Partnership compensation tax?

I am trying to look up a tax code for my compensation from my partnership. I was wonderinf if you can point me tothe right direction.

When I quit my 3-way partnership last year, my other two partners agreed to buy out my 33% with three payments over three years. They are issuing 1099 for the first payment. Is this the right form. What is the correct term for my stock/ownership compensation?

2 Answers

  • Anonymous
    1 decade ago
    Favorite Answer

    The correct definition of the buyout of your partnership interest is a "complete liquidation of your partnership interests," which is always treated as a capital gain or loss.

    You would recognize a capital gain to the extent that the cash you receive exceeds your adjusted basis in the partnership. If the buyout was for less than your adjusted basis, you may be able to recognize a capital loss. As the buyout is being split into three payments, you would record the liquidation as a sale on Schedule D of your personal 1040 using Form 6252 to report each payment as an "installment sale." Form 6252 essentially helps you report each of the three payments in such a way that any gain you receive is spread out over the three years (note that if your buyout results in a capital loss, you cannot use an installment sale). The third IRS link below explains this further.

    A full explanation of this whole process would get pretty lengthy. Hopefully, your partnership basis has been tracked by whomever prepared the partnership tax returns. If not, the first IRS link below discusses how to compute your adusted basis in the partnership, and the second link describes how to compute and handle your capital gain or loss when "liquidating" (disposing of) your partnership interest. Good luck! :-)

    Source(s): IRS Publication 541, Partnerships - Basis of Partner's Interest - Disposition of Partner's Interest IRS Publication 537, Installment Sales
  • 1 decade ago

    You should not be issued a 1099 for getting your partnership interest being bought out. The total agreed amount (without regard to a payment plan) should be listed on your last K-1 you receive from the partnership.

    To report the income on your tax return you will need to fill out Form 6252 to report the installment sale of your partnership interest. You will need to know your tax basis in the partnership to correctly figure your capital gain.

    Source(s): Form 6252 Form 1065 Instructions
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