With the compliance crunch largely behind us, it’s time for CPAs to refocus on consulting, planning and transactional work if we want to keep the lights on.
One of the more commonly encountered transactions we’re asked to opine upon is the most tax advantageous way to buy out a departing partner or shareholder from a partnership or corporation: should it be done as a cross-purchase — whereby one or more of the remaining members acquires the interest of the departing member directly — or as a redemption, in which the entity buys back the departing member’s interest.
As with all tax questions, the correct answer is “it depends.” It depends on the available cash at the entity and member levels. It depends on the willingness of the entity and members to take on any debt that might be necessary to fund the buyout obligation. And yes, it depends on the myriad of differing tax implications resulting from the selected structure.
And that’s where we come in as tax professionals. Determining whether a cross-purchase or redemption is the right choice for a client requires a thorough understanding of the facts, as the resulting consequences, where they differ, is largely a result of subtle nuances written into the Internal Revenue Code.
To that end, I’d like to think this document should help. It’s something I put together a few years ago detailing the tax considerations between a cross-purchase and a redemption for a partnership, S corporation and C corporation. It is by no means all-inclusive, and as with all things you download off the internet (perverts), use it at your own risk.