Remedying Flaws in the Hot Asset Sale Approach
9 Pages Posted: 21 Dec 2007 Last revised: 12 Sep 2015
Notice 2006-14 requests comments concerning revision of the longstanding regulations under section 751(b) to reflect the modern concepts of revaluations and reverse section 704(c) allocations. The ABA and NYSBA have responded recently by recommending a deemed-sale approach, modeled on section 704(c)(1)(B), that would trigger ordinary income under section 751(b) whenever a partner's aggregate share of hot asset gain is reduced following a current or liquidating distribution. In this special report, Prof. Burke recommends that the deemed-sale approach be extended to current distributions that leave the distributee with booked-up hot asset gain in excess of the distributee's retained interest in partnership capital. Together, sections 704(c)(1)(B) and 751(b)provide a coherent solution to the problem of shifting hot and cold asset gain following a partnership distribution. By eliminating the need for spectral section 704(c) allocations to reflect value-basis disparities inherent in distributed property, such an approach would allow reverse section 704(c) allocations to function properly. While the drafters of the 1954 code considered a section 704(c)-type approach excessively complex, the section 704(b) regulations now generally require revaluations and reverse section 704(c) allocations. The author wishes to thank Prof. William D. Andrews for helpful comments and suggestions.
Keywords: partnership, hot assets, 751, 704(c), allocations, Notice 2006-14
JEL Classification: K34
Suggested Citation: Suggested Citation