Additional comments:
1) Your definition of hot assets is most likely not the same as the IRS definition.
If you were using the cash method of accounting, then you have hot assets (accounts receivable). Your inventory is possibly a hot asset. Depreciation recapture is also a hot asset. This comes into play for the seller as this individual may need to reflect ordinary income for their portion of these items.
2) The facts are not clear as to whether or not the new investor paid the old partner or infused the $$ into the company and you used those funds to redeem the old partner. If the former, then the new partner just steps into the shoes of the old partner for book purposes. Keep in mind this is not the same as tax. This individual will need to maintain their own tax basis in this investment.
3) Not sure your questions 2 or 3 come into play, but as noted above, not sure how the buy out came about.
As you can see, this is complicated regardless of the value of the business.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
