The most logical solution should the remaining partners want to
continue the marina business would be option 3, to ask carol to find
an outside buyer, or as an organization, solicit another partner to take
Carol’s share. This option is reasonable because the entire team can
asses whether the new partner would be a good fit for the business
and to work with the remaining partners and the sale wouldnt affect
the business. per IRC 708, the partnership can still remain so long as
50% of the partnership isnt sold (Cornell, 2000). As Carol's stake is
only 33% of the business, the sale would be straightforward and wont
have a tax impact on the remaining partners unless the FMW changes
dramatically at the time of sale. should it be discovered that FMV of
assets have changed, a special adjustment can be made. "An IRC
Section 754 election allows a partnership to adjust the basis of the
property within a partnership under IRC Sections 734(b) and 743(b)
when one of two triggering events occur: 1) a distribution of
partnership property or 2) certain transfers of a partnership interest"
(IRS, 2022)
However, if no special elections need to be made, upon Carol’s
retirement, the sale would be recognized as a capital gain or loss
under section 741, as the partnership is a capital asset ( Cornell,
1954). If she should pass away prior to finalizing the terms of the sale,
her stake would go to the estate. A lump sum payment could be paid
out by the owners, whereby the cash or loan mix would be recorded
in the statement of cash flows, increase in debt, and increase in asset
allocation (The Federal Register, 2022).
Legal Information Institute. (2000, January 11).
26 CFR § 1.708-1 -
continuation of partnership.
Legal Information Institute. Retrieved
from https://www.law.cornell.edu/cfr/text/26/1.708-1
Legal Information Institute. (1954, April 16).
26 U.S. Code § 741 -
recognition and character of gain or loss on sale or exchange
. Legal
Information Institute. Retrieved from
https://www.law.cornell.edu/uscode/text/26/741
Legal Information Institute. (1976, October 4).
26 U.S. Code § 754 -
manner of electing optional adjustment to basis of partnership
property
. Legal Information Institute. Retrieved from
https://www.law.cornell.edu/uscode/text/26/754
FAQs for Internal Revenue Code (IRC) sec. 754 election and
revocationi
. Internal Revenue Service. (2022, December 2). Retrieved
from https://www.irs.gov/businesses/partnerships/faqs-for-internal-
revenue-code-irc-sec-754-election-and-
revocation#:~:text=An%20IRC%20Section%20754%20election%20al
lows%20a%20partnership%20to%20adjust,transfers%20of%20a%20
partnership%20interest.
The Federal Register
. Federal Register :: Request Access. (2022, June
7). Retrieved from
https://www.federalregister.gov/documents/2022/08/05/2022-
16271/streamlining-the-section-754-election-statement
