2. The Big Picture (slide 1 of 4)
• In the previous chapter, Josh, Kyle, and Maria created
Beachside Properties, LLC, to own and operate the
Beachsider Cafe´ and to own, manage, and lease the
remaining properties in the Shorefront Center.
• Several years have passed since the LLC was formed.
– The LLC interests and the net underlying assets are
currently valued at approximately $10 million (including
$1 million of goodwill for the Beachsider Cafe´).
– During this period, the LLC has made significant
distributions of cash and property to its members.
3. The Big Picture (slide 2 of 4)
• The area has grown substantially, and it appears to be
a good time to develop the remaining 7 acres of
property.
– The cost of development is estimated at $10 million.
• Josh wants to manage the expansion.
– Kyle and Maria are nearing retirement age.
– They would prefer to dispose of their interests (valued at
$9.5 million, or 95% of the net LLC value).
• Josh has been approached by a group of developers
who are willing to invest the $19.5 million necessary
to make the improvements and to purchase Kyle’s
and Maria’s interests.
4. The Big Picture (slide 3 of 4)
• The transfer of Kyle’s and Maria’s interests and the
admission of the new LLC members can be
accomplished in two ways.
– First, the LLC could admit the new members for $19.5
million of cash
• Use $9.5 million to redeem the interests of Kyle and Maria.
– Second, Kyle and Maria could sell their LLC interests
directly to the new members for $9.5 million.
• The new members would also contribute $10 million of cash to the
LLC for the expansion.
5. The Big Picture (slide 4 of 4)
• Although the two alternatives have identical
economic effects, the tax results could differ
substantially.
– How are the distributions of cash and property to the LLC
members treated over the years?
– What are the tax consequences of admitting the new
members to the LLC and redeeming the interests of Kyle
and Maria?
– What are the results if the new members acquire the
interests directly from Kyle and Maria and contribute the
cash for expansion to the LLC?
• Read the chapter and formulate your response.
6. Distributions from a Partnership
(slide 1 of 4)
• A payment from a partnership to a partner is not
necessarily treated as a distribution
– e.g., Partnership may pay interest or rent to a partner, make
a guaranteed payment, or purchase property from a partner
• If a payment is treated as a distribution, it will fall
into one of two categories:
– Liquidating distributions
– Nonliquidating distributions
• Depends on whether the partner remains a partner in
the partnership after the distribution
7. Distributions from a Partnership
(slide 2 of 4)
• A liquidating distribution occurs when either:
– Partnership itself liquidates and distributes all its
property to the partners, or
– Ongoing partnership redeems interest of one of its
partners
• e.g., Partner retires
8. Distributions from a Partnership
(slide 3 of 4)
• A nonliquidating distribution is any
distribution from a continuing partnership to a
continuing partner
– Two types of nonliquidating distributions
• Draw
– Distribution of partner’s share of current or accumulated
profits
• Partial liquidation
– Reduces partner’s interest in partnership capital but does not
liquidate partner’s interest
9. Distributions from a Partnership
(slide 4 of 4)
• Distributions from a partnership may be either:
– Proportionate—Partner receives his or her share of
certain ordinary income-producing assets
– Disproportionate—Partner’s share of certain
ordinary income-producing assets increases or
decreases
10. The Big Picture – Example 1
Distributions From A Partnership
• Return to the facts of The Big Picture on p. 11-2.
• Assume that Josh’s basis in his interest in Beachside
Properties, LLC, is $300,000.
• The LLC distributes $50,000 cash to Josh at the end
of the year.
– Josh does not recognize any gain on the distribution and
reduces his basis by $50,000 (the amount of the
distribution) to $250,000.
– Josh’s basis in the cash he received is $50,000,and the
LLC’s inside basis for his assets is reduced by the $50,000
cash distributed.
11. Proportionate Nonliquidating
Distributions (slide 1 of 3)
• In general, neither partner nor partnership
recognizes gain or loss on proportionate
nonliquidating distributions
– Partner usually takes a carryover basis in assets
distributed
– Basis in partnership interest is reduced by amount
of cash and basis of property distributed
12. Proportionate Nonliquidating
Distributions (slide 2 of 3)
– Partner recognizes gain to extent cash received
exceeds partner’s adjusted basis (outside basis) in
partnership interest
• Reduction in partner’s share of partnership debt is
treated as a distribution of cash
– First reduces partner’s basis in partnership
– Any reduction in excess of partner’s basis in partnership
results in taxable gain to the partner
– Partner cannot recognize loss on a proportionate
nonliquidating distribution
13. Proportionate Nonliquidating
Distributions (slide 3 of 3)
• Property distributions
– In general, no gain recognized on a property
distribution
• If inside basis of property distributed exceeds partner’s
outside basis in partnership interest, distributed asset
takes substituted basis
• Assets are deemed distributed and basis applied in a
certain order
14. Ordering Rules
• 1. Cash
• 2. Unrealized receivables and inventory
• 3. All other assets
• Basis is allocated to assets within a category
based on adjusted basis to partnership
15. Proportionate Nonliquidating
Distribution Examples (slide 1 of 6)
Bill’s basis in partnership interest: $30,000
Proportionate nonliquidating distributions
(independent fact situations):
Assets Distributed A B C .
Cash $15,000 $15,000 $ 5,000
Land—basis N/A $ 6,000 N/A
(Fair mkt value) N/A $10,000 N/A
Accts rec—basis N/A N/A -0-
(Fair mkt value) N/A N/A $16,000
16. Proportionate Nonliquidating Distribution
Examples (slide 2 of 6)
A B C .
Basis in interest $30,000 $30,000 $30,000
Cash distributed ( 15,000) (15,000) (5,000)
Basis after cash 15,000 15,000 25,000
Acct. rec. distrib. N/A N/A (-0-)
Basis after A.R. 15,000 15,000 25,000
Land Distrib. N/A ( 6,000) N/A
Basis after all dist. $15,000 $ 9,000 $25,000
17. Proportionate Nonliquidating Distribution
Examples (slide 3 of 6)
A B C .
Basis in p’ship int. $15,000 $9,000 $25,000
Basis in cash 15,000 15,000 5,000
Basis in land N/A 6,000 N/A
Basis in A/R N/A N/A -0-
Total basis $30,000 $30,000 $30,000
Sale of non-cash assets
at FMV: Selling price N/A $10,000 $16,000
Basis N/A (6,000) (-0-)
Gain N/A $4,000 $16,000
18. Proportionate Nonliquidating Distribution
Examples (slide 4 of 6)
Bill’s basis in partnership interest: $30,000
Proportionate nonliquidating distributions
(independent fact situations):
Assets Distributed D E F .
Cash $40,000 N/A $20,000
Relief of liabilities N/A 40,000 N/A
Land-basis N/A N/A $30,000
(Fair mkt value) N/A N/A $50,000
19. Proportionate Nonliquidating Distribution
Examples (slide 5 of 6)
D E F .
Basis in interest $30,000 $30,000 $30,000
Cash distributed (40,000) N/A (20,000)
Relief of liabilities N/A (40,000) N/A
Gain recognized 10,000 10,000 N/A .
Basis after cash (and
deemed cash) dist. -0- -0- 10,000
Land distrib. N/A N/A (10,000)
Basis after all distrib. -0- -0- -0-
20. Proportionate Nonliquidating Distribution
Examples (slide 6 of 6)
D E F .
Basis in p'ship int. -0- -0- -0-
Basis in cash 40,000 N/A 20,000
Liabilities relieved N/A 40,000 N/A
Basis in land N/A N/A 10,000
Gain recognized (10,000) (10,000) N/A .
Original basis 30,000 30,000 30,000
Sale of non-cash assets
at FMV: Selling price N/A N/A $50,000
Basis N/A N/A (10,000)
Gain N/A N/A $40,000
21. Effect of Liquidating Distribution
• In general:
– No gain or loss is recognized by partnership
– Partner reduces basis in partnership interest by
basis in property received at each level using
Ordering Rules
– Partner’s entire basis in interest will be absorbed
by distributed assets
22. Exceptions to Liquidating Distribution
Rules (slide 1 of 2)
• Gain is recognized if:
– Cash distributed exceeds partner’s basis
– Precontribution gain exceptions
– Disproportionate distribution
23. Exceptions to Liquidating Distribution
Rules (slide 2 of 2)
• Loss is recognized only if:
– Assets received include only cash, unrealized
receivables and inventory, and
– Outside basis exceeds partnership’s inside basis in
distributed property
24. Proportionate Liquidating Distribution
Examples (slide 1 of 4)
Bill’s basis in partnership interest: $30,000
Proportionate liquidating distributions (partnership also
liquidates) (independent fact situations):
G H I .
Cash $50,000 $10,000 $10,000
Unrealized rec. N/A -0- -0-
(Fair mkt value) N/A $16,000 $16,000
Filing cabinet (1231) N/A N/A 300
(Fair mkt value) N/A N/A 300
25. Proportionate Liquidating Distribution
Examples (slide 2 of 4)
G H I .
Basis in interest $30,000 $30,000 $30,000
Cash distribution (50,000) (10,000) (10,000)
Gain recognized 20,000 N/A N/A
Basis after cash -0- 20,000 20,000
A/R distrib. N/A -0- -0-
Loss recognized N/A (20,000) N/A
Basis after A/R -0- -0- 20,000
Filing cabinet N/A N/A (20,000)
Ending basis $ -0- $ -0- $ -0-
26. Proportionate Liquidating Distribution
Examples (slide 3 of 4)
G H I .
Basis in p’ship int. $ -0- $ -0- $ -0-
Basis in cash 50,000 10,000 10,000
Basis in A/R N/A -0- -0-
Basis in filing cabinet N/A N/A 20,000
Capital (Gain)/loss (20,000) 20,000 N/A .
Original basis $30,000 $30,000 $30,000
27. Proportionate Liquidating Distribution
Examples (slide 4 of 4)
Sale of non-cash assets at FMV:
Example H: A/R Fil.Cab. Total .
Selling price $16,000 N/A $16,000
Basis -0- N/A -0- .
Gain/(loss) $16,000 N/A $16,000
(Ordinary)
Example I:
Selling price $16,000 $ 300 $16,300
Basis -0- 20,000 20,000
Gain/(loss) $16,000 ($19,700) ($3,700)
(Ordinary) (May be ord)
28. Property Distributions with Special
Tax Treatment (slide 1 of 4)
• Disguised sales
– Contribution of appreciated property to partnership
followed by a cash distribution to the contributing
party may be treated as a disguised sale
– Treated as a sale of property resulting in gain
recognition
• Partnership’s basis in the asset is cost
29. Property Distributions with Special
Tax Treatment (slide 2 of 4)
• Marketable securities
– FMV of marketable securities distributed to a
partner is treated as a cash distribution
• Some or all of excess of FMV of securities distributed
over partner’s outside basis is taxable gain
– Marketable securities include most actively traded
debt or equity interests, options, futures, and
derivatives
– Exceptions apply
30. Property Distributions with Special
Tax Treatment (slide 3 of 4)
• Precontribution gain property
– Contributing partner recognizes gain on
distribution of precontribution gain property in two
situations:
• 1. If property is distributed to another partner
within 7 years of contribution date, contributing partner
recognizes remaining precontribution gain
– Partner’s basis in partnership and basis of distributed property
is increased by gain recognized
31. Property Distributions with Special
Tax Treatment (slide 4 of 4)
• Precontribution gain property
– Contributing partner recognizes gain on
distribution of precontribution gain property in two
situations (cont’d):
• 2. If partnership distributes any property other than cash
to a partner within 7 years after that partner contributes
appreciated property, the partner recognizes the lesser
of:
– Remaining net precontribution gain
– Excess of FMV of distributed property over partner’s basis in
partnership interest
32. Disproportionate Distributions
(slide 1 of 3)
• Occurs when partnership distributes cash or
property to a partner which increases or
decreases the partner’s share of ordinary
income-producing assets (hot assets)
33. Disproportionate Distributions
(slide 2 of 3)
• If partner receives less than proportionate
share of hot assets, then treated as if:
– Partnership distributed some of the assets, and
– Partner sold these hot assets back to partnership
– Partner recognizes ordinary income on sale of the
hot assets; Partnership’s basis in hot assets is cost
34. Disproportionate Distributions
(slide 3 of 3)
• Hot assets include:
– Substantially appreciated inventory
• Inventory includes all assets other than cash, capital and
§1231 assets
• Substantially appreciated means FMV > 120% of
partnership’s adjusted basis in inventory
– Unrealized receivables
• Rights to receive future amounts that will result in
ordinary income recognition
35. §736: Liquidating Distribution Where
P’ship Does Not Liquidate (slide 1 of 3)
• §736(a) income payment:
– Treated as distributive share of partnership income or
guaranteed payment to partner
– Certain items if partnership is service-provider and retiring
partner is a general partner:
• Unrealized receivables (except depreciation recapture)
• Goodwill (unless provided for in partnership agreement)
• §736(b) property payment:
– Payments made for liquidated partner’s share of
partnership’s assets
36. §736: Liquidating Distribution Where
P’ship Does Not Liquidate (slide 2 of 3)
• §736(a) income payment:
– Partner has:
• Ordinary income (guaranteed payment), or
• Distributive share of income
– Partnership has:
• Guaranteed payment (deductible) if determined without
regard to partnership profits
• Distributive share if based on profits
37. §736: Liquidating Distribution Where
P’ship Does Not Liquidate (slide 3 of 3)
• §736(b) property payment:
– Disproportionate distribution to extent of partner’s
share of hot assets
– Return of basis (and capital gain (loss) for
remainder)
38. The Big Picture – Example 27
§ 736(b) Property Payments (slide 1 of 4)
• Return to the facts of The Big Picture on p. 11-2.
• Recall that the members of Beachside Properties,
LLC, are considering two alternatives for its future
expansion.
• Assume that they decide to admit new partners for
$19.5 million and use $9.5 million of the cash to
redeem the interests of Kyle and Maria.
• Because the LLC itself is not liquidating, the
distribution to Kyle and Maria is classified under §
736.
39. The Big Picture – Example 27
§ 736(b) Property Payments (slide 2 of 4)
The current balance sheet for Beachside Properties,
LLC, is as follows:
40. The Big Picture – Example 27
§ 736(b) Property Payments (slide 3 of 4)
• Capital is a ‘‘material income-producing
factor’’ for Beachside Properties, LLC.
– The entire $9.5 million distribution from the LLC
to Kyle and Maria is a § 736(b) payment for their
interests in the partnership’s property.
– Kyle and Maria will recognize gain to the extent
that this cash distribution (including forgiveness of
their shares of the LLC’s debt) exceeds their bases
in the LLC interests.
41. The Big Picture – Example 27
§ 736(b) Property Payments (slide 4 of 4)
• Because Kyle and Maria receive cash in lieu of their
shares of the LLC’s unrealized receivables and
inventory, this is a disproportionate distribution.
– They will recognize ordinary income to the extent that their
gain relates to these receivables and inventory.
• The remaining gain will be a capital gain.
• As there are no § 736(a) payments, the LLC cannot
claim any deductions.
– Absent a § 754 election (discussed later), the basis of the
LLC’s property will not be affected
42. Sale of Partnership Interest
(slide 1 of 4)
• Generally, results in gain or loss recognition
by selling partner
– Gain (loss) = amount realized less partner’s basis
in partnership interest
– Partnership liabilities assumed by purchasing
partner are treated as part of consideration paid for
the partnership interest
43. Sale of Partnership Interest
(slide 2 of 4)
• Partnership tax year closes for selling partner
on sale date
– Partner’s share of income through sale date is
calculated
• Can prorate annual income or use interim closing of the
books
– Taxed to selling partner and increases basis in
partnership interest
44. Sale of Partnership Interest
(slide 3 of 4)
• Effect of hot assets
– Hot assets include:
• Unrealized receivables (same as for disproportionate
distributions)
• Inventory
– Includes all partnership property except money, capital assets,
and §1231 assets
45. Sale of Partnership Interest
(slide 4 of 4)
• Effect of hot assets (cont’d)
– Must allocate sales price of partnership interest
between “hot” (ordinary income) assets and
“nonhot” (capital gain) components
– Selling partner’s gain is classified as a capital gain
or loss portion and an ordinary income or loss
amount related to the hot assets
46. The Big Picture – Example 36
Effect Of Hot Assets (slide 1 of 2)
• Return to the facts of The Big Picture on p. 11-2
• Recall that the second restructuring option for
Beachside Properties, LLC, is for Kyle and
Maria to sell their interests directly to the new
members of the LLC.
– The new members will contribute $10 million of
cash to Beachside Properties and pay $4.75 million
each to Kyle and Maria in exchange for their
interests in the LLC.
47. The Big Picture – Example 36
Effect Of Hot Assets (slide 2 of 2)
• Refer back to the balance sheet in Example 27.
– Kyle and Maria will receive cash of $9.5 million (total)
plus relief of their shares of the LLC’s debt.
– Their bases in the LLC interests equal their capital account
balances plus their shares of the LLC’s liabilities.
• The difference must be recognized as a gain.
– The gain is ordinary income to the extent that it relates to
Kyle’s and Maria’s shares of the LLC’s accounts
receivable, inventory, and depreciation recapture.
– The remaining gain is a capital gain.
• Absent a § 754 election (discussed later), the basis of
the LLC’s property will not be affected.
48. Other Dispositions of Partnership
Interests (slide 1 of 8)
• Transfer of a partnership interest to a
controlled corporation
– Tax free if §351 requirements are met
– If 50% or more of the total interest in capital and
profits of the partnership are transferred, the
partnership terminates
49. Other Dispositions of Partnership
Interests (slide 2 of 8)
• Incorporating a partnership
– At least three methods available:
• 1. Transfer each partner’s interest to the corp in
exchange for stock
– Partnership terminates
– Corp becomes owner of all partnership assets
– Corp has substituted basis in assets; Old partners have
substituted basis in stock
50. Other Dispositions of Partnership
Interests (slide 3 of 8)
• Incorporating a partnership (cont’d)
• 2. Transfer partnership assets to corp in exchange for
stock and assumption of partnership liabilities
– Partnership distributes stock to partners in liquidating
distribution
– Corp has carryover basis in assets; Old partners have
substituted basis in stock
51. Other Dispositions of Partnership
Interests (slide 4 of 8)
• Incorporating a partnership (cont’d)
• 3. Partnership distributes all assets and liabilities pro
rata to partners in complete liquidation of
partnership
– Partners transfer assets and liabilities to corp in exchange for
stock under §351
– Corp has substituted basis for assets; Partners have substituted
basis for stock
52. Other Dispositions of Partnership
Interests (slide 5 of 8)
• Incorporating a partnership (cont’d)
– All three methods of incorporating a partnership
are tax-free
• Exception: if liabilities of partnership exceed basis of
transferred assets
53. Other Dispositions of Partnership
Interests (slide 6 of 8)
• Nontaxable like-kind exchange rules do not
apply to the exchange of interests in different
partnerships
54. Other Dispositions of Partnership
Interests (slide 7 of 8)
• Generally, the gift of a partnership interest is
tax-free
– Partnership income, loss, etc. is prorated between
donor and donee
55. Other Dispositions of Partnership
Interests (slide 8 of 8)
• Death of a partner
– Taxable year of partnership closes with respect to
that partner on date of death
– Compute deceased partner’s share of partnership
income or loss to that date and report on partner’s
final Form 1040
56. §754 Election
• Adjusts partnership’s basis in assets to reflect:
– The difference in the amount paid by the purchasing
partner and his share of the inside basis of partnership
assets
• The adjustment can be positive or negative
• The adjustment affects the basis of partnership property with
respect to the transferee partner only
– Gain or loss recognized by partner receiving distribution
from partnership
• Once made, election remains in effect for all future
years unless election revoked with IRS consent
57. The Big Picture – Example 43
§ 754 Election (slide 1 of 2)
• Return to the facts of The Big Picture on p. 11-2.
• For either restructuring option, Beachside Properties could
make a § 754 election and reflect an adjustment to the basis of
the LLC’s property.
• Step-up related to sale of interests
– On a sale of the interests to the new LLC members, the step-up would
equal the difference between the $9.5 million paid and Kyle’s and
Maria’s share of the inside basis of the LLC’s property.
– This step-up of approximately $7.6 million [$9.5 million - (95% X $2
million net assets)] would be allocated to the various partnership
properties under the rules of § 755 (not discussed in this chapter).
– Deductions related to the stepup, such as depreciation, would be
allocated to the new developer group.
58. The Big Picture – Example 43
§ 754 Election (slide 2 of 2)
• Step-up related to distribution in liquidation of the partners’
interests.
– If the LLC redeems the interests of Kyle and Maria, the LLC can step
up the bases of its remaining assets by the amount of gain recognized
by Kyle and Maria.
– This step-up is approximately $7.8 million [$9.5million distribution -
$1.7 million total basis in partnership interests (Kyle’s basis of
$400,000 + Maria’s basis of $1.3 million)], and benefits all the
remaining partners in the partnership.
• Note that the step-up differs depending on whether there is a
sale or redemption, because Kyle’s and Maria’s share of the
basis of the assets differs from their basis in the LLC interests
59. Termination of Partnership
(slide 1 of 3)
• Partnership terminates when either of the
following events occur:
– No part of the business continues to be carried on
by any partners
– Within a 12-month period, 50% or more of the
partnership’s capital and profits interests are sold
or exchanged
60. Termination of Partnership
(slide 2 of 3)
• Partnership terminates and its tax year closes
when:
– The partnership incorporates
– One partner in a two-party partnership buys out the
other partner
• A termination also occurs when the
partnership ceases operations and liquidates
61. Termination of Partnership
(slide 3 of 3)
• Partnership tax year usually does not close:
– Upon the death of a partner
– Entry of a new partner
– Liquidation of a partner’s interest in other than a
two-party partnership
– Sale or exchange of a less than 50% partnership
interest
62. The Big Picture – Example 45
Termination Of A Partnership (slide 1 of 2)
• Return to the facts of The Big Picture on p. 11-2.
• Before the sale or redemption, Kyle’s and Maria’s
combined interests equal
– 95% of the LLC’s capital, and
– 80% of the LLC’s profits interests.
• If they both sell their interests within a 12-month
period, they will cause a technical termination of the
existing LLC, and a new LLC will be deemed to be
formed.
63. The Big Picture – Example 45
Termination Of A Partnership (slide 2 of 2)
• A technical termination would require
redetermination of the LLC’s basis in its assets and
reestablishing the (new) LLC as an entity.
– Note: The partners could structure the sale so that the
termination did not occur.
– For example, have Kyle and Maria sell less than a 50%
interest in the LLC in one year and the remaining interest
more than 12 months later.
• If the LLC redeems the interests, there is no sale or
exchange transaction, and no technical termination of
the LLC.
64. Family Partnerships
(slide 1 of 3)
• Owned and controlled primarily by members
of the same family
– Often formed to save taxes by funneling some of
parent’s income to the children
• Often difficult to establish for tax purposes
65. Family Partnerships
(slide 2 of 3)
• Family member will be recognized as a partner if:
– Capital is a material income-producing factor and
partnership interest is acquired in a bona fide transaction
where ownership and control are received
• Can be acquired by gift or purchase from another family member
– Capital is not a material income-producing factor, but
family member contributes substantial or vital services
66. Family Partnerships
(slide 3 of 3)
• Kiddy tax may apply to child partner under age 19 (or
a student under age 24) and claimed as a dependent
by parent-partner
• Family member whose interest is acquired by gift
from another family member may only have a portion
of partnership income allocated to them
– Donor partner must be allocated income representing
reasonable compensation for services rendered to the
partnership
67. Limited Liability Companies
• A LLC with 2 or more owners is taxed as a
partnership
– LLC members are not personally liable for debts of
the entity
• Effectively treated as a limited partnership with no
general partners
– LLCs are relatively new so there is no established
body of case law available
• Makes planning difficult
68. Limited Liability Partnerships
• Partners are not personally liable for the
malpractice and torts of their partners
• Taxable as a partnership
• Conversion of a general partnership into a LLP
is not taxable if all of the general partners
become LLP partners and hold the same
proportionate interest
69. Refocus On The Big Picture (slide 1 of 3)
• Two things are happening when the new developers
become members of Beachside Properties, LLC.
– The developers are buying out the interests of two existing
LLC members, and
– They are providing cash with which to expand the LLC’s
operations.
• The expansion itself raises no specific tax problems.
– An LLC can admit new members with no immediate tax
consequences.
• In addition to the issues addressed earlier in the
chapter, the LLC’s operating agreement should be
modified to ensure that there is no shift in ownership
rights between Josh and the new LLC members.
70. Refocus On The Big Picture (slide 2 of 3)
What If?
• Changing the facts, assume the developers
have only $2 million in cash, with good
prospects for receiving an additional $2
million over the next two years, and $1 million
more in the third year.
– The LLC has found a bridge loan and temporary
financing to cover costs during this interim period.
71. Refocus On The Big Picture (slide 3 of 3)
What If?
• This loan, though, is not large enough to also completely buy
out Kyle’s and Maria’s interests.
– Thus, they have agreed to accept installment payments for the sale or
redemption of their interests.
• Now the buyout of Kyle and Maria can be treated either as an
installment sale or as a redemption under § 736 requiring a
series of payments.
• While the specific results of these arrangements are beyond
the scope of this chapter, different tax consequences might
arise as to the timing and character of Kyle’s and Maria’s gain
recognition.