There are two types of Member Withdrawals......partial and complete.    The tax code treats these two types of distributions differently.     Rather than going into all of the specific details here, let me point you to a couple of documents on the NAIC web site that might help you understand this complex issue.    First,  you'll find a treatise that I wrote some time ago about withdrawals at http://www.better-investing.org/clubs/jerrys-best.html .    Once there, pay particular attention to Question's #12 through #16.   Also, the article at http://www.better-investing.org/bi/distributions-jul97.html provides some insight on partial withdrawals.   

 

A typical partnership agreement may require notification of the withdrawal from the withdrawing member in the following fashion.   "WITHDRAWAL OF A CLUB MEMBER: Any club member may withdraw a part or all of his interest. He shall give notice in writing to the secretary. His notice shall be deemed to be received as of the first meeting of the club at which it is presented. If notice is received between meetings it will be treated as received at the first following meeting. In making payment the valuation statement prepared for the first meeting following the meeting at which notice is received will be used to determine the value of the club member's account."

 

In the case of a partial withdrawal, most clubs determine that a payment may be made in cash, securities, or a mix of each at the option of the partner making the partial withdrawal.   Where securities are to be distributed, the remaining partners get to select the securities.  The reason that the withdrawing partner is given the choice of cash or securities, in the case of a partial withdrawal, if the withdrawing member were to receive securities that have appreciated, he/she may realize taxable gains sooner then if cash was paid in the withdrawal.

 

Since the  tax code treats total withdrawals differently, a totally withdrawing member is not susceptible to this same possibility of the acceleration of taxable income.   A typical partnership agreement might go on to say "In the case of a full withdrawal, payment may be made in cash or securities or a mix of each at the option of the remaining partners".     Again, where securities are to be distributed, the remaining partners select the securities.   If the withdrawing partner immediately sells stock given to him/her in a total withdrawal, they will realize the same tax consequences as if they had received payment in cash.   On the other hand, the withdrawing partner may choose to hold the stock and, therefore, defer the realization of any gains from the withdrawal until the stock is sold.