Today, I’m going to finish looking at a basic view of US partnership taxation by giving a general overview of selling the partnership interest.
As with all sales transactions, we start with section 1001(a) which states:
The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.
This is a straightforward proposition and concept for anyone who’s ever been involved with any transaction.
Next, we turn to the partnership subchapter; specifically referencing sections 741 and 751. We start with section 741, which states:
In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items).
This means the sale of the partnership interest is subject to capital gains tax rates. However, this does not apply to the selling partners proportionate share of partnership inventory and accounts receivable, which must receive ordinary income treatment under 751:
The amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his interest in the partnership attributable to—
(1) unrealized receivables of the partnership, or
(2) inventory items of the partnership,
shall be considered as an amount realized from the sale or exchange of property other than a capital asset.
Finally, if the partner is relieved of his proportionate share of partnership liabilities, this amount must be considered as money received by the partner in exchange for his interest under 752(d):
In the case of a sale or exchange of an interest in a partnership, liabilities shall be treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships.
That ends this look at US Partnership tax. If you have any questions about this very complex section of the tax code, please call us at 832.330.4101.
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