Question

Your colleague claims that all of the statements below regarding a partner’s sale or exchange of a partnership interest are true. Do you agree? If so, why? If not, why not?

a. The sale or exchange of a partner’s interest in a partnership usually results in a capital gain or loss.

b. Gain or loss recognized by the selling partner is the difference between the amount realized and the adjusted basis of the partner’s interest in the partnership.

c. The selling partner must include, as part of the amount realized, any partnership liability he/she is relieved of.

d. The installment method cannot be used by the partner who sells a partnership interest at a gain.

Answer 1

a. The sale of a partner's interest in a partnership may result in a capital gain or loss or all or part of the gain may be treated as ordinary income which is taxable.

This is because the partnership is treated as an entity as well as an aggregate of partners.

The gain or loss is calculated as the excess of recognized sale proceeds from the sale of the partner's interest to the partner's outside basis. Since taxable items of income flow through this, part of the gain may be treated as taxable income.

b. Yes, I agree. the gain or loss recognized by the selling partner is the difference between the amount realized and the adjusted basis of the partner's interest in the partnership.

Section 754 requires the partner's to calculate the adjusted basis of their interests in the partnership.

This is to determine the exact tax liability. The partnership basis incorporates the share of profits and hence is vital.

c. Yes. If the partner is relieved of any interest in the partnership he/she must include the liability relief as a part of the amount realized. This is because the amount of liability he is relieved off is a gain for him/her and hence need to be included for his realization.

d. No. The installment method may be used by the partner who sells a partnership interest at a gain.