What is a SEC 751 disproportionate distribution?

Under section 751, if a partner receives property (including cash) in a distribution that consists of more than his pro rata share of one class of property, and in exchange he relinquishes his interest in the other class of property, he must take account of (recognize) gain or loss with respect to the property …

Can a partnership make disproportionate distributions?

Partnerships and LLC agreements will sometimes allow investors to distribute assets to investors “disproportionately,” although many partnership agreements call for these disproportionate distributions to be cured at some later date (such as upon winding up of the business or the sale of the ownership interest).

When considering partnership distributions which of the following is considered an IRC 751 hot asset?

Section 751, in turn, provides that A’s gain is ordinary income to the extent it is attributable to the three categories of so-called “hot assets”—cash-basis receivables, appreciated inventory, and Section 1245 depreciation recapture.

What are hot assets for sale of partnership interest purposes?

When a partner sells his partnership interest to anyone other than the partnership, the partner is entitled to capital gain or loss treatment, except with respect to so-called “hot assets.” “Hot assets” are “unrealized receivables” and “inventory items” as defined under IRC Section 751.

What is considered a hot asset?

Definition: Hot assets are business assets that have the potential of built in ordinary income. In other words, these are assets that would generate ordinary income if sold. The main two examples are inventory and accounts receivable.

Can you have a 751 loss?

751 may ultimately generate an ordinary loss if the partnership holds inventory that has declined in value below its aggregate basis and the transaction is structured as a sale rather than a redemption.

Can partners take unequal distributions?

Partnerships may make unequal distributions and allocations (as long as the allocations have substantial economic effect under Treas.

What is a disproportionate distribution?

a distribution in which some shareholders receive cash or other property and others receive increased proportionate interests in the assets or earnings and profits of the corporation.

How do hot assets affect the character of gain or loss on the sale of a partnership interest?

Hot assets cause a portion of the gain or loss on the sale of a partnership interest to be classified as ordinary rather than capital. -Usually paid to distribute the business profits to the partners but can also reduce a partner’s ownership. -Partners generally do not recognize gain or loss.

Is 1250 recapture a hot asset?

Section 1250 is not a hot asset. result in significant ordinary income offset by a large capital loss.

What is included in hot assets?

Is 1250 gain a hot asset?

1250 capital gain (IRC Section 1(h)). Section 1250 is not a hot asset. result in significant ordinary income offset by a large capital loss.

What is the disproportionate distribution of hot assets?

For distributions, the so-called “disproportionate distribution” is recast as (1) a proportionate distribution of hot assets followed by (2) a deemed sale of these assets from the partner(s) who did not receive them to the partner(s) who did receive them.

How are disproportionate distributions treated in a partnership?

Disproportionate distributions of these assets aren’t treated as distributions, but as a sale or exchange of assets. Both the partnership and the partners may have income, gain, or loss as a result of proportionate distributions. No gain or loss is recognized to a partnership on a distribution of property or money to a partner. [27]

Can a hot asset be considered an entity?

[Instructor note: Absent the hot asset rules, the “entity” theory would apply to each of the three types of transactions discussed. There would be no ordinary income recognition related to disproportionate distributions (including under § 736) or sales of a partnership interest.

What is the Hot asset rule in IRC 751?

section 751(b). The “hot asset” rule of section 751(b) is very complicated. Section 751(b) provides that in certain circumstances, a distribution of property or money can result in the recognition of gain or loss to the recipient partner and/or the partnership.