Legal Updates

Income from sale of partnership units will be taxed as capital gains even if paid over time

December 28, 2016
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A partner retired from a partnership and transferred his part to the other partners against annual payments from the partnership's profits for several years. The Tax Authority contended that this should be taxed as income and refused to accept the position that it is a capital gain from the sale of the partnership units.

The Court held that the income, whether deriving from work of the tax payer or not, is created from the control (legal or economic) in the factors that produce that revenue stream unlike capital gains that are from the sale of the revenue stream creator, similar to payment for cutting off of the “tree” of that produces the revenues in the past. The conveyance of the right of the retiring partner to the other partners is a sale and as such will be taxed as capital gains even if paid over time.

 

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