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

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


Conducted on Thursday, November 1, 2018

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 treated 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 what would be a 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 Section 751 assets must be aware, before the sale of the interest, of the different tax treatment of these assets to avoid adverse 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 an in-depth 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

Klinzing, Morgan
Morgan L. Klinzing

Atty
Pepper Hamilton

Ms. Klinzing focuses her practice on the federal income tax aspects of U.S and international mergers and acquisitions....  |  Read More

Stauber, David
David Stauber

Of Counsel
Pepper Hamilton

Mr. Stauber focuses his practice on the federal income tax aspects of mergers and acquisitions, fund formation, and...  |  Read More

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