before the sale you should have contacted a tax advisor. things may be complicated for both the buyer and seller. the seller would be allocated income through the date of sale and that would include any income/loss from that pass-thru entity. if the starting tax basis was $50K it would go up by the allocated income and down by any distributions before the date of sale. but wait there could be .
IRC Section 751 Treatment of Hot Assets (the partnership would need to report this on the sellers k-1)
The linchpin of taxing transfers of partnership interests is IRC Section 751. Under IRC Section 741, when a partner sells his interest, he is entitled to capital gain treatment, except as provided in IRC Section 751. Under IRC Section 731, when a partner receives a partnership distribution in liquidation of his interest, he is entitled to capital gain treatment, except as provided in IRC Section 751. Regarding sales of partnership interests to third parties, IRC Section 751 is pretty straightforward. But regarding sales of partnership interests back to the partnership, IRC Section 751 can get a little intricate.
Sale of Partnership Interest
When a partner sells his partnership interest to anyone other than the partnership, the partner is entitled to capital gain or loss treatment, except with respect to so-called "hot assets." "Hot assets" are "unrealized receivables" and "inventory items" as defined under IRC Section 751. These are basically ordinary income producing assets, such as accounts receivable not already recognized as income, LIFO reserves, appreciated inventory, and depreciation recapture. Thus, unlike the seller of corporate stock, a selling partner's tax
treatment depends upon the underlying partnership assets.
the buyer also faces tax issues as to where to properly allocated the purchase price above the tax basis of what he's buying.
