Bees, can you clarify

[DTS]

Bees,

When I posted some links from past posts to Lion's thread yesterday, you had given this reply to Sandy regarding her technical termination of the partnership she was working on.

Quote:
In other words, you pretend the partnership sells all of its assets at their FMV. Some of the gain is going to be short term capital gain, some of it is going to be long term capital gain, some of it is going to be depreciation recapture, and some of it is going to be ordinary income from the sale of inventory. The gain from the sale of each asset is then allocated to each partner based upon their ownership interest.

Those numbers will not be on the K-1. I would have the partnership issue a separate worksheet to each partner that makes this calculation for each, and in turn attach it to the taxpayer's copy of the 1040 to justify the Schedule D and 4797 amounts.

I was studying all of this yesterday, as I will have a very similar situation for one of my partnerships that will be selling their partnership to another company by year's-end (they will no longer be connected with the new company). My partnership has receivables, recapture, income/profit, etc.,for '07.

My questions to you are:
1) Does the advice you gave Sandy below hold true for my situation or is there a different way to show this? I am having a hard time understanding how this is shown without a K-1.

2) Is only profit/loss for my client's partnership shown on a final K-1 and the rest is shown on an office-generated worksheet for the IRS and then manually input onto the client's 1040 and related forms? Or, do we prepare the sale of assets to print on the K-1, along with the profit/loss then delete that process, as if it never happened?

I really am so confused, so I was hoping you could walk me through the steps and maybe shed some light on how to do this for me. Sorry to be such a pain-in-the-neck, but I am panicked, to say the least!

Thank you,

Dennis

[Bees Knees]

My questions to you are:
1) Does the advice you gave Sandy below hold true for my situation or is there a different way to show this? I am having a hard time understanding how this is shown without a K-1.

What I told Sandy was that when you sell a partnership interest, you have to look at the assets inside the partnership to determine how much of the partnership interest sale is capital gain and how much is ordinary income.

If you sell your stock in a corporation, you have capital gain, because stock is considered a capital asset. It is irrelevant what kinds of assets are inside the corporation.

If you sell a partnership interest, you may have some capital gain, and you may have some ordinary income. That is because the sale of a partnership interest is treated as the sale of each asset inside the partnership. That is where the “Hot Assets” rule comes into play, where you look at how much of your gain is going to be due to assets that produce ordinary income upon sale, verses those that would produce capital gain.

These rules would apply to your situation as well.

2) Is only profit/loss for my client's partnership shown on a final K-1 and the rest is shown on an office-generated worksheet for the IRS and then manually input onto the client's 1040 and related forms? Or, do we prepare the sale of assets to print on the K-1, along with the profit/loss then delete that process, as if it never happened?

For the selling partners, I would provide an information sheet so that each are able to calculate all this mess. The K-1 shows activity that took place inside the partnership. Since the sale of your partnership interest is something that takes place outside of the partnership, it isn’t going to be reported on the K-1. Therefore, you need to give the selling partner a separate worksheet or statement that identifies the assets and gain that should be allocated to this partner.

Keep in mind, these are rules that apply when individual partners sell their partnership interest. Most sales, however, are the sale of individual assets. For example, I want to buy your partnership. I don’t want your liabilities. I just want your customer list, your business name, maybe some equipment. But I don’t actually want your business entity because I might want to operate as a corporation or a sole prop instead of a partnership.

In that case, it is the partnership that is selling individual assets to the buyer. Then each asset sale is reported by the partnership, and the character of gain or loss for each asset is passed through to the partners on their K-1. After all assets are sold, the partnership liquidates by distributing the cash from the sale to the partners.

This type of sale is going to be more common, since buyers generally do not want to take on hidden liabilities of the business they are purchasing. Hidden liabilities meaning product warranties or potential lawsuits that a buyer might not know about at the time of purchase.

[DTS]

Bees...

thank you so much for taking the time to clarify for me. It does make more sense to me now. The way you worded your answer is what I was looking for to make this clearer for me.

Again, thank you!

Dennis