In an investment club organized as a partnership, when a partner fully withdraws and is paid in cash that partner will have a realized capital gain (or loss) due to their withdrawal. That capital gain/loss is shown on their Withdrawal Report (but *not* on their final K-1!). The amount of capital gain/loss will be the difference between the market value of their club units and their tax basis in the club. This capital gain/loss must be reported on their personal tax return for the year of withdrawal.

The benefit to a fully withdrawing partner of getting paid with transferred stock instead of cash is that the withdrawing partner does not realize any capital gain/loss due to their withdrawal. (In this situation, the stock transfer is not a taxable event.) Capital gain/loss is deferred until they eventually sell the transferred stock. The withdrawn partner's tax basis in the transferred stock will be their tax basis in the club (less any cash paid as part of the withdrawal).

If the fully withdrawing partner intends to quickly sell the transferred stock, there isn't any benefit to that partner for being paid with stock. The net amount of their realized gain/loss because of withdrawing will be pretty much the same regardless of whether they are paid with cash or with stock. In this situation, for the withdrawing partner, "what's in it" for them is nothing. They are no better off for getting paid in stock *which they will quickly sell*, but they are no worse off either. (In practice, the withdrawing partner may have some relatively nominal expense and hassle vs. getting paid in cash. For this reason, "small" full withdrawals are commonly paid in cash.)

So, why should a fully withdrawing partner who prefers cash be willing to accept payment in stock instead? First, because they are willing to cooperate so the remaining partners can benefit from what may be a significant tax deferal opportunity. Second, because the club partnership agreement may require it. It's often the case that an investment club partnership agreement provides that the remaining partners (*not* the withdrawing partner) make the decision about whether to pay a full withdrawal with stock or cash. Of course, the only way to know what your club's partnership says is to read it in detail.

Keep in mind that the largest tax deferal benefit for the remaining members generally results from the club transferring the most highly appreciated stock the club owns.  If the stock the club would transfer is held at a loss, it's generally best for the club to sell the stock so all club members can share the tax benefit of the realized loss.

-Jim Thomas
 

When an investment club transfers stock shares to a withdrawing member, the withdrawn member is guaranteed a number of shares, not a specific dollar value. It's not uncommon for there to be a time period during which the withdrawn member is the legal owner of the shares but does not yet have access to the shares in their brokerage account in order to sell them. (The same issue could arise when an individual transfers shares from one brokerage account to another.) During this time, the risk of price fluctuation in the shares is born by the withdrawn member. So, yes, it's possible for the "bottom to fall out" of the share price before the withdrawn member has had a chance to sell the shares. (As you point out, it's also possible for the share price to rise dramatically.) To help expedite the transfer of shares, it is good practice for the withdrawing member to open (if they don't already have one) a brokerage account with the same broker used by the club.

The only practical way for the club to guarantee that a withdrawing member receives a specific dollar value is to fund the withdrawal 100% in cash.

-Jim Thomas