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Proposals change how partners calculate gain
Proposals under Section 751(b) contain new measures regarding the distributions from partnerships. Taxand USA provides an overview of these potential changes in an increasingly complex tax environment.
The purpose of Section 751 is to prevent taxpayers from converting ordinary income to capital gain through the sale of partnership interests, when the value of the partnership interest consists of appreciated ordinary income assets, also called “hot assets,” such as inventory and unrealised receivables.
The proposed regulations allow any reasonable approach to determine the tax consequences of a Section 751(b) distribution. Two approaches the IRS deems to be reasonable in the majority of cases are:
- a hot asset sale approach and
- a deemed gain approach
The proposed regulations also include anti-abuse provisions that attempt to prevent the application of Section 751(b) by using Section 704(c). If the distribution would otherwise be subject to 751(b) absent the application of Section 704(c), then the IRS believes that Section 751(b) should apply.
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Whether the proposed regulations are finalised as proposed or with modifications, it is clear that taxpayers should carefully consider these proposed rules since they are one more example of the IRS’s increased attention to what it believes are abuses of partnership distributions.