Change of partnership interest mid year

[JoshinNC]

I have an LLC (taxed as partnership) where one of the partners (30% owner) left the company and transferred his partnership interest to the wife of the remaining partner for $0. The partner who left had a negative basis in the partnership. My question is this:

How much, if any, of the LLC income/loss is attributable to the partner who left (I know he can't deduct the loss with his basis being negative, but that's his accountants job)? The new partner contributed cash to the partnership throughout the year to keep it afloat, and they closed the business effective 12/31/06. There was some inventory held in the business that was returned to the suppliers, thus reducing AP for the value of the inventory. Cash in bank was left to cover any debts that may come in as owed by the partnership and will then be distributed out to remaining partners after their sure everything is paid. This will be a gain to them, if it exceeds their basis, correct?

The closer we get to the end, the worse they seem to get!

[erchess]

I don't know about LLCs in particular but

I am pretty sure that when a general partner leaves a garden variety partnership the partnership terminates instantly and has a filing deadline of the fifteenth of the third month following......

I'm afraid that your client partnership needs two short year returns prepared and one of them is past due, unless as I say LLCs are somehow different. And of course the individuals in question all need their K1s in order to do their individual returns so everyone wants both returns completed by the middle of last week. Of course, the only penalty will be financial. No one will go to jail or lose a professional license, and I don't think they have any beef against you unless they apprised you of the relevant events on a timely basis.

[JoshinNC]

TTB pg 20-11

It is my understanding that as long as less than 50% interest did not change hands during the year the partnership has not been terminated, and therefore there is no need for a short year return. Am I wrong in this?

[cpadan]

You aren't joshin

It is my understanding that as long as less than 50% interest did not change hands during the year the partnership has not been terminated, and therefore there is no need for a short year return. Am I wrong in this?

That is true, per sec 706(C)(2)(B) Income is alloacated, usually by the number of months. You might find more info in PUB 541.
Dan

[JoshinNC]

Thanks Dan,

That was my thought process also, but wanted to ensure that there wasn't a more uniform standard.