§736 — Title 26 Internal Revenue Code | U.S. Code

Summary

When a partnership pays out a retiring partner or a deceased partner's successor, the tax label depends on how the payment is figured. Payments tied to partnership income are treated as the recipient's share of that income; payments set without regard to income are treated as guaranteed payments. But to the extent the payments are made in exchange for the partner's share of partnership property, they are treated as a distribution instead. Payments for unrealized receivables, or for goodwill the partnership agreement does not provide for, do not count as payments for property — though that carve-out applies only when capital is not a material income-producing factor and the departing partner was a general partner.

Title 26, §736

Internal Revenue Code — Source: USLM XML via OLRC

(a)Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered—

(1)as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or

(2)as a guaranteed payment described in section 707(c) if the amount thereof is determined without regard to the income of the partnership.

(b)(1)Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsection (a).

(2)For purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for—

(A)unrealized receivables of the partnership (as defined in section 751(c)), or

(B)good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will.

(3)Paragraph (2) shall apply only if—

(A)capital is not a material income-producing factor for the partnership, and

(B)the retiring or deceased partner was a general partner in the partnership.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1993—Subsec. (b)(3). Pub. L. 103–66, § 13262(a), added par. (3). Subsec. (c). Pub. L. 103–66, § 13262(b)(2)(B), struck out heading and text of subsec. (c). Text read as follows: “For limitation on the tax attributable to certain gain connected with section 1248 stock, see section 751(e).” 1978—Subsec. (c). Pub. L. 95–600 added subsec. (c). 1976—Subsec. (b)(1). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

Statutory Notes and Related Subsidiaries

Effective Date

of 1993 Amendment Pub. L. 103–66, title XIII, § 13262(c), Aug. 10, 1993, 107 Stat. 541, provided that: “(1) In general.—The

Amendments

made by this section [amending this section and section 751 of this title] shall apply in the case of partners retiring or dying on or after January 5, 1993. “(2) Binding contract exception.—The

Amendments

made by this section shall not apply to any partner retiring on or after

January 5, 1993, if a written contract to purchase such partner’s interest in the partnership was binding on

January 4, 1993, and at all times thereafter before such purchase.”

Effective Date

of 1978 AmendmentAmendment by Pub. L. 95–600 applicable to transfers beginning after Oct. 9, 1975, and to sales, exchanges, and distributions taking place after Oct. 9, 1975, see section 701(u)(13)(C) of Pub. L. 95–600, set out as a note under section 751 of this title.

§736 Payments to a Retiring Partner or a Deceased Partner’s Successor in Interest

Summary

Title 26, §736

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Amendments

Amendments

Effective Date

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