George is planning to retire from the GDP LLC, where he is an active managing member owning a 60% interest. Capital is not a material income-producing factor to GDP. The LLC can either redeem his interest under § 736 or he can sell his interest to Dale, who currently owns a 20% interest. The LLC's operating agreement is silent regarding treatment of goodwill. As to George's alternatives, which one of the following statements is true?
A)Either the sale or the redemption would terminate the partnership.
B)Payments to George for his share of GDP's goodwill would be treated the same for either a sale or redemption.
C)George will report ordinary income related to his share of "hot assets" under either the sale or the redemption scenario.
D)If GDP/Dale negotiate payments over several years, either an installment sale or a redemption over time would result in the same tax situation to George.
E)All of the above statements are true.

Question

Quizplus · Accepted Answer

Option A is incorrect because neither the sale nor the redemption would terminate the partnership. Option B is incorrect because the treatment of goodwill would differ depending on whether George sells or redeems his interest. Option D is incorrect because an installment sale would result in different tax treatment than a redemption over time. Option E is incorrect because only option C is true. Under either scenario, George could potentially have ordinary income related to his share of "hot assets," which are assets that would give rise to ordinary income if sold by the partnership. Payments for goodwill would be treated differently depending on whether George sells or redeems his interest.

George Is Planning to Retire from the GDP LLC, Where