Sale of partnership units, LLC had inventory

[Linda Mathey]

How do I reflect on their 1040 the portion of the sales proceeds that is attributable to the inventory? If I need to use 4797 which part? When I enter sales proceeds in part one with $0 cost basis it calculates gain but wants to make it ordinary.

Any advice is welcome.

[Gail in Virginia]

I am not sure I understand what you are asking - sale of inventory is ordinary income. :dunno:

[Linda Mathey]

I am not sure I understand what you are asking - sale of inventory is ordinary income.

What I am asking is that they sold their partnership units not the assets of the LLC. However instead of reporting all the proceeds on Sch D as LTCG, a portion must be allocated to ordinary income because the underlying assets of the LLC contained inventory.

Internal Revenue Code Section 751 (a) states that "the amount of any money received by a transferor partner in exchange for all or a part of his interet in the partnership attributable to (1) unrealized receivables of the partnership or (2) inventory items of the partnership shall be considered as an amount realized from the sale or exchange of property other than a capital asset.

I think I found my answer I will report it on Part II, Form 4797.

Thanks for responding.

[BulldogTom]

You seem to have the hot assets identified and know that they are going to be ordinary income, so it is hard to understand what the question is. I am a little confused on what you are asking also, because you seem to have everything correct.

Are you asking how to make the software produce the correct result that you know it should produce?

Tom

Lodi, CA

[Linda Mathey]

Tom,

Yes I need to know how to get the software to put it into Part II without overriding things. I just want to make sure the ordinary income portion is shown correctly. What am I doing wrong?

Thanks.

[Lion EA]

Just chiming in here with a quasi-question since I have one coming up who sold their LLC interests and had A/R. Is the F4797 on the member's F1040? Or, do you do a phantom sale on the F1065 of all its assets? The F1065 will end up with all zeros on Schedule L, right, when all members sell their interests to an outside corporation? I'm dreading this one.

[Charley in Ohio]

I have the same situation this year (selling an LLC, but with Fixed Assets, not Inventory, which can also be "hot assets" due to depreciation recapture). Fortunately for me, we had assigned values to the fixed assets and they are not sold at a gain so no ordinary income. Be aware that you may have ordinary income from depreciation recapture to consider in calculating the 751(a) amount. Otherwise, I was going to report the ordinary income on F4797 P2 as well.

One other comment, I would think that you could allocate the basis in your partnership interest between the hot assets and everything else to compute the final gain. Just another thing to consider.