50% Partner in Partnership sells out?

[euphoriant]

Hi! I'm a CPA, but I've never run into this situation before and I'm not sure how to handle it. One of my clients files a Partnership tax return. There are 2 partners. One partner is going to buy out the other partner as soon as possible. I told them that we'd have to file a short year return and that this event will cause the dissolution of the partnership, since there will only be one owner. I also informed them that the partner who is remaining, who will own 100% of the business is now a sole proprietor.

My questions are as follows:
(1) Do I file the final Form 1065 showing the partner who sold with an ending balance of 0% and the other showing an ending balance of 100%?
(2) Are there any special forms/elections/statements that need to be filed with the return informing the IRS that from here on out the remaining partner will be filing a Schedule C?
(3) Are there any special forms/elections/statements that need to be filed with the Schedule C?

Is there any other advice you can give me?

Thank you all!

[DaveinTexas]

I'll take a stab

The ownership percentage would be zero at year end since the partnership will be terminated.

No special forms or elections to be made, just indicate a final year return on page 1 of 1065.

No elections to indicate the new sole proprietorship status of the new owner. The assets would transfer to the buyer's 1040, the basis of the assets would be a combination of one half the adjusted basis of the assets the of the buying partner's interest plus what was paid for the selling partner's interest. See Code Section 736 and 741. Also it may be a good idea to include form 8594 on the 1040 as well; to indicate a change in ownership in the assets and business.

***The amount paid to the selling partner is deemed to include his share of the Partnership's debts. And, the selling partner will have to recognize ordinary income They would have to report had they sold the receivables (if any), inventory and any depreciation recapture on the sale of assets at fair market value (hot assets). This topic is a bit messy and the calculation is challenging without a worksheet of some kind.

Use caution and do plenty of research on this topic as it can be a complex one. There are some really good examples and worksheets to figure the ordinary income elements of the hot assets (mentioned above) in the workbook NCPE produces each year at their seminars. I assume CCH may have similar worksheets.

As I said this is complex and I certainly don't pretend to have all the answers. I am not well versed in partnership law so what I have given you is tidbits. I wish you luck and just please take time to research this subject thoroughly before you file this return. And, since the return is due by the 15th day of the fourth month following the dissolution you may consider filing an extension. This way the 2012 1065 would be available.

I hope others that have a stronger 1065 knowledge would chime in if I have misspoke at all.