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

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Program Materials

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.

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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)?

Faculty

Yoram Keinan
Yoram Keinan

Partner
Smith Gambrell & Russell

With more than two decades of experience in tax law both in the United States and in Israel, Mr. Keinan focuses on U.S....  |  Read More

James Lynch, Esq., CPA
James Lynch, Esq., CPA

Tax Director
Sobel & Co.

Mr. Lynch is the Firm's Tax Director and is charged with preparing many of the Firm's more complex...  |  Read More

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

With more than thirteen years of public accounting experience, Mr. Keida’s industry focus has been serving...  |  Read More

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