Structuring Redemptions of Partnership and LLC Interests: Navigating 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 CLE/CPE webinar with Q&A


Conducted on Wednesday, June 14, 2017
Recorded event now available


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 in the tax code and outline best practices to structure transactions.

Description

Transfer of ownership of partnership interests by a departing partner is often accomplished via a 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 in terms of tax consequences to the departing partner. Redeeming partners may receive an exemption from the Section 751 “hot asset” rules in situations where a partnership holds inventory. Also, they are not required to recognize their share of any unrecaptured Section 1250 gain on assets held by the partnership, which shifts instead to the remaining partners.

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

Additionally, the Section 754 election is available in a redemption transaction, but the election is made using the Section 734 rules instead of referring to Section 743. This generally results in slight differences in both basis allocation and timing, if the redemption is done in installments.

Listen as our experienced panel provides a thorough and practical guide to the tax issues that occur in partnership redemptions. Tax counsel advising partnerships involved in redemption transactions must be aware of the specific rules governing redemptions to avoid negative tax consequences.

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 prior to redemption
  8. Disguised sale risks

Benefits

The panel will review these and other key issues:

  • Under what circumstances would a redemption be disadvantageous to the partnership or the remaining partners?
  • How the Section 754 election rules function in a redemption as opposed to a sale
  • Applying the Section 751 “hot asset” rules to the redeeming partner
  • Differences in character of gain between redemption and other sale transactions
  • Risk of technical termination and application of the disguised sale rules
  • Filing requirements for a partnership engaged in a redemption on an installment basis
  • How Section 736(b) applies to payments to the redeeming partner
  • How distributions of partnership property including deemed distributions under Section 752 are treated
  • Planning possibilities with respect to special allocations of the partnership’s taxable income in the year of redemption

Learning Objectives

After completing this course, you will be able to:

  • Recognize scenarios where redeeming a partner’s interest may create tax disadvantages to the remaining partners or the partnership
  • Identify tax considerations in structuring redemption transactions with payment over multiple years
  • Discern the difference in application of a Section 754 election to a redemption as opposed to a sale
  • Determine the impact of the Section 736(b) rules on structuring payments to a redeeming partner

Faculty

Robert A.N. Cudd, Senior Partner
Polsinelli, New York

Mr. Cudd advises both domestic and foreign entities on tax-efficient structures as well as on transactions between the domestic and foreign entities. He has extensive experience in public and private REITs, timber and infrastructure funds, solar and wind projects, energy and pipelines, reorganization of domestic and foreign corporations and partnerships, private equity funds, controlled foreign corporations and PFICs, and bankruptcy and insolvency.

Michelle M. Jewett, Partner
Stroock & Stroock & Lavan, New York

Ms. Jewett's practice focuses on federal income taxation. She has experience in a wide range of tax matters, including corporate, mergers and acquisitions, partnership, financial instruments, private fund structures, intellectual property and real estate investment trusts, both domestically and internationally. She provides tax advice for structuring cross-border taxable and tax-free mergers and acquisitions transactions, acquisitions and dispositions, domestic and foreign private equity investments, real estate investments by taxable and tax-exempt entities, mortgage-backed securities and other securitization transactions, leveraged leases, foreign investments in the U.S., outbound investments by domestic companies, bankruptcy and debt workouts, renewable energy investments and life settlements. She has also structured numerous cross-border arrangements, including U.S. and foreign private equity funds, real estate funds, timber funds and hedge funds.


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Tax Law Advisory Board

Robert S. Barnett

Partner

Capell Barnett Matalon & Schoenfeld

William H. Byrnes

Associate Dean, Special Projects

Texas A&M University Law

Robert A.N. Cudd

Senior Partner

Polsinelli

Patrick Derdenger

Tax Partner

Steptoe & Johnson

Janice Eiseman

Principal

Cummings & Lockwood

Lynn Fowler

Partner

Kilpatrick Townsend & Stockton

Edward Froelich

Of Counsel

Morrison & Foerster

Daniel L. Gottfried

Partner

Hinckley Allen

J. Leigh Griffith

Partner and Practice Group Leader - Tax

Waller Lansden Dortch & Davis

L. Andrew Immerman

Partner

Alston & Bird

Mark S. Lange

Partner

BakerHostetler

Joseph C. Mandarino

Partner

Smith Gambrell & Russell

Lori Mathison

Partner, Cross-Border Transactions Tax

Fraser Milner Casgrain

Christian M. McBurney

Partner

Arent Fox

Suzanne Ross McDowell

Partner, Tax-Exempt Organizations

Steptoe & Johnson

Todd Reinstein

Partner, Corporate Tax and Due Diligence

Pepper Hamilton

Alex Sadler

Partner

Morgan Lewis

Susan Seabrook

Shareholder

Buchanan Ingersoll & Rooney

Peter Stathopoulos

Managing Director, State and Local Tax Practice

Bennett Thrasher

Eric Tresh

Partner & Co-Chair, State & Local Tax Practice

Sutherland Asbill & Brennan

Amanda Wilson

Shareholder

Lowndes Drosdick Doster Kantor & Reed

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