The sale of a partnership interest generally results in a capital gain or loss for the selling partner. However, if the partnership holds inventory items or unrealized receivables (which includes depreciable property) at the time of the sale or exchange, a portion of the gain or loss will be ordinary gain or loss. The concept of the aggregate theory and Section 751 “hot assets” will be discussed along with the proper valuation methods to employ when performing the “hypothetical sale” computation required as part of every sale of a partnership interest.
Most partnerships have section 751 assets and therefore are required to conduct a hypothetical sale of partnership assets when one or more partners sell their partnership interest. The most common section 751 assets are depreciable and amortizable assets. In conducting the hypothetical sale analysis, the partnership must assign a reasonable fair market value to each asset, using a going concern valuation methodology. Even if the taxpayer has an appraisal, or there is an agreement between two unrelated third parties, it does not mean the Service will accept the FMV allocations for the assets. The agreement must reflect reasonable valuations for partnership assets.
Learning Objectives:
IRS
Subject Matters Expert
Geoff Gaukroger is currently a Subject Matters Expert in the partnership and TEFRA practice network and has been with the IRS for 17 years. Prior to joining the IRS Geoff worked in public accounting for 5 years and 7 years in the corporate world. Geoff is a licensed CPA in the State of Oregon and has a Bachelor’s and a Master’s Degree in Accounting both from Washington State University.
IRS
Senior Revenue Agent
Andrew Dux is currently a senior revenue agent with the partnership and TEFRA practice network and has been with the IRS for 14 years. Andrew obtained his Bachelor’s Degree and Master of Professional Accountancy Degree from the University of Nebraska, Lincoln. Andrew has been serving as a Subject Matters Expert co-leading the Sale of Partnership Interest Campaign for the last two years.
IRS
Team Manager
Marietta Pietrzak is a Team Manager in LB&I’s Pass-Through Entities (PTE) Practice Area and leads the PTE Campaign Development Team. The Campaign Development Team evaluates campaigns involving pass-through entities and was instrumental in getting the Sale of Partnership Interest campaign approved and to the field.
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