Transfer assets before liquidating partnership

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Under the purchase scenario, one or more remaining partners may buy out the terminating partner's interest for fair market value (FMV) plus any relief of debt realized by the partner.If the FMV of the partnership assets is greater than their associated tax basis, it is usually advantageous for the partnership to make a Sec.However, the partner can make an election to prorate the basis, if desired.If the partner makes this election, gain will be recognized proportionately as in the purchase scenario.If they do, the transaction is treated as a sale as described above. 736(a) payments are for a continuing share of partnership income or for guaranteed payments. 736(a) payments also include payments for unrealized receivables and for goodwill when goodwill payments are not called for in the partnership agreement.The remaining partners should also be careful in making capital calls so that the substance of the capital calls cannot be construed as being used as a payment to liquidate the partner's interest. This treatment for unrealized receivables and goodwill applies only to general partners in partnerships where capital is not a material income-producing factor.The partnership may use its assets to liquidate the partner's interest, or it can take on debt to liquidate the partner's interest.

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736(b) for all capital-intensive partnerships or where the partnership agreement specifies that terminating payments may be made for goodwill (Sec. A cash-basis partner should be aware that if the partnership accrues a payment to the partner in its tax year, the partner must recognize that income in the same tax year. These payments generally receive capital gain treatment for the liquidating partner.Under the purchase scenario, the terminating partner is treated as having sold his or her partnership interest, usually receiving capital gain treatment.If the proceeds of the sale include property other than cash, the difference between the FMV and the tax basis of this property is realized as gain at the time of the sale.754 election to step up the basis of the assets under Secs. However, once the partnership makes the election, it stays in effect for any subsequent sale until the partnership requests the election to be rescinded.The acquiring partners' incremental change in ownership now has a basis equal to FMV. 754 election must be applied to each asset of the partnership.

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