7753 / What is a partner's distributive share of partnership income and loss in the year he or she sells, exchanges, or liquidates an entire partnership interest?

A partner includes the distributive share of partnership items up to the time of sale, exchange, or liquidation. The taxable year of the partnership closes with respect to the partner when the partner sells or exchanges his or her entire interest in the partnership, or if the interest is liquidated, but does not close with respect to any other partner¹ (unless the sale causes the partnership to terminate).² A partnership is considered terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners.

Thus, the distributive share of income or loss for the short partnership year resulting from the disposition is included in the tax year in which the sale is made, because that is the year in which the short partnership year ends as to the partner leaving the partnership. See Q 7736.If the partnership and partner have different years (i.e., the partnership is on a fiscal year and the individual uses a calendar tax year), it is possible that both a regular full partnership year and the short partnership year will end in the same year of the individual. Consequently, there can be a bunching of more than one year’s partnership income (or loss) in one year’s return of the individual.

The partner’s distributive share of partnership income for the part of the partnership year that ends when he or she sells, exchanges, or liquidates the interest may be determined under the method used to determine a new partner’s share, as discussed in Q 7746.

The partnership year does not end as to a partner who disposes of less than his or her entire interest³ (again assuming the disposition does not cause a termination of the partnership). A liquidation is a termination of a partner’s interest by a distribution or a series of distributions to the partner from the partnership. The entire interest of a partner is not liquidated until the final distribution of a series is made. Thus, the partnership year does not close with respect to a liquidating partner until the final distribution.⁴