The buyout of a partner's interest can be structered as a sale to the other partners (i.e. a cross-purchase) or as a liquidation by the partnership. Although the practical differences between a sale and a liquidation may be minimal, the structure of the buyout can result in a significant differences in Tax treatment.
Generally, a liquidation is more advantageous because it permits the partners to decide whether certain payments to a retiring partner or a deceased's partners's successor in interest will be treated either as a distribution of income that reduces the distributivve shares of the remaining partners or as a guaranteed payment that is deductible by the partnership and is ordinary income to the withdrawing partner instead of as a nondeductible payment for a partnership interest that is taxed a capital gain rates.
This ability to pay part of the liquidation price with pretax dollars can be accomplished at little or no cost to the partner whose interest is being liquidated, even with the reintroduction of somewhat more favorable capital gains tax rates.
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