Disposal of a Partnership Interest
Jim Thomas has been holding my feet to the flames in connection with reporting requirements for a member who experiences a complete withdrawal from an investment club. I thought the exchange of emails might be of interest to others. Jim's comments are bolded and italicized. He raises a point about bivio's withdrawal statement.

I'm also curious about the "Gain/(Loss) Realized on Withdrawal (B)-(A)" item in the [bivio] withdrawal reports.  Later in the report it says "Note- any gain/loss realized on withdrawal must be reported by the member on Schedule D of the 1040.", but this value does not show up anywhere on Sched K-1.  Shouldn't everything that needs to be reported to the IRS appear somewhere on the K-1? 
And I respond.........
The k-1 is designed to report a member's distributive share of partnership income. The gain/loss that a member realizes from his/her disposal of a partnership interest appears nowhere on the partnership return, but must be reported by the withdrawing partner on Schedule D of his/her 1040. The purpose of the Member Withdrawal Statement is to provide the necessary figures for this.
It should also be noted that, in addition to reporting the sale on Schedule D, the member should record all the k-1 items on his/her individual tax return. These k-1 items will have been added/deducted from the basis for the partnership interest as reported on the Member Withdrawal Statement.
Back to Jim.......
It's hard to believe there is no requirement that the partnership report this gain to the IRS (perhaps on one of the various types of 1099, or even on line 25 of the K-1).
Can you give me a reference in an IRS publication that discusses this topic (something more specific than just Publication XXX).
And I respond...........
An investment in a partnership is akin to an investment in a security. With a security, the broker may or may not keep track of the investor's cost basis. The broker will report the gross amount of any sale to the IRS.
The partnership does report the gross amount of any distributions to a partner on line 22 of the k-1. The partnership may not be in a position to know the gain/loss that should be reported. This would happen if one partner bought the interest of another partner. If this happens outside the partnership, the club has no record of the transaction. It is for this reason that I always recommend that any buy out be done through the partnership. That is to say, have the club redeem the units and have the new partners put in funds to buy new units. If it is done in this manner, the club will know the gain/loss on withdrawal, and thus is able to generate the withdrawal statement.
Since the partnership may have no means of knowing what the gain is, there can be no requirement on them to report the gain to the IRS. Therefore, I can't give you a reference, since it is impossible to document a non-requirement.
Back to Jim..............
Thanks for the detailed explaination.  It makes sense now. 
BTW ... how *would* I describe this on Schedule D?  As a sale of "xxx units of YYY partnership"?  Would it be important to mention on Schedule D that it was a "full" (or "partial") withdrawal?
And I...............
If it was a full withdrawal, I would call it 'Disposal of Partnership Interest'. If a partial, I would refer to it as Partnership withdrawal in excess of basis.
And Jim.........
In my NCA manual (v1.02, also over 5 years old) there is more detail (pg 16-34).  Interestingly the Withdrawal Earnings Report described there has a section (gone from the v1.04 report) titled Value Appreciation where the capital gain associated with the withdrawal *is* broken down into ST and LT gains (" ... based upon when the units being withdrawn were purchased.).  You said previously that the entire gain was LT if the partner had been a member of the club for over 1 year.  Have the rules on this changed since 1995?
My answer [with the remarks about the tax expertise at NAIC headquarters slightly toned down <g>] ......................
The rules have not changed! Each member of an investment club holds an undivided interest. The holding period of this interest starts with the date of the first contribution. NAIC [and the NCA software] used to allocate the gain on withdrawal between long-term and short-term on the basis of the dates for the units held. This was wrong, and they both have now changed.
If it needs saying, I really appreciate the give and take with someone like Jim. It keeps me on my toes, and provides good information for other users.
Rip West
Saint Paul, MN