IRS Finalizes Regulations Modifying Reporting for Partnership Interest Exchanges

Overview

The Department of the Treasury and the Internal Revenue Service recently published final regulations amending the information reporting obligations applicable to sales or exchanges of certain interests in partnerships owning inventory or unrealized receivables.

Background

Under section 741 of the Internal Revenue Code, gain or loss recognized by a transferor partner upon sale or exchange of a partnership interest is generally treated as gain or loss from the sale or exchange of a capital asset, with such gain or loss generally treated as capital gain or loss. However, under section 751(a), amounts received by a transferor partner in exchange for the portion of a partnership interest attributable to unrealized receivables or inventory items (“hot assets”) are treated as amounts realized from the sale or exchange of property other than a capital asset, potentially resulting in ordinary income to the transferor on the exchange.