IRC 751 "Hot Assets": Calculating and Reporting Ordinary Income in Disposition of Partnership or LLC Interests

Recording of a 110-minute CPE webinar with Q&A


Conducted on Wednesday, July 26, 2017
Recorded event now available


This webinar will provide accounting and tax professionals with a deep dive into the tax treatment of so-called Section 751 “hot assets” when a partner disposes of his or her partnership interest. The panel will discuss identifying, calculating and reporting of ordinary income from hot assets in the sale of a partnership or LLC interest, and will review the proposed regulations under Section 751(b).

Description

Generally, when a partner sells his or her partnership interest, the transaction is considered as the disposition of a capital asset, and any gain from the sale is taxed at lower capital gains rates. A notable exception to this treatment occurs when the partnership holds “hot assets” detailed in IRC Section 751.

In those cases, the sale of the partnership interest converts a portion of that long-term capital gain to ordinary income, and the sale may require the seller to report ordinary income in a transaction that generates a capital loss.

Section 751 was implemented to prevent partners from claiming favorable capital gain treatment on income that would be taxed as ordinary income if realized by the partnership, and lists two basic classes of properties requiring reclassification: “inventory” and “unrealized receivables.”

Taxpayers holding interests in partnerships with significant levels of either inventory or unrealized receivables must be aware, prior to sale of the interest, of the different tax treatment of these assets to avoid negative tax consequences. Section 751 applies when there is a shift in “hot assets,” whether a partner has capital gains or not.

Because the regulations seem to provide some difference in treatment depending on whether the transaction is structured as a sale of interest or a redemption, tax advisers should calculate the impact of Section 751 assets in each scenario to achieve the best possible tax result.

Listen as our expert panel provides a deep exploration into the Section 751 requirements, offering practical guidance and best practices for avoiding unforeseen tax traps in partnership interest dispositions.

Outline

  1. Section 751(a) asset rules
  2. Section 752(b) listed assets
    1. Inventory
    2. Unrealized receivables
    3. Substantially appreciated inventory
  3. Proposed regulations under Section 751

Benefits

The panel will discuss these and other important issues:

  • How does the regime of Section 751 work in calculating gain/loss from ordinary income producing assets held at the partnership level?
  • What assets does Section 751 require to be calculated separately?
  • How are inventory assets treated differently in a redemption vs. a sale of partnership interest?
  • What options are available regarding cost allocation to minimize gain calculations on Section 751 assets?
  • What are the potential effects of the proposed regulations under Section 751(b)?

Learning Objectives

After completing this course, you will be able to:

  • Identify the specific rules governing tax treatment of Section 751 assets in a partnership disposition
  • Recognize assets that will trigger ordinary income recognition upon sale of a partnership interest
  • Discern circumstances in which a redemption may achieve better tax results for the selling partner than a sale

Faculty

Yoram Keinan, Partner
Smith Gambrell & Russell, New York

With more than two decades of experience in tax law both in the United States and in Israel, Mr. Keinan focuses on U.S. and international taxation of financial products and institutions and represents multinational entities, banks, hedge funds, private equity funds and REITs. He has a broad tax practice, which also includes representing high net-worth individuals and providing support to entities and individuals involved in IRS disputes. Prior to joining his Firm, he headed Carter Ledyard & Milburn’s Tax Practice in New York, served as shareholder at Greenberg Traurig’s Tax and International Tax Practices in New York, as senior manager with Ernst & Young’s National Tax Department in Washington, D.C., as an associate with Shearman & Sterling’s Tax Practice in Washington, DC., and as a Manager with Ernst & Young’s tax department in Israel.

James Lynch, Esq., CPA, Tax Director
Sobel & Co., Livingston, N.J.

Mr. Lynch is the Firm's Tax Director and is charged with preparing many of the Firm's more complex personal, partnership, and fiduciary returns, as well as most of the firm's estate tax returns. In addition, he is significantly involved in research and planning, particularly in the partnership and estate areas.

Brian Keida, CPA, Tax Senior Manager
Crowe Horwath, Atlanta

With more than thirteen years of public accounting experience, Mr. Keida’s industry focus has been serving clients predominantly in the real estate and asset management industry. The clients primarily have been investment funds, real estate companies, home builders and developers, REIT’s, private equity and sovereign wealth funds. His technical focus is in the areas of partnership compliance and structuring with diverse investor profiles, revenue recognition for home builders, in-bound foreign investment in US real estate, REIT and corporate taxation.


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