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, b 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
