Several years ago, Amy, Bob, and Carol formed a partnership that operates a mari

Question

Several years ago, Amy, Bob, and Carol formed a partnership that operates a marina in Florida.

Carol is ready to retire. Three options are being considered:

Option 1: Sell the business and distribute part of the proceeds to each partner.

Option 2: Borrow money to pay for Carol’s interest in the business.

Option 3: Ask Carol to find an outside buyer for her interest in the business.

For each option, describe the tax consequences for the partnership and the partners. If Carol should die before the plan is executed, how would each option be affected?

Explanation / Answer

Option 1: Selling the entire property and distribution to partners would entail the capital gain tax liability on the partnership firm. Proceeds from the firm will be tax-free in the hands of the partners

Option 2: Borrowing money in the firm will leverage the firms balancesheet and has its own advantages and disadvantages viz. tax benefit for interest paid, etc. Amount received in the hands of Carol would be tax free

Option 3: No tax liability in the hands of the firm. Carol is subject to capitl gain tax for selling his interest in the firm

Incase Carol dies before any of the options, his inherit will acquire the rights in the firm. No taxability in the hands of the firm.

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