The “hot asset” re-characterization provisions of IRC 751 frequently result in unanticipated tax consequences for taxpayers disposing of partnership interests. Section 751 operates to prevent partners from converting ordinary income to capital gain in the sale or exchange of two specific types of partnership property—business inventory and unrealized receivables. Recent IRS guidance may offer taxpayer relief from the harsher aspects of Section 751 application.
There are two key components of Section 751: Subsection (a) holds that when a partner sells or exchanges all or part of his interest in a partnership holding hot assets, the proceeds of that sale are treated as amounts from the sale of ordinary income (i.e., non-capital) assets.
IRC 751(b) negates otherwise-applicable nonrecognition treatment for distributions that would shift the distributee partner’s interest in the partnership’s hot assets and the partner’s interest in the partnership’s other property.
The proposed regulations would change the approach from the current “gross-value” approach in determining a partner’s interest in Sec. 751 property, to an approach that would require taxpayers to take a “hypothetical sale” approach in determining a partner’s share of Section 751 property subject to ordinary income reclassification.
The new rules would also apply a deemed-sale method to identifying the percentage of a partnership distribution to be recharacterized as ordinary income.
Listen as our panel provides a thorough and practical guide to the planning opportunities and tax risks involved in the proposed Section 751 hot asset regulations.
Key topics include:
- How will the proposed regulations affect tax treatment of sales and/or distributions for partners holding ownership interests in partnerships holding Section 751 assets?
- What industries will be most affected by the proposed change to Section 751 property calculations?
- How does the new approach change allocation of partnership assets?
- What steps must tax counsel take for partnership clients to utilize potential tax advantages of the proposed regulations?