Sub: Advanced Federal Taxation

Sam, Stan, Sue and and Sean have have a partnership in which each of them own a 25% interest in the business. The books are maintained by a CPA who set it up based on the cash method of accounting. The balance sheet has Cash, Accounts Receivable, Inventory, Equipment, Land and other assets.

Sam wants out. He is thinking of different alternatives that might be used to terminate his ownership. The ones he has come up with so far are:

• Selling his interest to an outside person.
• Asking the other partners to buy him out.
• Asking the partners to distribute some partnership assets to him in exchange for his interest in the business.

Discuss the tax issues associated with each of the alternatives Sam is proposing. Which do you think is the best alternative for Sam and his partners?