Sales of Partnership Interests

• Pages: 189-212
• Author: James R. Repetti,William H. Lyons,Charlene D. Luke

189

Chapter Ten

SALES OF PARTNERSHIP INTERESTS

This Chapter will examine sales of p artnership inte rests from

the point of view of the seller, the buyer, and the other partners. We

are concerned here only with cases in which one partner sells an

interest in the partnership. That interest may be all of the seller’s

interest or only a part of it, and the buyer may be either an outsider

or someone who has been a partner all a long and is increasing her

partnership stake by acquiring another partner’s interest.

Transactions in which one “buys” a partnership interest from the

partnership itself are not “sales” for tax purposes; they are

acquisitions subject to § 721, § 722, and § 723, covered in Chapter 4.

A transaction in which a partnership “buys” one of its partner’s

interests is also not a “sale”; it is a liquidation of the partner’s

interest. Chapters 11, 12, and 13 deal with liquidations.

A. Taxation of the Seller

The tax treatment of someone who sells a partne rship interest

differs in three ways from that of someone who sells a share of stock

or a tract of land. First, the partnership’s liabilities will enter into

the calculation of the selle r’s amount realized. Second, if the

partnership has any “§ 751 property” (and nearly every partnership

will), the seller must recognize ordinary income and loss equal to the

seller’s share of income and loss in that kind of property, and the

seller must adj ust the am ount of capital gain or loss on the sale for

such recognized ordinary income and loss. Third, if a sale of all the

partnership’s assets would result in an allocation of “collectibles

gain” or “unrecaptured section 1250 gain” to the selling partner, the

seller will recogn ize that kind of gain upon selling a partnership

interest.

1. The Seller’s Amount Realized

A partner’s outside basis depends in part on the partner’s share

of the partnership’s liabili ties. (Recall that § 752 treats an increase

in a partner’s share of partnership liabilities as a c ash contribution

to the partnership. This constructive cash contribution increases the

partner’s outside basis.

1

) Just as a liability ( such as a purchase -

money mortgage) to which prope rty is subject is included in the

seller’s amount realized when the prope rty is sold, a partner’s share

of partnership liabilities is included in the partner’s amount realized

when a partnership interest is sold. The Code authorizes this result

1

See Chapter 3 § B and Chapter 8.

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Sales of Partnership Interests

Ch. 10

by providing in § 752(d) that when a partnership interest is sold,

“partnership liabilities shall be tre ated in the same manne r as

liabilities in connection with the sale . . . of prope rty not associated

with partnerships.” Although this phrasing is opaque, the meaning

of the provision is clear.

Example 10-1: Antje, a 30% partner in ABC, sells her

interest in the partnership to Dwight for $50,000 cash. The

partnership owns a building subject to a nonrecourse

mortgage of $100,000; Antje’s share of this liability under

the § 752 regulations was $30,000 just before the sale.

Antje’s amount realized on the sale is $80,000, consisting of

the $50,000 cash and her $30,000 share of the debt.

Because a partner’s share of partnership liabilities is part of the

amount realized upon the sale, there will be few cases in which a

transfer of a partnership interest is not a “sale or exchange,” at least

in part. If a partner makes a g ift of an interest in a partnership, the

“gift” will be a part-gift, part-sale tran saction if the transfer reduces

the donor’s share of partnership liabilities. Or consider a partner who

abandons a partnership interest in the hope of claiming that the loss

on the disposition of the interest is ordinary for lack of a “ sale or

exchange.”

2

If this partner had a share of partnership liabilities that

disappeared as a result of the “a bandonment,” the partner will have

an amount realized, and so the transaction will be a “sale.”

3

2. Section 751(a)

Section 741, which provides that gains and losses from sales of

partnership interests are treated as capital gains and losses, is

limited by § 751(a), which will create some ordinary income (and,

occasionally, ordinary loss) in nearly every case in which a

partnership interest is sold.

4

Section 751(a) requires the selling

2

Section 741, which characterizes gains and losses on “sales or exchanges” of

partnership interests as capital (unless § 751 applies), does not cover dispositions that

are not sales or exchanges.

3

If a partner sells only a part of her total ownership interest, the partner will

need to determine the basis for the part sold by looking to the value of the sold portion

relative to the retained interest. The partner must also consider the effect on basis of

the partner’s share of liabilities for both the portion sold and the retained interest.

Because each partner has a single outside basis in a partnership even if the partner

owns multiple state law interests (for example, the partner owns both a general and

limited interest in the same partnership), determining basis when a partner sells only

part of her partnership stake can be quite complex. See Rev. Rul. 84–53, 1984–1 C.B.

159.

4

As discussed in Chapter 1 note 13, capital gains and losses are ineligible for

the § 199A deduction because they do not constitute “qualified business income.”

§ 199A(c)(3)(B); Reg. § 1.199A–3(b)(2)(ii). To the extent § 751(a) recharacterizes gain

on the sale of a partnership interest as ordinary income or loss, however, that ordinary

income or loss is “qualified business income” eligible for the 20% § 199A deduction

(assuming the other requirements of § 199A are met). Reg. § 1.199A–3(b)(1)(i).