§751 — Unrealized receivables and inventory items
56 cases·14 followed·6 distinguished·1 criticized·35 cited—25% support
Statute Text — 26 U.S.C. §751
The amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his interest in the partnership attributable to—
unrealized receivables of the partnership, or
inventory items of the partnership,
shall be considered as an amount realized from the sale or exchange of property other than a capital asset.
To the extent a partner receives in a distribution—
partnership property which is—
unrealized receivables, or
inventory items which have appreciated substantially in value,
in exchange for all or a part of his interest in other partnership property (including money), or
partnership property (including money) other than property described in subparagraph (A)(i) or (ii) in exchange for all or a part of his interest in partnership property described in subparagraph (A)(i) or (ii),
such transactions shall, under regulations prescribed by the Secretary, be considered as a sale or exchange of such property between the distributee and the partnership (as constituted after the distribution).
Paragraph (1) shall not apply to—
a distribution of property which the distributee contributed to the partnership, or
payments, described in section 736(a), to a retiring partner or successor in interest of a deceased partner.
For purposes of paragraph (1)—
Inventory items of the partnership shall be considered to have appreciated substantially in value if their fair market value exceeds 120 percent of the adjusted basis to the partnership of such property.
For purposes of subparagraph (A), there shall be excluded any inventory property if a principal purpose for acquiring such property was to avoid the provisions of this subsection relating to inventory items.
For purposes of this subchapter, the term “unrealized receivables” includes, to the extent not previously includible in income under the method of accounting used by the partnership, any rights (contractual or otherwise) to payment for—
goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or
services rendered, or to be rendered.
For purposes of this section and sections 731, 732, and 741 (but not for purposes of section 736), such term also includes mining property (as defined in section 617(f)(2)), stock in a DISC (as described in section 992(a)), section 1245 property (as defined in section 1245(a)(3)), stock in certain foreign corporations (as described in section 1248), section 1250 property (as defined in section 1250(c)), farm land (as defined in section 1252(a)), franchises, trademarks, or trade names (referred to in section 1253(a)), and an oil, gas, or geothermal property (described in section 1254) but only to the extent of the amount which would be treated as gain to which section 617(d)(1), 995(c), 1245(a), 1248(a), 1250(a), 1252(a), 1253(a), or 1254(a) would apply if (at the time of the transaction described in this section or section 731, 732, or 741, as the case may be) such property had been sold by the partnership at its fair market value. For purposes of this section and sections 731, 732, and 741 (but not for purposes of section 736), such term also includes any market discount bond (as defined in section 1278) and any short-term obligation (as defined in section 1283) but only to the extent of the amount which would be treated as ordinary income if (at the time of the transaction described in this section or section 731, 732, or 741, as the case may be) such property had been sold by the partnership.
For purposes of this subchapter, the term “inventory items” means—
property of the partnership of the kind described in section 1221(a)(1),
any other property of the partnership which, on sale or exchange by the partnership, would be considered property other than a capital asset and other than property described in section 1231, and
any other property held by the partnership which, if held by the selling or distributee partner, would be considered property of the type described in paragraph (1) or (2).
For purposes of applying this section and sections 731 and 741 to any amount resulting from the reference to section 1248(a) in the second sentence of subsection (c), in the case of an individual, the tax attributable to such amount shall be limited in the manner provided by subsection (b) of section 1248 (relating to gain from certain sales or exchanges of stock in certain foreign corporation).
In determining whether property of a partnership is—
an unrealized receivable, or
an inventory item,
such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner. Under regulations, rules similar to the rules of the preceding sentence shall also apply in the case of interests in trusts.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.751-1 Unrealized receivables and inventory items
- Treas. Reg. §Treas. Reg. §1.751-1(a) Sale or exchange of interest in a partnership—(1) Character of amount realized.
- Treas. Reg. §Treas. Reg. §1.751-1(b) Certain distributions treated as sales or exchanges—(1) In general.
- Treas. Reg. §Treas. Reg. §1.751-1(c) Unrealized receivables.
- Treas. Reg. §Treas. Reg. §1.751-1(d) Inventory items which have substantially appreciated in value—(1) Substantial appreciation.
- Treas. Reg. §Treas. Reg. §1.751-1(e) Section 751 property and other property.
- Treas. Reg. §Treas. Reg. §1.751-1(f) Effective date.
- Treas. Reg. §Treas. Reg. §1.751-1(g) Examples.
- Treas. Reg. §Treas. Reg. §1.751-1(i) Stock in trade of the partnership, or other property of a kind which would properly be included in the inventory of the partnership if on hand at the close of the taxable year, or property held by the partnership primarily for sale to customers in the ordinary course of its trade or business.
- Treas. Reg. §Treas. Reg. §1.751-1(v) With respect to any taxable year of a partnership ending after December 31, 1963, the term unrealized receivables, for purposes of this section and sections 731, 736, 741, and 751, also includes potential gain from section 1250 property.
56 Citing Cases
As we have noted, section 741 has an explicit exception: “except as otherwise provided in section 751 (relating to unrealized receivables and inventory items).” Section 751 provides that the “inventory items” portion of proceeds “shall be considered as an amount realized from the sale or exchange of property other than a capital asset”. Section 741, by its own terms, does not apply to the “inventory items” portion addressed by section 751, to which section 741 yields.
However, section 751 requires that “we look through the partnership to the underlying assets and deem such a sale as the sale of separate interests in each asset.” Grecian Magnesite Mining, Indus.
Generally, section 741 requires that taxpayers recognize as capital all gains or losses realized in the sale or exchange ofa partnership interest--exceptto the extent section 751 applies." To the extent that a noncorporate taxpayer incurs capital losses, the taxpayer may deduct those capital losses currently against capital gains and up to $3,000 ofordinary income.
Generally, section 741 requires that taxpayers recognize as capital all gains or losses realized in the sale or exchange ofa partnership interest--exceptto the extent section 751 applies." To the extent that a noncorporate taxpayer incurs capital losses, the taxpayer may deduct those capital losses currently against capital gains and up to $3,000 ofordinary income.
Under section 751, the selling partner (Kaiser) would be required to recognize any gain attributable to the amortization deductions on the player contracts as ordinary income. Sec. 751(a), (c). Section 751 would prevent the selling partner from converting section 1245 depreciation recapture income from the player contracts into capital gain. Accordingly,
Sale of Partnership Interest Section 741 provides that the sale or exchange of a partnership interest shall, except to the extent section 751 applies, be treated as the sale or exchange of a capital asset.
Under section 751, the selling partner (Kaiser) would be required to recognize any gain attributable to the amortization deductions on the player contracts as ordinary income. Sec. 751(a), (c). Section 751 would prevent the selling partner from converting section 1245 depreciation recapture income from the player contracts into capital gain. Accordingly,
Such gain or loss shall be considered as gain or loss from the sale or exchange ofa capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items).
751 (West 2001). In other words, a community-property interest in a spouse's partnership interest is "more than a mere money claim;" it's a "present interest." Kenworthy v. Hadden, 151 Cal. Rptr. 169, 170, 172 (Ct. App. 1978). The dispute in Kenworthywas also over the nature ofa wife's community- property interest in her husband's partnership.
751 (West 2001). In other words, a community-propertyinterest in a spouse's partnership interest is "more than a mere money claim;" it's a "present interest." Kenworthyv. Hadden, 151 Cal. Rptr. 169, 170, 172 (Ct. App. 1978). The dispute in Kenworthywas also over the nature ofa wife's community- property interest in her husband's partnership. A
s to the total contract price. Sec. 453(c). In the case ofa sale or exchange ofa partnership interest, gain or loss recognized to the transferor is considered gain or loss from the sale or exchange of a capital asset, except as otherwise provided by section 751. Sec. 741. Section 751(a) provides that the amount received by a transferor partner in exchange for all or part ofa partnership interest shall be considered as an amount realized from the sale or exchange ofproperty other than a capital a
issioner, 103 T.C. 525, 538-539 (1994), affd. 100 F.3d 778 (10th Cir. 1996). _ 9 _ (1972)); cf. Ware v. Commissioner, 92 T.C. 1267 (1989) (holding that the Commissioner was not precluded from raising for the first time ön brief the applicability of section 751), affd. 906 · F.2d 62, 65-66 (2d Cir. 1990). Respondent was no less well situated than these pro sese petitioners to be aware of the relevant statutory, provisions. Respondent had adequate opportunity to present pertinent evidence at trial