Sale of Ownership %

[Oh Baby!]

Client owns 50% of the shares of a partnership. His capital that he has contributed over the years is $7million. An individual wants to join as a partner and is willing to contribute $10M for a % share in the partnership. If my client, one of the original partners, takes the $7M out, regardless of what his ownership % is, he should not have a taxable issue, because it's only a return of his capital. But the distributions above his $7M I would believe are taxable and I'm thinking as capital gains (he's owned his shares in the partnership for more then 2 years) at 10%.

Can anyone confirm, disagree or provide any insight?

[RoyDaleOne]

Does not work as you stated.

Be very careful what you advise if anything.

[kcjenkins]

I believe you need to download the Pub on Partnerships, and do some serious reading, because this is one of the most convoluted and complex areas of the entire tax code. And the rules are very detailed and have to be followed, and at the amounts you are dealing with, you can not make mistakes.

Over the years, partnerships came up with all sorts of tax maneuvers, and then the code was changed to defeat those, and then more were thought up, and more code changes to defeat them, etc, until this area of the code is horrendous. But we are stuck with it. You need to start with the Pub, then narrow in on the areas that are specific to your client, and go to the actual code and/or to research sources like Kleinrock, RIA, BNA, etc and be sure you understand the options, before you advise the client.

I've been doing this for many years, but I would not advise this client without doing hours of research to be sure that my advice was totally up to date. Between the code changes and the many court cases, this is a minefield for the lawyers.