Business & farm

A few comments:

1. The link provided by @M-MTax didn't work for me, so not sure if it works for you. edit..works now.
2. Under Section 708 the partnership will no longer exist, and as such, you will liquidate all the assets of the partnership.
3. Since you are liquidating the partnership, you will need to report all the items that will be going to the two of you as liquidating distributions on the K-1.  The liquidating distribution will be reported based on the property that was distributed to the partners; specific codes for line 19 on the K-1
4. As a partner in a partnership, you should be maintaining your tax basis in your partnership interest.  This will be critical and essential with the liquidating distribution.
5. There is a 5 step process in determining the basis of the assets received in liquidation.  Whether or not all 5 steps are necessary depends on a partners outside basis and the value of the property distributed.
6. Based on your limited facts, it appears you are 50/50 partners.  As such, the liquidating distribution needs to be allocated based on your interest in the partnership.  If anything other than that, this will cause disproportionate distribution issues.
7. After you determine the basis of the property distributed, once you sell it (ie the inventory), you will most likely have gain at this point.  This will be ordinary income to you.  I don't recommend you just sell the inventory at cost to your partner, as if audited, the IRS will frown on this.  
8. There are a number of other issues that have not been addressed; such as did any partner contribute any of the property to the partnership.   Additionally, are there are debt basis issues that could trigger income.  Either one of these will cause some additional complexity.
9. Also depending on your tax basis and property distributed, you could recognize a capital gain based on the allocation process noted above.

Unfortunately, the partnership world is very complicated regardless of entity size.

I would recommend you have a one on one meeting with a tax professional who can help you navigate the winding down of the partnership.