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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

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Conducted on Tuesday, October 24, 2023

Recorded event now available

or call 1-800-926-7926

This course will provide accounting and tax professionals with a deep dive into the tax treatment of Section 751 hot assets when a partner disposes of their partnership interest. The panel will discuss identifying, calculating, and reporting ordinary income from hot assets in the sale of a partnership or LLC interest.

Description

Generally, when a partner sells their partnership interest, the transaction is treated as the disposition of a capital asset. 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 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 of 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. History and background
  2. Section 751(a) asset rules
  3. Reporting
  4. Section 751(b) listed assets
    1. Inventory
    2. Unrealized receivables
    3. Substantially appreciated inventory
  5. Section 751(b) proposed regulations
  6. Non-U.S. partner impact
  7. Planning opportunities

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?

Faculty

Venables, Robert
Robert Venables, CPA, JD, LLM
Director, Tax
Cohen & Company

Mr. Venables advises closely held businesses in a variety of industries with a focus on pass-through entities. He is...  |  Read More

Williamson, Jonathan
Jonathan Williamson, CPA, MT
Director, Tax
Cohen & Company

Mr. Williamson focuses on partnership tax issues primarily for real estate clients, including retail, self-storage,...  |  Read More

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