American Bar Association Section of Taxation Comments on Proposed Regulations Under Section 751(b)

• Published in: The Tax lawyer 2017-04, Vol.70 (3), p.661-710
• Main Author: American Bar Association Section of Taxation
• Format: Article
• Language: English
• Subjects: Bar associations; Capital gains; Committees; Controlled foreign corporations; Distribution of partnership interests; Foreign partnerships; Foreign tax credits; Internal Revenue Code; Partnership interest; Profits; Proposals; Regulation; Simplification; Studies; Tax regulations; Taxation
• ISSN: 0040-005X; 2329-6089

The American Bar Association Section of Taxation (the "Section") released comments (the "Comments") on proposed regulations issued by the Treasury and the Service concerning section 751(b), which was included in Subchapter K when first enacted in 1954, and has been amended slightly since then. Section 751(b) applies to a distribution of property from a partnership to a partner if the effect of the distribution is to effect an exchange of the distributee's share of unrealized receivables and substantially appreciated inventory "in exchange for" an increased share of other assets, or vice versa. Thus, section 751(b) is directed at distributions that have the effect of shirting ordinary income among partners. Regulations under section 751(b) were promulgated in 1956 and were focused on distributions that shift partners' shares of the value of a partnership's ordinary income assets. The regulations have not been amended since their original promulgation. The examples in those regulations determine a partner's interest in section 751 property by reference to the partner's share of the gross value of the partnership's assets (the "gross value" approach), not by reference to the partner's share of the unrealized gain or loss in the property. If a distribution results in a shift between the partner's interest in the partnership's section 751 property and the partnership's other property, those regulations require a deemed asset exchange of both section 751 property and other property between the partner and the partnership to determine the tax consequences of the distribution (the "asset exchange" approach). With their focus on value, the 1956 regulations were found to yield results that were both internally inconsistent and inconsistent with the goals of the statute. In response to this well-recognized problem, the government issued Notice 2006-14, proposing a new approach to implementing section 751(b). In the Notice, the government asked for comments on (1) replacing the gross asset value approach with a "hypothetical sale" approach for purposes of determining a partner's interest in the partnership's section 751 property and (2) replacing the asset exchange approach with a "hot asset sale" approach to determine the tax consequences when it is determined that section 751(b) applies. The proposed 751(b) regulations adopt many of the principles described in Notice 2006-14. The proposed regulations (1) provide rules for determining partners' interests in section 7