Dad owns a 60% interest in the Consulting Services Partnership in which capital is not a material income producing factor. Two other unrelated partners each own 20% of the partnership.

His son, Bill, worked for the partnership on a part-time basis while in college and has shown a strong aptitude for the business. Dad wants to retire but needs to cash in his partnership interest for its $850,000 value as soon as possible in order to do so. He wants Bill to take over as majority owner of the partnership when he retires. Dads basis in the partnership is $300,000. His share of the partnerships unrealized receivables is $200,000 (Basis $0). The partnership has a favorable tax year-end, so the other partners dont want the partnership to terminate. The partnership can distribute $850,000 cash to buy out Dads interest immediately. Bill is the beneficiary of a trust fund established by his grandmother. He receives about $80,000 a year and will vest in the $900,000 principal amount in 4 years, when he reaches age 30. Dad is considering two courses of action: a. He can sell his interest to Bill on an installment basis with a balloon payment at the end of 4 years. In this case, the entire 60% interest is deemed sold for tax purposes at the same time the installment contract is consummated (although gain is deferred until payments are received). b. He can allow the partnership to redeem his partnership interest. In this case the partnership will enter into an employment agreement with Bill, whereby he vests in a 10% interest in the partnership each year for 6 years in exchange for services rendered to the partnership.