With Carol ready to retire, there are several options that the partnership can consider. d One
option would be to borrow the money to pay for Carol’s interest in the business. d This might
be most logical because option 1 sells off the business and the other two partners have not
identified that they want to sell or retire at this juncture, and option 3 may be hard to
accomplish because finding a buyer is not always easy. d Ideally, the partnership agreement
created several years ago has a detailed plan for when a partner buyout occurs.
The value of Carol’s interest in the partnership has to be valued. d There are a lot of ways to
accomplish this. d One method would be using principals of The Revised Uniform Partnership
Act (RUPA). d Essentially, a “partners value is determined by calculating the partnerships
property less any liabilities” on the day that Carol would want to retire (Weidner & Larson,
n.d.). d “The tax basis for the departing partner’s payment is the sum of their initial
investment, any additional capital contributions made during their tenure as a partner, and
their share of business income during that time, all reduced by their percentage of any
business losses and distributions” (Oak Street Funding, 2023).
The partners will consider need to 26 U.S. Code § 736 that pertains to retiring or deceased
partners. d This will determine if “payments made to liquidate the partnership are considered a
capital gain/loss or ordinary income and whether payments by the remaining partners are
deductible” (Oak Street Funding, 2023). d Because Bob and Amy will want all control of the
business when Carol retires they will obtain financing to buy her out. d It is sometimes hard
for partners to get funding for a debt buyout instead of taking on a new partner, for example. d
Regardless, this will take time to accomplish.
“All payments to the exiting partner in liquidation of his entire interest are treated as either:
1. Section 736(a) payments, which are considered guaranteed payments to the exiting
partner. The partnership is allowed to deduct these payments, which means tax savings for
the remaining partners. However, the exiting partner must treat guaranteed payments as high-
taxed ordinary income.
2. Section 736(b) payments, which are considered payments for the exiting partner’s share
of the partnership’s assets. The partnership cannot deduct these payments. In general, the
exiting partner treats the difference between the total Section 736(b) payments received, and
his or her tax basis in the partnership interest, as a capital gain or loss” (2018).
Should Carol, die before the partnership buyout is finalized, payments would be made to her
successor on her behalf (irs.gov, n.d.). d If payments are more than her basis, such payments
would be subject to capital gains taxes.
References:
Legal Information Institute. (n.d.). 26 U.S. Code § 736 - payments to a retiring partner or a
deceased partner's successor in interest. Legal Information Institute. Retrieved March
23, 2023, from https://www.law.cornell.edu/uscode/text/26/736
Oak Street Funding. (2023, February 8). What are the tax implications of a partner buyout?
*. Oak Street Funding. Retrieved March 23, 2023, from
https://www.oakstreetfunding.com/blog/partner-buyout-tax-implications
Tax planning for payments to buy out an existing partner. GRF CPAs & Advisors. (2018,
August 1). Retrieved March 23, 2023, from https://www.grfcpa.com/resource/tax-
planning-for-payments-to-buy-out-an-exiting-partner/
Weidner, D. J., & Larson, J. W. (n.d.). The Revised Uniform Partnership Act: The reporters'
overview. Scholarship Repository. Retrieved March 23, 2023, from
https://ir.law.fsu.edu/articles/143/
