Sale of Partnership Interest

[S T]

Brief Scenario

Partnership 2/3 and 1/3 Partnership Interest

1/3 partner sold his partnership interest to remaining 2/3 partner and then another partner purchased a 10% interest. So in essence 2/3 partner increased his interest from 66.667% to 90% and new partner (also family) acquired 10%.

Transaction is all "family" related.

Can the selling 1/3 partner report part of the sale under an installment sale on the part that qualifies (exlcuding allocation of hot assets) since it is a related party sale. I do have allocations for inventory, cash, etc. However, in the agreement the payout from the acquiring partners, is NO interest and payments over 36 months.

And

Is the sale reported through the K-1 partnership form ( I am thinking not, as the partnership did not purchase) Individuals purchased.

If not through K-1 form, just allocate hot assets on Form 4797 and if installment sale on the remaining portion qualifies report on the 6252, otherwise Schedule D using basis for the 1/3 partner.

Only reporting on K-1 would be the allocation of income/deductions for the period of time in 2009 that the 1/3 partner owned the partnership interest, correct? No distribution, etc.

Clients like to "confuse" issues, as they don't think about using personal funds vs Company funds

Thanks

Sandy

I am so confused

[BHoffman]

You can report installment sales to related parties, but the rules are different if the buyer re-sells within two years.

No installment sale reporting if the sale results in a loss.

Regarding the interest free loan: From RIA Checkpoint:

"¶ 1309. Unstated (imputed) interest on deferred payment sales.
For certain deferred payment or installment sales ( ¶ 1310 ) where the sales contract fails to provide for interest at a minimum rate specified by the Code or by IRS, part of the payments received is treated as interest (“unstated interest”) that's taxable to the seller despite any contrary intention of the parties. ( Code Sec. 483 ) FTC ¶ J-3750 et seq.; USTR ¶ 4834 ; Tax Desk ¶ 152,001"


An election can be made to opt out of reporting as an installment sale.

This is a transaction between the two people, and the partnership isn't involved.

Hope this helps

[S T]

Sale

Thanks B Hoffman, it does help - I confuse myself way too much sometimes

Sandy

[BHoffman]

Those "family" things can be boggling. Hope you have a nice weekend.

[veritas]

I am not an expert with partnerships

Is form 8308 required to be filed?

[BHoffman]

See Sec 751 "Hot Assets"

Specifically, Reg. 1.751-1(a)(3):

http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A%2C_Sec._1.751-1

From my "Gear Up - Business Entities" information on page 330:

"When '751 assets' are part of the sale or exchange of a partnership interest, Reg. 1.751-1(a)(3) requires the outgoing partner to disclose the transaction on his or her income tax return for the taxable year in which the sale or exchange took place. The partner should include a statement setting forth the sale of the date or exchange [could be author's error, might need to read "....setting forth the date of the sale or exchange....."], the amount of any gain (or loss) attributable to '751 assets', and the amount of capital gain (or loss) on the sale of the partnership interest.

Additionally, the partnership is required to disclose a sale or exchange by a partner when '751 assets' are involved. Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) is required as an attachment to the Form 1065 for the tax year of the partnership that includes the last day of the calendar year in which the IRC Sec. 751(a) exchange or sale took place."

ST - you already know that taxpayers may not report income from the sale of an interest in a partnership using the installment method to the extent the income is attributable to 751 assets. Taxpayers are permitted to use the installment method to report the balance. (CCA 200722027).