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The partnership terminates and a final return is filed. Since you are continuing the business it would be reported directly on your 1040. Most likely schedule C unless it is rental real estate or farm.
There can be tax consequences to every partner upon liquidation. see this link. If you don't understand post back with your questions. We may be able to help or consult a tax pro.
You need to look at the IRS Revenue Ruling 99-6 as this provides some guidance on some of the technicalities involved.
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