Structuring Redemptions of Partnership and LLC Interests: Issues Unique to Liquidating Distributions

IRC 754 Elections, Section 736(b) Payments, Character and Timing of Gain, Installment Sales, and More

Recording of a 90-minute premium CLE/CPE webinar with Q&A


Conducted on Thursday, March 5, 2020

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide tax counsel and advisers with specific and practical guidance to navigating the tax rules that apply to the redemption of LLC or partnership interests. The panel will discuss common pitfalls and uncertainties under current tax law and outline best practices to structure transactions.

Description

Transfer of ownership of partnership interests by a departing partner is often accomplished via redemption of the partner's interest by the partnership, rather than a sale of the interest to a third party. Redemptions can result in significantly different tax treatment than a sale for the departing partner, the partnership, and the remaining partners.

Redemption transactions often provide more flexibility than a sale regarding tax consequences to the departing partner. For example, redeeming partners may receive an exemption from Section 751 "hot asset" rules in certain situations where a partnership holds inventory.

Redeeming partners also have an advantage in the treatment of installment sale type transactions. The redemption rules generally allow the redeeming partner to recover full basis before recognizing any gain, unlike standard installment sale rules that require pro rata recognition.

Additionally, there may be positive/upward partnership basis adjustments under Section 734(b) upon a redemption, assuming that a Section 754 election is in effect. In some situations, however, there may also be a mandatory downward partnership basis adjustment under Section 734(b). Counsel must know about these basis adjustment situations.

Listen as our panel provides tax counsel and advisers with specific and practical guidance to navigating the tax rules that apply to the redemption of LLC or partnership interests. The panel will discuss common pitfalls and uncertainties under the new tax law and outline best practices in structuring transactions.

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Outline

  1. Redemption transactions and Section 736(b) payments
  2. Treatment of Section 751 "hot assets" in redemption transactions
  3. Section 736(a) payments to general partners
  4. Installment sale treatment of partnership redemptions
  5. Liquidating distributions of property rather than cash
  6. Section 754 elections in effect or not in effect
  7. Stuffing allocations before redemption
  8. Disguised sale risks

Benefits

The panel will review these and other challenging issues:

  • Distinguishing between a redemption and a sale of a partnership interest by the redeeming partner to another partner(s)
  • Under what circumstances would a redemption be disadvantageous to the partnership or the remaining partners?
  • How the basis adjustment rules that apply when a Section 754 election is in effect function in a redemption as opposed to a sale of a partnership interest
  • Applying the Section 751 "hot asset" rules to the redeeming partner
  • Differences in the character of gain or loss between redemption and other sale transactions
  • Filing considerations when a partner is redeemed
  • How Section 736(b) applies to payments to the redeeming partner
  • Treatment of distributions of partnership property (including cash) and deemed cash distributions arising from a reduction in partnership liability allocations under Section 752

Faculty

Phelan, Thomas
Thomas D. Phelan

Attorney
Pepper Hamilton

Mr. Phelan focuses his practice on tax law. He has written on tax law issues and co-authored an article with Steven...  |  Read More

Stauber, David
David Stauber

Partner
Troutman Pepper

Mr. Stauber focuses his practice on the federal income tax aspects of mergers and acquisitions, fund formation, and...  |  Read More

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