The preferred way for a withdrawing partner to leave a partnership is normally thought to be by way of redemption under Internal Revenue Code Section 736 rather than as a transfer under Section 741 The advantage to the continuing partnership lies in the deductability of the payment to the withdrawing partner for goodwill. The withdrawing partner benefits from a higher exchange price, increased by the tax benefits of redemption treatment. However, the following three factors tilt the preference back toward a 741 transfer for both parties: individual obligation of portions of the exchange price, with additional basis, goodwill negotiations and safeguarding of the optional basis adjustment. To allow for proper consideration of these factors, indifference equations are proposed which produce an exchange price that makes 741 as advantageous to the dominant party as 736. These equations constitute a dynamic interactive econometric model for finding a position improvement equilibrium ("PIE") indifference model that provides an incisive decision tool. This model takes graduated tax brackets into consideration, heightening its value as a decision tool.
Patankar, Jayprakash G.; Moore, Charles K.; and Childs, James W.
"Transfer or Redemption for a Withdrawing Partner: An Indifference Econometric Decision Model Built on the Position Improvement Equilibrium ("PIE") Concept,"
Akron Tax Journal: Vol. 6
, Article 2.
Available at: https://ideaexchange.uakron.edu/akrontaxjournal/vol6/iss1/2