Partnership Terminiation on Sale - Oelerich & Associates · Chapter 21: Partnership Termination on Sale, Retirement or Death21 - Partnership Termination on Sale, Retirement or Death

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21 - Partnership Termination on Sale, Retirement or Death 1

Page 431-453

A. When is a Partnership Terminated?• No activity continues to be carried on

by any of the partners• Sale or exchange of > 50% of interests

within a 12 month periodKnown as a “Technical

termination under IRC 708


I. Partnership TerminationPage 431

C. What happens at a Sec 708 termination?

I. Partnership Termination

Old Partnership

Due date is 2 months and 15 days after date of termination


Page 431

C. What happens at a Sec 708 termination?


New Partnership

Due date is 2 months and 15 days after tax year end


Page 431

What happens at a Sec 708 termination?Net effect:

• Tax year ends: 2 returns due The first short year return is due 2

months and 15 days after the terminationD. Tax elections end• No gain / loss recognized in general

Watch out for disproportionate distributions



Page 432


The Steps – It will start as if new, retaining name and FEIN. Making any new elections it deems appropriate.


Page 432

II. Understanding the Hot Asset Rules

A. Hot assets (IRC 751 assets) are defined as:

1. Unrealized Receivables – By definition any asset that is subject to ordinary income treatment such as:Payments for servicesPayments for goodsPotential recapture

2. Inventory


Page 433-434


10Chapter 21: Partnership Termination on Sale, Retirement or Death21 - Partnership Termination on Sale, Retirement or Death

Page 435



Inventory will include Stock in trade and

property held for resale

ANY property held for one year or less


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When is the sale of a partnership interest an ordinary loss, well not this time according to the tax court.

IV. Sale of Partnership Interest


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A. Usually a capital gain / lossB. How computed:

• What did you receive -- including relief from debt

• What was your basis?• A disproportionate distribution of “hot”

assets?? IRC 751 hot assets: Receivables,

Inventory



Page 437

F. Additional Issues of IRC 751 Assets:

Requires the disclosure of such assets by outgoing partner on the 1040 in the year of saleDate of SaleAmount of IRC 751 gain (loss)Amount of capital gain (loss) Filing Form 8308 No reporting on an installment basis is allowed by

the exiting partner



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Chapter 21: Partnership Termination on Sale, Retirement or Death

A/R Amounts


Page 439IV. Sale of Partnership Interest

V. Complete Liquidation ofPartnership Interest

While the liquidation of the partnership and the sale to other partners will yield the identical tax result there are some differences as noted on the table


Page 440-441

V. Complete Liquidation ofPartnership Interest

C. Payments to a retired/exiting partner will be treated as either:

1. IRC 736(a) Payments – Deductible by the partnership and ordinary income to the partner

2. IRC 736(b) Payments – The payment to the partner of his/her interest in the partnership, non-deductible by partnership and not taxable to the partner until basis is exceeded


Page 441

VI. IRC Sec. 736(a) Payments

A. Deductible payments under IRC 736(a) payments that are ordinary income to the partner are:

1. Service Partnership Goodwill2. Continuing share of partnership income3. Guaranteed payments


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VI. IRC Sec. 736(a) Payments

B. Guaranteed Payments will be subject to SE Tax unless:

1. Made on a periodic basis per a written plan that is on account of the retirement

2. Continue to at least the partner’s death3. No services are provided4. The payments are in fact “retirement income”5. The payments are the only remaining obligation6. The partner’s capital has been fully liquidated


Page 442

VII. Section 736(b) Payments

There can be both IRC 736(a) and 736(b) payments made on a concurrent basis:

IRC 736(b) payments are payments in recognition of the equity interest and will be treated as distributions by the partnershipAll payments except 751 (Hot Assets) will be

treated as a recovery of basis until fully recoveredOnly cash and securities in excess of basis will

yield a taxable event


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VII. Section 736(b) Payments

There may be gain or loss recognized by the exiting partner based on the partner’s basis, losses will be capital unless property other than money, unrealized receivables or inventory is received.


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VIII. Liquidation of a Service Partnership Interest

C. Special exception to the liquidating payments for goodwill for a service partnership (capital is not a material producing factor)

Payments can be structured under IRC 736(a) (deductible for partnership) unless they are for goodwill per the partnership agreement

Payments for goodwill that are specified in operating agreement will be under IRC 736(b) (not deductible for partnership)


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VIII. Liquidation of a Service Partnership Interest

Review the table on page 451 to review the differences between liquidating payments of a general partner in a service partnership versus other partners


Page 451

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Partnership Terminiation on Sale - Oelerich & Associates · Chapter 21: Partnership Termination on Sale, Retirement or Death21 - Partnership Termination on Sale, Retirement or Death