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

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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 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.

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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 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

Faculty

Robert A.N. Cudd
Robert A.N. Cudd

Senior Partner
Polsinelli

Mr. Cudd advises both domestic and foreign entities on tax-efficient structures as well as on transactions between...  |  Read More

Michelle M. Jewett
Michelle M. Jewett

Partner
Stroock & Stroock & Lavan

Ms. Jewett's practice focuses on federal income taxation. She has experience in a wide range of tax matters,...  |  Read More

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