be reported on
the Form 1065 tax return and Carol will be issued a final K-1. Carols
ownership interest accounts will be reduced to $0 and the new
partners ownership interest will be increased to similar amounts.
When the IRS reviews returns for completeness and accrcury they
take a look at these details to indicate if there was a sale of
ownership interest. Carol will also report the sale on her Form 1040
as Schedule D, Capital Loss or Gain and will include Form 8949 and
Form 4797 as needed. In Carols best interest she should ensure that
the sale of the transaction is reported according to IRS code, any
deviation from the code could seen seen as fraudulent intent or a
motive to avoid paying taxes.
It is agreed upon that if Carol chooses to sell her ownership interest
she would find a suitable buyer, but in the event of her untimely
death, Bob and Amy will have quite a tedious task on their hand to
reorganize the partnership if their is no formal agreement in place at
the time of her death. If business operations ceased altogether after
Carol dies the partnership will have to be dissolved. Any income
made by Carol will be reported on her final return and her estate will
have to decide rather they would like to obtain ownership of her
share in ownership interest. If Carols estate does not want to obtain
her ownership interest Bob and Amy may have to buy out her
ownership interest or they could try to find a suitable buyer for her
share of ownership interest. In the worse case scenario if Amy and
Carol can't find a suitable buyer or the estate does not obtain
ownership interest they will have to sell the business completely or
close down if services offered by Carol cause business activities to
stop.
Bob, Amy, and Carol should review their partnership agreement to
ensure that events such as untimely deaths are addressed.
References
Ellentuck , A. (2015, August 1). Accounting for the Death of a
Partner. Retrieved March 24, 2023, from
https://www.thetaxadviser.com/issues/2015/aug/accounting-for-
death-of-partner.html.
LB & I Transaction Unit, IRS.gov (2021). Retrieved March 23, 2023,
from
https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=web&c
d=&cad=rja&uact=8&ved=0CAQQw7AJahcKEwjI-
5HLlfX9AhUAAAAAHQAAAAAQAg&url=https%3A%2F%2Fwww.irs.
gov%2Fpub%2Firs-
utl%2Fsale_of_partnership_interest.pdf&psig=AOvVaw0dvVj78Oz93
7YDrONr50hq&ust=1679760242718891.
