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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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