Blog · 16 October 2026

Section 736 Payments to a Retiring Partner: What US CPA Firms Should Check When Firms Merge

By Keshav Bansal, CA

When accounting firms combine or a partner retires or dies, section 736 payments decide how much of each retiring partner payment is capital gain, how much is ordinary income, and whether the continuing partners get a deduction. The latest reminder: on October 13, 2026, top-15 firm CohnReznick said it is acquiring the Aldrich group of companies, including INSIDE Public Accounting top-100 firm Aldrich CPAs + Advisors, with closing expected in mid-December, CPA Practice Advisor’s Jason Bramwell reported. Financial terms were not disclosed, so nothing here describes how that deal is structured. The point for US CPA firms is the question every exiting partner faces: how the dollars are labelled under IRC §736.

The deal, briefly

Per Bramwell, Aldrich CPAs + Advisors had revenue of $103.3 million in its most recent fiscal year, according to INSIDE Public Accounting. Aldrich Wealth, a registered investment advisory firm, had more than $8 billion in assets under advisement as of August 26, 2026. The group also includes Aldrich Capital Advisors and Aldrich Solutions. Aldrich CEO John Lauseng said Aldrich becomes “the cornerstone of CohnReznick’s new West Region.” CohnReznick announced a strategic growth investment from funds advised by Apax Partners on February 26, 2025. For ownership and independence rules on investor-backed platforms, see our private equity and alternative practice structures guide.

Two exits: sell to a buyer (§741) or be liquidated (§736)

If a partner sells the interest to another person—an incoming partner, the other partners individually, or an acquirer—§741 treats the gain or loss as capital, “except as otherwise provided in section 751” for unrealized receivables and inventory items. Treas. Reg. §1.736-1(a)(1)(i) says §736 applies only to payments made by the partnership, not to sales between partners. For how §751 hot assets work on a sale, see our §751 hot assets article.

If instead the partnership pays the partner to end the entire interest—a liquidation under §761(d)—§736 controls. Under Reg. §1.736-1(a)(1)(ii) and (a)(6), the retiree is still treated as a partner for subchapter K purposes until that interest is completely liquidated, so a multi-year payout keeps the former partner on the K-1s.

§736(b): payments for the partner’s share of partnership property

Under §736(b)(1), liquidating payments are treated as a distribution—not a distributive share or guaranteed payment—to the extent they are made in exchange for the partner’s interest in partnership property. Reg. §1.736-1(a)(2) says those amounts follow the complete-liquidation rules of §§731, 732 and, where applicable, 751, and the remaining partners get no deduction for them. IRS Publication 541 (12/2025) explains that gain is generally recognized only to the extent money distributed exceeds the partner’s adjusted basis. An assumption of the partner’s share of liabilities counts as money distributed. Our West §704(d) basis article walks through outside-basis rollforwards.

§736(a): everything else is ordinary

Payments that are not for the property interest fall under §736(a). If the amount is determined with regard to partnership income, it is a distributive share; if determined without regard to income, it is a guaranteed payment under §707(c). Either way the retiree has ordinary income, and the continuing partners benefit: a distributive share reduces their own shares, and a guaranteed payment is deductible by the partnership under §162(a) (Reg. §1.736-1(a)(4)). That trade-off—capital for the retiree versus a deduction for the firm—is why buyout terms are negotiated, not boilerplate. For a deceased partner, §753 treats §736(a) amounts received by the successor as income in respect of a decedent under §691.

The professional-firm rule: receivables and goodwill

Section 736(b)(2) carves two items out of “property”: unrealized receivables (as defined in §751(c)) and goodwill, except to the extent the partnership agreement provides for a payment with respect to goodwill. Since the 1993 amendment, §736(b)(3) limits that carve-out to cases where capital is not a material income-producing factor for the partnership and the retiring or deceased partner was a general partner. When both are met, payments for receivables and unstated goodwill move into §736(a) as ordinary income.

That profile fits many CPA firms. Treas. Reg. §1.704-1(e)(1)(iv), written for the family-partnership rules, says capital generally is not a material income-producing factor where income consists principally of fees, commissions or other compensation for personal services, and ordinarily is material where the business needs substantial inventories or plant and equipment. It is a facts-and-circumstances test, and §736 does not define “general partner” for LLP or LLC members, so confirm both conditions with counsel.

Under §751(c), unrealized receivables include rights to payment for services rendered or to be rendered, to the extent not previously includible in income under the partnership’s accounting method—so a cash-method firm’s uncollected fees are squarely in scope. The extended list of recapture items in §751(c) applies for §§731, 732 and 741 but, by its terms, not for §736.

Why the agreement has to allocate the dollars

• State goodwill if it is meant to be capital. Under Reg. §1.736-1(b)(3), a payment for goodwill in excess of basis is §736(a) unless the partnership agreement provides for a reasonable goodwill payment; an arm’s-length valuation, fixed or by formula, is generally respected. In the regulation’s Example 3, stating $9,000 of goodwill raises the retiree’s capital gain from Example 1’s $1,000 to $4,000.
• Amendments can still count. Under §761(c), modifications agreed by all partners (or adopted as the agreement allows) by the unextended partnership return due date are part of the partnership agreement.
• Set the annual split. For fixed payments over several years, Reg. §1.736-1(b)(5)(i) allocates each year’s payment pro rata between (b) and (a). Under (b)(5)(iii), the partners may agree to another allocation if total (b) amounts do not exceed the property’s fair market value at retirement or death.

Caution: §1.736-1 was last amended in 1965 and predates §736(b)(3), so read it with the current statute. Capital-intensive partnerships, and limited partners, do not get the receivables-and-goodwill carve-out.

Timing

Section 736(a) payments are included in the recipient’s year with or within which ends the partnership year for which they are a distributive share, or in which the partnership deducts them as guaranteed payments. Section 736(b) payments are taken into account in the year paid; under §731, gain generally appears only after basis is recovered, although a recipient of a fixed §736(b) total may elect, with a statement on the first year’s return, to report gain pro rata (Reg. §1.736-1(b)(6)). In the regulation’s Example 1, each $10,000 annual payment on a $30,000 buyout splits $4,000 (b) and $6,000 (a).

A checklist for firms merging or retiring partners

• Document whether the exit is a sale to buyers (§741/§751) or a partnership liquidation (§736).
• Schedule cash, fixed assets, receivables, unbilled work and goodwill separately, with basis.
• Test the capital-as-a-material-factor and general-partner conditions.
• Write the goodwill and annual (a)/(b) allocation into the agreement; calendar the §761(c) deadline.
• Report consistently on Form 1065, the K-1s and the retiree’s return.

Where Tax Brew fits

Partner exits turn on clean capital accounts, basis rollforwards and receivables schedules. Tax Brew provides bookkeeping, cleanup and tax prep support for US CPA firms, including those workpapers when a partner retires or practices combine. Your firm keeps the advice, the deal terms and the sign-off. The first 20 hours are free for qualifying engagements. See our services, or email info@taxbrewglobal.com.

Sources: Jason Bramwell, CPA Practice Advisor, “CohnReznick Acquires Top 100 Accounting Firm Aldrich” (Oct. 13, 2026); CohnReznick, “CohnReznick secures strategic growth investment from Apax Funds” (Feb. 26, 2025); 26 U.S.C. §§707(c), 736, 741, 751, 753, 761 (Cornell LII); Treas. Reg. §1.736-1 and §1.704-1(e)(1)(iv) (eCFR); IRS Publication 541, Partnerships (12/2025). General information, not tax or legal advice. As of 16 October 2026.