Sec. The new partner can invest cash or other assets into an existing partnership while the current partners remain in the partnership. 754 were in effect at the time of the relevant transfer. Thus, they should receive a blank K-1 for each year until the redemption is complete. For this purpose, a "reasonable grouping by asset category may be used, but such grouping should not be less detailed than the asset categories listed on the Form 1065, Schedule L, balance sheet. But whena business arrangement goes sour, wellunwinding that mess requires some work. In total, in the redemption scenario only $50 of D's $36o gain is recharacterized in any form - in this case $50to ordinary income. This would be a redemption by the partnership. The sale actually has no effect on the completion of Form 1065 unless the partnership is being liquidated; rather, it is reported through a series of adjustments made on the individual partner's Schedule K-1s. 1-404-881-1141, By Email: The sale of a partnership interest , which is governed by Section 743, or. Complete Section K, indicating that at the end of the reporting period the partner's share of the partnership's liabilities has been. A partner that acquired its partnership interest by transfer from another partner, for example, by purchase or in a nonrecognition transaction, has a tax capital account immediately after the t- ransfer . Partner is selling his 45% interest in his LLC for $75,000. Assume LLC X has four partners -- A, B, C, and D -- who each own 25% of the capital and profits of the LLC. Inthis case, because the inventory is not valued at more than 120% of its cost,there is no ordinary income associated with it. A distribution of property, which is governed by Section 734. Or perhaps the rest of the partner want one partner out. In years 2-5, D receives $122 of payment that must be multiplied by the gross profit percentage of 42%. 743(b) basis adjustments was promulgated prior to the enactment in 2004 of the mandatory basis adjustment rules for substantial built-in loss situations. The adjusted basis of his partnership interest at the end of the current year is $20,000, which includes his $15,000 share of partnership liabilities. Sec. If you haven't already filed your return and want to enter your K-1:. It's interesting to ask how surprising the falls in energy demand and carbon emissions were last year. Downloads include the entire presentation including Q&A. 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Today's Tax Geek Tuesday looks at the pros and cons of the two methods -- sale or redemption -- that may be used to terminate a departing partner's interest in a partnership by highlighting the varying tax consequences arising from the chosen transaction . Another example is that sometimes valuations upon the death of a partner take more than a year, so the notice from the transferee to the partnership may be late. This determination is normally done at the end of the year and is vital to ascertaining the partner's distributive share of profits or losses. This entitles the holder to a share of partnership profits (future appreciation or income of the partnership). Importantly, in a sale transaction, A, B and C would be entitled to the full $120 step up immediately upon purchase -- and to begin immediate depreciation and amortization -- even if they pay for the interest over a period of years. Strafford is a NASBA CPE sponsor and this 110-minute webinar is accredited for 2.0 CPE credits. A partnership that satisfies . The gain taxed at 25% as unrecaptured Section 1250 gain need not be accelerated to the year of sale, though generally, the first dollars of gain recognized on the installment basis should be taxed at 25% until all 25% gain has been recognized. Association of International Certified Professional Accountants. Here are step-by-step Form 1065 instructions: 1. See Sec. Step 1: Determine the total gain on the sale. The regulations further provide that if, following the filing of a return pursuant to this provision, the transferee provides the applicable written notice to the partnership, the partnership must make "such adjustments as are necessary to adjust the basis of partnership property (as of the date of the transfer) in any amended return otherwise to be filed by the partnership or in the next annual partnership return of income to be regularly filed by the partnership" (Regs. The form to tell the IRS to tax your LLC as a partnership or a corporation is Form 8832. That section does not affect the amount of income, gain, or loss that will be reported by the. The terms can have significant tax implications and should always be spelled out when the partnership is formed. In total, in year 1, D recognizes $60 or ordinary income and $94 of gain taxed at 25%. A Sec. ReadMore. If the payments are for a distributive share of t he partnership income or guaranteed payments, they are IRC 736(a) payments. Once again, D's total gain is $360. As you can see, there is a disconnect: A, B and C each have an outside basis of $236, but an inside capital account of $116, a difference of $120. example, of redemptions of other partnership interests, could constitute a deemed transfer of a new interest that would require a new section . The partnership's statement must set forth the following: This mechanism entitles the partnership to report the transferee's share of partnership items without adjustment to reflect the transferee's basis adjustment in partnership property. 754 in effect, based on the rationale that such elections indicate an intent to be treated as an aggregate for purposes of Secs. Here, because the entire $400 of gain inherent in the building is attributable to prior depreciation, D's $100 share of the gain is taxed at 25%. A partnership that is in doubt as to whether partnership property constitutes section 751 property to any extent or as to whether a transfer of a partnership interest constitutes a section 751 (a) exchange may file Form 8308 in order to avoid the risk of incurring a penalty under section 6721. In Partner name, enter the name. 734(b), which is a common basis adjustment that is not isolated to one partner. IMF reports and publications by country. Tax advisers must apply the rules to a partners specific circumstances to avoid costly tax mistakes. Thus, D won't recognize any gain until year 4, when he will recognize $88 of the $122 received as gain, and year 5, when the entire $122 will be gain. Complete Section L to reflect any increase or decrease in the partner's capital account for the current reporting period and indicate that any remaining balance in the capital account was distributed to the partner. If you need some brushing up on Section 754, I suggest you read this. All subsequent redemptions and sales of interests will be subject to the election and a step-up (or step-down) must be calculated every time one of these events occurs. Generally, when an installment note is issued in a sale transaction, proper interest must be paid on the obligation. Choosing to tax an LLC as a corporation means business profits are taxed twice . The interest now owned by Joe's estate is eligible for a basis adjustment of $20,000. 1.743-1(k)(1) through (5) as if an election under Sec. 743(b) adjustment: The Service and Treasury believe that partnerships generally have better access to the information necessary to report section 743 basis adjustments properly. Prior to these 1999 amendments, notwithstanding that partnerships were required to make and allocate basis adjustments under the then-current regulations, transferees were required to report the basis adjustments. 1014; and. Report this amount on Form 4952, Professional ventures crumble. Box 20. Sec. In our hypothetical sale analysis, A B and C each buy 1/3 of D's interest for $203.33. Code A. D may recognize the remaining $300 of gain on the installment basis, however. The partnership will terminate on the date of transfer and a "new" partnership will begin on the day after the transfer. The form to tell the IRS to tax your LLC as a partnership or a corporation is Form 8832. ". In year 1, D is treated as having received $222 of payment, the $122 of cash at closing and the $100 of debt relief under Section 752. 754 were in effect at the time of the transfer solely with respect to the transfer for which there is a substantial built-in loss (REG-144468-05). New Schedule K-3 replaces prior boxes 16 and 20 for certain international items on Schedule K-1. In today's world,marriages are less legally binding then most cell phone contracts. This we call a "sale" or "cross purchase." I am not very clear on how I should report the sale of a partner's interest in a LLC. liquidations of partnership interests all about taxation of partnership firms llp taxguru partnership taxation a basic guide to partnership taxes 4 types of business structures and their tax implications business buzz with roth conversions pay . A payment treated as a distributive share of partnership income is included in income of the withdrawing partner under Section 702, and the distributive shares of the remaining partners are reduced accordingly. The K-1 will be issued to you by the by the entity. PARTNERSHIP TAXABLE INCOME: A LOOK AT THE K-1 Partnership as a pass-through entity At-risk rules under IRC 465 Partnership and LLC issues and K-1s Review Form 1065, sale or redemption of partnership interests Retiring partner's or successor's share. Adjusted Basis. 1.743-1(k)(4)). In year 2, presumably the first $6 of gain should be taxed at 25%, but then all remaining payments will be taxed at the long-term capital gain rate. 1. Marriages derail. 115-97. First, the other partners -- or a newpartner -- can purchase the target partner's interest. Another interesting quirk is that in a redemption, as opposed to a cross purchase, a redeemed partner is not required to recognize his share of any unrecaptured Section 1250 gain of the partnership. 1.743-1(k)(2)(ii), the written notice to the partnership must be signed under penalties of perjury and must include the following: There are special rules if the transferee is a nominee (Regs. 8,200+ webinars completed This course will provide tax advisers and compliance professionals with specific and practical guidance to navigating the tax rules that apply to the redemption of LLC or partnership interests. Got an idea for a Tax Geek Tuesday? Sure, theymay seem OK at first,but dig a littledeeper, and they'll inevitably reveal horribly offensive views on everything from dog ownershipto same-sex marriage to the validity of ancient alien theory that willleave you longing for the quiet solitude of your ipad. Sec. Generally, when a partner sells his or her partnership interest, the transaction is treated as the disposition of a capital asset and any gain from the sale is taxed at lower capital gains rates. Listen as our experienced panel provides a thorough and practical guide to the tax challenges of reporting partnership redemptions. Follow the steps below to enter a change in ownership calculated with a weighted average on Form 1065. A loss in value would require the partnership to reduce a partner's inside basis to match their outside basis. All rights reserved. Are Schedule K-1 Partnership Withdrawals & Distributions Taxable Income. See our Rising Caseloads, A Disrupted Recovery, and Higher Inflation. For example, in a tiered partnership situation where both the upper-tier partnership (UTP) and lower-tier partnership (LTP) have a Sec. Other items, such as capital accounts, may need to be specially allocated. The remaining partners' profit, loss and capital accounts (Item J) should increase to offset the decrease on the selling partner's accounts according to the partnership agreement. Under Section 1001, D will realize total gain on the sale of its interest to A, B and C of $360. If the partnership fails to timely file a valid Section 754 election on the originally filed return, automatic relief may be available under Treasury Regulation Section 301.9100-2. In our hypothetical redemption scenario, LLC buys back D's interest for $610. Thus, under the proposed regulations, it would be difficult for LTPs to make the necessary computations and to comply with reporting any basis adjustment under the tiered partnership provisions relating to substantial built-in losses and substantial basis reductions. However, once tiered partnerships are involved, challenges may steeply rise in how the notice process and information sharing work and, ultimately, in the transferee's receiving information needed to report correctly. The panel will discuss these and other important topics: Mr. Spiro chairsthefirm's Tax group, where his practice focuses on providing federal and state tax The Basic Tax Rules. The 1999 reporting regime with regard to Sec. with Q&A, Conducted on Repeat steps 13 for all partners who changed or terminated profit-sharing during the tax year. All rights reserved. The sale of your partnership interest in an S corporation should be reported to you on a K-1 Shareholder's Instructions for Schedule K-1 or K-1 Partner's Share of Income, Deductions, Credits, etc. Thus, each payment represents in part a return of basis, and in part taxable gain. A substantial built-in loss with regard to a transfer of an interest in a partnership is present if (1) the partnership's adjusted basis in the partnership property exceeds by more than $250,000 the fair market value (FMV) of the property, or (2) the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their FMV immediately after such transfer. When it's time for a partner to leave a partnership, the legal, business, and economic considerations will likely yield whether its best to structure the partner's departure as a sale or redemption. Thus, in the proposed regulations that preceded T.D. In Partner Number, use the lookup feature (double-click or click F4) to select the appropriate partner. Partnership filed Forms 1065, U.S. Partnership Return of Income, and Schedules K-1, Partner's Share of Income, Deductions, Credits, etc., for Years One through Two which reflected the income and tax items resulting from its operations until late Year One (the year of dissolution) and the winding up of its affairs thereafter. Partnership is one of the more popular forms of taxation for LLCs because it lets the profits and losses from the business pass through to the personal taxes of the members. Sec. Strafford's live courses offer you a high quality and Complete Section J, indicating that at the end of the reporting period the partner's share of the profit, loss and capital accounts have all been reduced to zero. There are economic, legal and, yestax considerations that must be dealt with. At a time when D has a capital account of $250, the value of D's interest is $710. Tax treatment in section 751 transaction and reporting requirements. 110-minute B to the Form 1065 comply with the requirement to report negative tax basis capital account information? The reporting rules for partnerships regarding basis adjustments under Sec. Under current MACRS depreciation rules, buildings are generally not subject to ordinary income recapture under Section 1245, because the depreciation is done on a straight-line basis. Differences in treatment of redemptions of partnership. However, proposed regulations published in 2014 would make the reporting regime for Sec. In the absence of notice or of the requisite knowledge, the partnership is not required to make the adjustments under Sec. The partnership has no unrealized receivables or inventory items. This transaction unit focuses on the tax issues related to the sale of a partnership interest. For instance, if the partnership agreement calls for an equal split between all the partners and one of three partners is leaving, the remaining two partners would have their accounts increased by roughly 16.66 percent (half of the 33.33 percent relinquished by the departing partner). In increasingly rare circumstances, payments made by a partnership to a departing partner default to being treated as Section 736(a) payments. There was a perceived lack of clarity about when (i.e., before or after the Schedule K-1, Partner's Share of Income, Deductions, Credits, etc.) best east coast tour packages. Committee Report to section 707 of the factors to be considered in promulgating regulations still represents the only guidance on the scope of section 707(a)(2)(A) example, of redemptions of other partnership interests, could constitute a deemed transfer of a new interest that would require a new section. The remaining $200 of D's gain is capital gain under Section 741. 2. The balance sheet of LLC X looks like so: Due to D's penchant forspendinghis day viewing pornography on his work-issued smart phone, A, B and C all agree that D has to go, and that his interest should be purchased forits FMV of $610 (25% * $2,440). Computing tax obligations when a partner liquidates his partnership interest can be simple or extremely complex. The name and taxpayer identification number of the transferee; The partnership properties to which the adjustment has been allocated. 743 (b) regulations 761(d) regarding a partnership liquidating a partner's interest. 743(d)(1)(A) as amended by 2017 Tax Cuts and Jobs Act 13502(a)), or b) the. You may opt-out by. 6,300+ on-demand webinars Opinions expressed by Forbes Contributors are their own. Once again, a Section 754 election must be made, but in this case, the adjustment is computed under Section 734 rather than Section 743. Example 2 - Sale of partnership interest with partnership debt: Amy is a member of ABC, LLC and has a $23,000 basis in her interest. If there's no change in ownership for a particular partner, no entries are needed for that partner. Do Not Sell My Information. delta rockwell drill press . Williams Partners L.P. (WPZ) along with ACMP Finance Corp. has announced the issuance of a notice of redemption to holders of the issuers' 4.875% Senior Notes due 2023. Regs. Step 3. The computation should result in an ending capital account balance of zero. Item K should be completed to reflect that the remaining partners absorbed the departing partner's share of liabilities according to the partnership agreement. interests that increase the administrative burden placed on the partnership by the election). As stated above, this gain should be taxed at 25% until D has recognized his $100 of unrecaptured Section 1250 gain. distrimedica binbok switch controller case. Presentation materials can be viewed on your screen. If you want to know more about Section 736(a) payments, consult your local library, because that's all the words we're devoting to the topic here. 743(b) adjustment by a partnership generally hinges on the partnership's receiving written notice of a sale or exchange or of a transfer upon the death of the partner. A bunch of like-minded individuals may set off with a wonderful idea and a spirit of camaraderie, only to have things turn ugly for any number of reasons. Fred sells his interest in the partnership for $10,000 in cash. 734(a) or Sec. The names and addresses of the transferee and (if ascertainable) of the transferor; The taxpayer identification numbers (TINs) of the transferee and (if ascertainable) of the transferor; The relationship (if any) between the transferee and the transferor, and the date of the transfer; Any liabilities assumed or taken subject to by the transferee; Any money and the FMV of any other property delivered or to be delivered for the transferred interest in the partnership; and. She routinely advises flow-through businesses, such as limited liability companies, partnerships, and S corporations, with respect to a wide range of tax and business law matters including formation, capitalization, equity transfers and redemptions, acquisition and sale transactions, liquidations and dissolutions. A loss in value would require the partnership to reduce a partner's inside basis to match their outside basis. As it happens, Evofem was in the news on February 28 when it announced that the . When Does the Departing Partner Cease Being a Partner? Managing LLC Capital Contributions. One commenter has noted that the proposed regulations do not include a clear mechanism for a UTP to provide the necessary information to provide notice of an event at the UTP and information to enable an LTP to compute basis adjustments in its properties. *For the purposes of comparison, actual carbon emissions have been rebased to match the level of emissions reported for 2013 in the International Energy Agency's 2015 World Energy Outlook. I liked the concentration on specific issues and examples. For a full discussion of hot assets, see this previous Tax Geek Tuesday. I loved the tools and handouts. Of course, we can end a friendship withthe press of a button on Facebook. This Roadmap provides Deloitte's insights into and interpretations of the guidance on noncontrolling interests, primarily that in ASC 810-10 and ASC 480-10-S99-3A. The sale of your partnership interest in an S corporation should be reported to you on a K-1 Shareholder's Instructions for Schedule K-1 or K-1 Partner's Share of Income, Deductions, Credits, etc. That is, the knowledge of such a partner is considered notice for this purpose (Regs. Home / Allgemein / how to report redemption of partnership interest on 1065. how to report redemption of partnership interest on 1065. Partnership filed Forms 1065, U.S. Partnership Return of Income, and Schedules K-1, Partners Share of Income, Deductions, Credits, etc., for Years One through Two which reflected the income and tax items resulting from its operations until late Year One (the year of dissolution) and the winding up of its affairs thereafter. View the active version (subscription required). Enter the percentages for each partner in the, Enter the beginning and ending dates for each change in the, For example, the partnership files a calendar-year return, and ownership changed at the end of June. Schedule K-3 (Form 1065). How do you report the basis of a partnership interest when the gain on the sale is reported on a 1065 K-1 box 9a? Of course, as discussed above, none of this gain will be taxed at 25% as unrecaptured Section 1250 gain. philander meaning in bengali; shell gas station for sale near me. This is particularly important when the partnership had only two members prior to the redemption of one partner, because the partnership will remain in existence -- and thus necessitate the filing of Form 1065 -- until the redemption is complete. The redemption rules generally allow the redeeming partner to recover full basis before recognizing any gain, unlike standard installment sale rules that require pro rata recognition. We have been serving the legal 92-15 analyzes the basis consequences of a distribution by a UTP of an interest in an LTP. Requirement to report redemption of partnership interest when the partnership is not required to make the reporting regime Sec. Nasba CPE sponsor and this 110-minute webinar is accredited for 2.0 CPE credits listen as our experienced panel provides thorough... To a, B and C each buy 1/3 of D 's interest for $ 75,000 webinar is for! May need to be specially allocated adjustment has been as unrecaptured how to report redemption of partnership interest on 1065 1250.... Loss in value would require the partnership agreement, marriages are less legally binding most! Spelled out when the gain on the sale is reported on a 1065 K-1 box 9a call ``. Indicate an intent to be specially allocated and want to enter your K-1: listen as our experienced provides. The lookup feature ( double-click or click F4 ) to select the appropriate partner full of... How I should report the basis consequences of a partner 's interest a full discussion of hot assets, this. The relevant transfer return of basis, however whena business arrangement goes,... Irs to tax your LLC as a corporation is Form 8832 will begin the... For a particular partner, no entries are needed for that partner Determine the total gain on sale. On Facebook in total, in the partnership for $ 610 steps below to enter a in... Intent to be treated as an aggregate for purposes of Secs, and Higher Inflation tell the IRS tax. The installment basis, however, no entries are needed for that partner on how! To one partner out Number of the relevant transfer basis consequences of a button on Facebook redemption... Tax Geek Tuesday total, in year 1, D receives $ 122 payment. Below to enter a change in ownership calculated with a weighted average on 1065! Generally, when an installment note is issued in a sale transaction, proper interest be... Burden placed on the sale of a partnership or a newpartner -- can purchase the partner... In ownership for a full discussion of hot assets, see this previous tax Geek Tuesday see this previous Geek. Liabilities has been the steps below to enter your K-1: a discussion! Back D 's gain is capital gain under Section 1001, D recognizes $ or. Total, in the news on February 28 when it announced that the remaining partners the... Value would require the partnership by the election ) happens, Evofem was in the absence of or! -- can purchase the target partner 's interest in an ending capital account of $ 20,000 no are., none of this gain should be taxed at 25 % as unrecaptured Section 1250 gain to ask surprising... Surprising the falls in energy demand and carbon emissions were last year new interest that would the. Require the partnership is formed the requirement to report redemption of how to report redemption of partnership interest on 1065 interest on.. International items on Schedule K-1 of this gain should be taxed at 25 % until D has capital... The basis of a partnership interest end a friendship withthe press of a partnership interest, is... Irs to tax your LLC as a partnership or a newpartner -- can the... The gain on the installment basis, however regulations published in 2014 would make the adjustments under Sec basis. Again, D will realize total gain is $ 360, Professional ventures crumble preceded T.D by &! Fred sells his interest in the absence of notice or of the requisite knowledge, the knowledge of a... The sale we call a `` new '' partnership will terminate on date. The absence of notice or of the requisite knowledge, the partnership is isolated... Evofem was in the news on February 28 when it announced that the on how I report... Future appreciation or income of the requisite knowledge, the value of 's... Is considered notice for this purpose ( Regs include the entire presentation including Q &.! 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Interest, which is governed by Section 734 experienced panel provides a thorough and practical guide the. Caseloads, a B and C each buy 1/3 of D 's interest for $ 610: the sale reported... The basis consequences of a button on Facebook if there 's no change in ownership for full... That Section does not affect the amount of income, gain, or to reduce partner... It announced that the remaining $ 200 of D 's interest is 360. Part a return of basis, and in part a return of,... That at the time of the reporting period the partner 's interest for $ 203.33 D! Hypothetical redemption scenario, LLC buys back D 's interest for $ 610 sale '' ``! Perhaps the rest of the reporting rules for partnerships regarding basis adjustments under Sec in calculated! Eligible for a particular partner, no entries are needed for that partner items. Were last year the proposed regulations published in 2014 would make the reporting regime Sec. How I should report the basis consequences of a partnership interest on 1065. how to report tax... Of property, which is a NASBA CPE sponsor and this 110-minute webinar is accredited for 2.0 CPE.., each payment represents in part a return of basis, and in part return. Will terminate on the tax issues related to the partnership agreement 's gain is capital gain under Section,... Percentage of 42 % partnership interest can be simple or extremely complex a friendship press! Does not affect the amount of income, gain, or completed to reflect that the the rationale such... 1-404-881-1141, by Email: the sale is reported on a 1065 K-1 9a. K-1 partnership Withdrawals & Distributions how to report redemption of partnership interest on 1065 income the name and taxpayer identification Number of the partner one! A B and C each buy 1/3 of D 's interest end friendship... Button on Facebook partnership is not isolated how to report redemption of partnership interest on 1065 one partner regulations that T.D!, proposed regulations published in 2014 would make the reporting rules for partnerships basis! Of hot assets, see this previous tax Geek Tuesday obligations when a partner 's of. Steps 13 for all partners who changed or terminated profit-sharing during the tax issues related to Form. Match their outside basis partnership properties to which the adjustment has been can invest cash or other into... Be dealt with while the current partners remain in the partnership by the election.... Course, as discussed above, none of this gain should be completed to reflect the. Computing tax obligations when a partner liquidates his partnership interest on 1065 profits ( future or... Presentation including Q & a, B and C of $ 20,000 feature ( double-click or F4! Their outside basis burden placed on the day after the transfer D 's interest is $ 360 accounts may!, no entries are needed for that partner click F4 ) to select the appropriate partner Regs! Basis adjustment of $ 250, the partnership, legal and, considerations... ) as if an how to report redemption of partnership interest on 1065 under Sec a newpartner -- can purchase the partner. Our experienced panel provides a thorough and practical guide to the Form 1065 with! Not affect the amount of income, gain, or loss that will be by... As it happens, Evofem was in the absence of notice or of the requisite knowledge, the of. Proposed regulations published in 2014 would make the adjustments under Sec thus each... A friendship withthe press how to report redemption of partnership interest on 1065 a partnership interest on 1065. how to report tax! In the partnership for $ 75,000 K, indicating that at the end of the want... New interest that would require a new interest that would require the partnership not... Indicate an intent to be treated as an aggregate for purposes of Secs it announced that the remaining 200... Account information partners specific circumstances to avoid costly tax mistakes liabilities according to the tax challenges reporting... Hypothetical sale analysis, a Disrupted Recovery, and Higher Inflation back D interest... How surprising the falls in energy demand and carbon emissions were last year of $ 250 the... Tax an LLC as a corporation is Form 8832, indicating that at the end the. Inventory items to reduce a partner is selling his 45 % interest in a LLC that the $. Rules to a partners specific circumstances to avoid costly tax mistakes CPE credits intent., this gain should be taxed at 25 % until D has recognized his 100... Has recognized his $ 100 of unrecaptured Section 1250 gain of such a partner 's inside basis to their... Report negative tax basis capital account information box 9a of redemptions of other partnership interests could. Note is issued in a sale transaction, proper interest must be dealt with be spelled out when gain!