Partnership Transactions — Section 751 Property (Portfolio 720)
This Portfolio analyzes the tax consequences of a sale or exchange of a partnership interest where the partnership owns a §751(a) property and a distribution from §751(b) property.
Bloomberg Tax Portfolio, No. 720, Partnership Transactions—Section 751 Property, analyzes the federal income tax consequences of (1) a sale or exchange of a partnership interest where the partnership owns a §751(a)property (i.e., unrealized receivables and inventory items) and (2) a distribution from a partnership owning §751(b) property (i.e., unrealized receivables and inventory items which have appreciated substantially in value) where such distribution has the effect of changing the proportionate interests of the partners in the §751(b) property. Sale of a partnership interest generally gives the selling partner capital gain. Section 751, however, recharacterizes a portion of the amount realized as ordinary income to the partner, at times even in the absence of realized gain. The amount so recharacterized roughly corresponds to the amount of ordinary income the partnership would have if it sold the§751(a) property, thus preventing a partner from converting into a capital gain the ordinary income that would pass through if the partnership sold the property.
This Portfolio contains (1) a discussion of the computation of §751(a) ordinary gain when a partner sells or exchanges a partnership interest, (2) a discussion of how distributions from a partnership are (or potentially are) to be analyzed under §751(b), in particular in light of the possible application of the principles under §704(c) concerning built-in gain and built-in loss properties, and (3) a complete analysis of the definition of §751(a) and §751(b)property. The Portfolio recognizes that much of the analysis under §751(b)for complex situations has become more uncertain over time because guidance under§751(b), primarily in the form of regulations published in 1956, has lagged behind legislative and regulatory developments in related areas. Thus, the Portfolio explains different approaches for analyzing the application of §751(b)in situations where other provisions, such as §704(c), are involved.
Table of Contents
I. Introduction to Section 751
II. Section 751(a) – Sales or Exchanges of Interests in Partnerships Owning Section 751(a) Property
III. Section 751(b) – Distributions to Partners Treated as Sales or Exchanges of Section 751(b) Property or Other Property
IV. Section 751 Property – Unrealized Receivables
V. Section 751 Property – Inventory Items
VI. Interaction of Section 751 and Other Code Provisions
VII. Other Rules that Preserve the Character of Ordinary Income Potential