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Video instructions and help with filling out and completing What Form 4797 Defined

Instructions and Help about What Form 4797 Defined

Okay let's continue talking about termination termination you're terminated your flier all right we're firing you now what does termination talk about termination basically says we've got this partnership and what's happening is we're ceasing the business so we're ceasing the business now and ceasing the business what it says is when a partner wishes to sell their interest to another partner the amount realized is the sum of so how much is realized it says the cash and the property received plus the relief from debt the relief from debt now what we're trying to do is we're trying to say there's kind of a special rule here normally as we said earlier like when you sell this thing it's generally considered a what a capital gain so for example let's see I'm liquidating I'm selling out and I go here's 10 and I got 15 boom here's a $5 gain and I said it's generally a capital gain okay that's great but there's some special rules and let's think about it for a minute because what's happening here is if for example I didn't sell my share of the partnership and I didn't leave if I stayed if receivables went up or inventory changes if I have any kind of income from inventory or receivables what is inventory or receivables considered those are considered what a current asset those are considered business assets any kind of gain from that would be what kind of gain any gain from that would be an ordinary gain right because inventory receivables would be considered an ordinary asset ordinary assets create ordinary income not a capital so because of that what it says is these inventories and receivables are called hot assets those are called the hot asset to the business so remember we talked about ordinary assets and we'll define it in another section with property an ordinary asset would be inventory and receivables ordinary assets create ordinary income so if I'm a member of the partnership and I state a member of the partnership and we had some sales and I had some receivables and I collected it that results in ordinary income but by taking my interest in selling it to someone else and selling my interest basically it resulted in a capital gain so what I did by selling it as I resulted in a capital gain instead of an ordinary game there you go ah so because of that we're gonna look to see that if there's an unrealized income because of the inventories and receivables on those hot assets that part would be considered an ordinary gain the rest would be a capital gain now it doesn't relate to what we call a cold asset like capital assets capital assets cold assets whereas these inventory and receivables of a hot assets of the business alright for example you're looking your notes it says under termination for example assume Ronny remainder and Sammy seller or equal partners in the RS partnership and at the partnership which reports on a cash basis has the following balance sheet that's his tax basis fair value cash receivables goodwill now notice the receivables the tax base is zero but the fair value is three hundred so it went up three hundred went up if I own 50% half a three hundred would be my share which is 150 then it goes down and it says liability says our capital twenty five SS capital twenty five total liabilities and so on Bobby buyer purchases Sammy's fifty percent interest in the partnership paying in 375 cash based on the fair value the partnership and assuming Sammy's share of liabilities in this transaction the sale proceeds to Sammy our four twenty five including the cash received and the debt relief because we're looking at net debt relief as as value as well Sammy's basis in the partnership before the sale was seventy five including the capital accounts tax base is a twenty five and Sammy's share of liabilities don't worry I'll put this into English in a minute the gain on sale reported would be 425 minus 75 or 350 okay so let's see what's happening here here's what's happening I hit to erase that all right let's do this here so here's what's happening all right it says actual cash proceeds so proceeds in cash 375 plus your net debt relief was fifty so that means that the amount that is realized is 425 the basis in the partnership was only 75 therefore we have a gain or loss in this case a gain of 350 so basically I'm selling for 375 plus the net debt relief of 475 my basis so my outside basis if you did it this way my outside basis is basically 75 and I got 425 which means though I've got a gain of 350 and as we said earlier oh that gain is going to be a capital gain but here's the deal it is going to be considered an ordinary gain for the increase in value of inventory and receivables receivables went up by 300 I own 50% of that or 150 so of the 350 the first 150 is ordinary the other 200 is capital mmm let's look at that under that box it says ordinary gain or loss for inventory capital for everything else next paragraph there is however one possible complication this is if when a partner sells our interest the amount the buyers willing to pay is based on the fair value of the assets and liabilities and not on the tax basis if the partnership has unrealized ordinary income assets inventory and receivables called hot assets at the time of sale the partner is effectively converted income that it will be ordinary to capital to prevent this the gain on sale of the partnership must be reported as ordinary to the extent of unrealized ordinary income assets the rest is.

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