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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4152
Experience:  35 years tax experience, including four years at a Big 4 firm.
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Im reporting the installment sale of a partnership interest.

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I'm reporting the installment sale of a partnership interest. Part of the total payments is for unrealized receivables, reported as ordinary income. How do I report the unrealized receivable portion on the 1040? Does the amount get excluded from the installment sale form? I know the unrealized receivable portion has to be ordinary income and it should be subject to SE tax. Should this be added as an income item on Schedule E for the sold partnership?

PDtax :

Welcome to the site. I'm PDtax, and will be helping you today.

PDtax :

"Inventory or Unrealized Receivables: If the partnership interest sold represents the selling partner's interest in both ordinary
income and capital assets, under Code Sec. 751(a) , some of the gain will be characterized as
ordinary income rather than capital gain. In the case of installment method reporting, the
income attributable to a partnership's inventory is not eligible for installment sale treatment.
Rev. Rul. 89-108, 1989-2 C.B. 100 .The sale of the interest is allocated to the assets being purchased."

PDtax :

http://taxtaxtax.com/pship/Sale%20of%20a%20Partnership%20Interests.pdf is the link to the text reproduced herein. I am going to the Rev Rul for backup.

PDtax :

http://www.charitableplanning.com/document/673445 is the link to the text of Rev Rul 89-108.

PDtax :

From the Rev Rul:

PDtax :

"Section 751 of the Code was enacted to prevent the conversion of certain
potential ordinary income into capital gain upon the sale or exchange of a
partnership interest. This section, in effect, severs certain income items
from the partnership interest. H.R. Rep. No. 1337, supra, at 70, 71, and S.
Rep. No. 1622, 83d Cong., 2d Sess. 99 (1954). Thus, to the extent a
partnership interest represents substantially appreciated inventory or
unrealized receivables described in section 751, the tax consequences to
the transferor partner are 'the same tax consequences which would be
accorded an individual entrepreneur.' H.R. Rep. No. 1337 at 71, and S. Rep.
1622, supra, at 99. In effect, the transferor partner is treated as
disposing of the property described in section 751 'independently of the
rest of his partnership interest.' S. Rep. No. 1622 at 98, 99. George
Edward Quick Trust v. Commissioner, 54 T.C. 1336 (1970), acq. 1970-2 C.B.
xxi, aff'd per curiam, 444 F.2d 90 (8th Cir. 1971); Woodhall v.
Commissioner, T.C. Memo. 1969-279, aff'd, 454 F.2d 226 (9th cir. 1972)."

PDtax :

This should not be a component of the sale of the partnership interest, but as a separate income item.

PDtax :

Thanks for asking at Just Answer. I'm PDtax.

Customer:

Ok, great. So I will report that amount allocable to unrealized receivables as it's own line, other income, subject to SE tax, and will report the remaining amount on the installment sale form, correct?

PDtax :

yes.

Customer:

thank you

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