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"Inventory or Unrealized Receivables: If the partnership interest sold represents the selling partner's interest in both ordinaryincome and capital assets, under Code Sec. 751(a) , some of the gain will be characterized asordinary income rather than capital gain. In the case of installment method reporting, theincome 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."
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.
http://www.charitableplanning.com/document/673445 is the link to the text of Rev Rul 89-108.
From the Rev Rul:
"Section 751 of the Code was enacted to prevent the conversion of certainpotential ordinary income into capital gain upon the sale or exchange of apartnership interest. This section, in effect, severs certain income itemsfrom 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 apartnership interest represents substantially appreciated inventory orunrealized receivables described in section 751, the tax consequences tothe transferor partner are 'the same tax consequences which would beaccorded an individual entrepreneur.' H.R. Rep. No. 1337 at 71, and S. Rep.1622, supra, at 99. In effect, the transferor partner is treated asdisposing of the property described in section 751 'independently of therest of his partnership interest.' S. Rep. No. 1622 at 98, 99. GeorgeEdward 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)."
This should not be a component of the sale of the partnership interest, but as a separate income item.
Thanks for asking at Just Answer. I'm PDtax.
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?