However, the differences in tax consequences between a sale and liquidation can be quite significant.
In many cases, structuring a partner’s withdrawal as a liquidation will provide more favorable tax treatment than if it is structured as a sale to the remaining partners.
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A corporation you own stock in might partially or completely liquidate.
Consider the taxation of payments for unrealized receivables.
In a liquidation, these payments will be taxed as ordinary income to the distributee (departing partner) under Section 736(a) of the Code, and the remaining partners will receive ordinary deductions.
However, if the transaction is instead structured as a sale, the departing partner will still have ordinary income under Section 751(a), but the remaining partners will receive no deduction.
(If a Section 754 election is in effect, the remaining partners will of course obtain a basis step-up, which will reduce their ultimate taxes.) If any of the payments to the departing partner are attributable to inventory, it would also generally be preferable to structure the transaction as a liquidation rather than as a sale.
In that case, the corporation pays you liquidating distribution.