A number of things are impacted here and depending on the $$ involved, you may want to consult with a tax professional. I will provide some direction and comments here:
- The IRS has a revenue ruling on this matter and I will include a link below (Rev Rul 99-6). Your facts are situation 1 in the revenue ruling.
- The answer to your question number 1; the technically correct answer is "yes". The reason is that the partnership has terminated.
- The answer to your question number 2; once again "yes" there has been a liquidating distribution of the assets.
- Your question 3; debt can have significant impact in partnership tax. Non-recourse debt provides basis and relief of debt is treated the same as a distribution of cash. This is an area that can cause issues and discussion with a tax professional can be beneficial.
- Your question 4 was addressed above in response 2 and 3.
- Your question 5; all partners receive a final K-1 when there is a termination of a partnership. In addition, the form 1065 will need to be marked as final as well.
- Your question 6; there could be a requirement to file form 8308. This is used when there are "hot assets" involved. These assets include "accounts receivable" for a cash basis partnership, depreciation recapture and inventory. All ordinary income type items. This is important as the character of the gain for the selling partner will be impacted.
- Your question 7; there are significant differences between capital account, basis and at-risk. Understanding the differences is critical to getting to the correct tax result.
- As you will see in Rev Rul 99-6 the basis of assets that you have post termination will have a bifurcated basis.
- You will need to check with the Secretary of State for your state as to any state filing requirements since you no longer have a partnership.
Here is the link to Rev Rul 99-6:
*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.
