Distributions from Collapsible Partnerships
Sec. 751 (b)
Sec. 751(b) applies only when:
1)A liquidating distribution occurs (either all or part of a partners interest).
2)The partnership has Sec. 751 property (i.e., unrealized receivables and substantially appreciated inventory)
3)The liquidating distribution is disproportionate with regards to the sec. 751 property (i.e., the partner did not receive his/her share of the Sec. 751 property in the distribution).
If the above 3 criteria are met, Sec. 751(b) applies.
Sec. 751(b) provides:
To the extent a partner receives a distribution from a partnership of
1)751 property in exchange for relinquishing all or part of his interest in the partnerships non-751 property, or
2)non-751 property in exchange for relinquishing all or part of his interest in the partnerships 751 property
the transaction is treated as a sale or exchange of such property between the distributee partner and the partnership.
Mechanics of Sec. 751(b) –
If in a liquidating distribution a partner receives more than his/her share of Sec. 751 property
1)Partner is treated as having sold his interest in the non-751 property to the partnership in exchange in exchange for the excess of the amount of his/her share of sec. 751 property.
2)Distributee partner recognizes gain or loss measured by the difference between his/her adjusted basis for the non-751 property and the FMV of the excess of the 751 property. The character of the gain is determined by the character of the non-751 property exchanged.
3)Partnership is treated as having sold the excess 751 property to the distributee partner.
4)Partnership recognizes ordinary income/loss measured by the difference between its adjusted basis in the 751 property sold and the FMV of the distributee partner’s interest in the property.
If in a liquidating distribution a partner receives less than his/her share of Sec. 751 property
5)Partner is treated as having sold his interest in the 751 property to the partnership in exchange in exchange for the excess of the amount of his/her share of sec. Non-751 property.
6)Distributee partner recognizes gain or loss measured by the difference between his/her adjusted basis for the 751 property and the FMV of the excess of the non-751 property. The character of the gain/loss is ordinary
7)Partnership is treated as having sold the excess non-751 property to the distributee partner.
8)Partnership recognizes gain/loss measured by the difference between its adjusted basis in the non-751 property sold and the FMV of the distributee partner’s interest in the property.
Step by Step Approach to Sec. 751(b)
1)Determine the distributee partner’s predistribution interest in the 751 and non-751 property.
2)Determine the distributee partner’s post-distribution interest in the Sec. 751 property and the non-751 property
3)Determine whether the distributee partner received a proportionate share of each type of property.
4)Determine the distributee partners adjusted basis in the exchanged properties
5)Determine the distributee partner’s ordinary income or loss under Sec. 751(b) as the difference between his adjusted basis for the sec. 751 property relinquished and the FMV of the non-751 property received by him in the exchange. (if received more non-751 property)
6)Determine the distributee partners g/l as the difference between his adjusted basis in the non-751 property relinquished and the FMV of the excess 751 property received by him in the exchange.
7)Determine the distributee partner’s capital gain under sec. 731(a)(1) or capital loss under Sec. 731(a)(2).
8)Determine the partnerships ordinary gain/loss as the difference between the partnerships adjusted basis in the 751 property exchanged, and the FMV of the distributee partner’s interest in the non-751 property relinquished (if more 751 property exchanged).
9)Determine the partnerships gain or loss under 751(b) as the difference between the adjusted basis of the non-751 property exchanged and the FMV of the distributee partner’s interest in the 751 property relingquished.