Question

A, B and C are equal partners in the ABC partnership which has the following balance sheet:

             Assets                               Partners’ Capital

                          A.B.        F.M.V.                 A.B.        F.M.V.

Cash                  $6,000     $6,000       A        $12,000    $18,000

A/R                            0       9,000       B          12,000     18,000

Inventory             18,000     18,000       C          12,000     18,000

Land & Building     6,000     12,000

Equipment            6,000      9,000

                        $36,000   $54,000                  $36,000    $54,000

The partnership distributes the $9,000 worth of accounts receivable to A and $18,000 worth of inventory equally ($9,000 each) to B and C.

(a) Is Internal Revenue Code Section 751(b) applicable to this operating distribution?

(b) What does this tell you about Internal Revenue Code Section 751(b)?

(c) Should Internal Revenue Code Section 751(b) be repealed?

Answer 1

Part a:

Yes the distribution of accounts receivables of $9000 to A and inventory of $9000 distribution each to B and C will be considered as operating distribution under section 751(b) as the section has clearly mentioned that unrealized receivables and inventory items will be considered as amount realized from sales in case these are distributed to the partners in a partnership.      

Part b:

This clearly explains that the section 751(b) has been made to ensure that in case of distribution of unrealized receivables and items of inventories at the time of liquidation or any time the same will attract the provisions of income tax as the same will be considered as amount realized from sale.

Part c:

No, section 751(b) should not be repealed as it is an effective tool to discourage the partnership firms to avoid taxation by distribution of unrealized receivables and items of inventories.