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Proposals change how partners calculate gain

1 Dec 2014

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. 

Discover more: New proposed regulations change how partners calculate gain under section 751

Your Taxand contact for further queries is: 
Tyler Horton
T. 1 703 852 5018

Quality tax advice, globally

Also published in Thomson Reuters' Taxnet Pro


Taxand's Take

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.

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