Taxing Hot Asset Shifts

Abstract

Notice 2006-14 invites comments concerning proposals to simplify and rationalize the treatment of disproportionate distributions that rearrange the partners’ shares of unrealized appreciation in ordinary income and capital gain assets (“hot asset distributions”). Specifically, the Notice requests comments concerning whether to adopt the “hot asset sale” approach in lieu of the imputed exchange mechanism under the current section 751(b) regulations. Upon a current nonprorata distribution, the hot asset sale approach would be coupled with a revaluation of partnership property and special allocations to preserve shares of built-in hot asset gain to the extent possible. Although enacted in 1954, section 751(b) has remained largely unchanged. Indeed, the regulations issued in 1956 have never been updated to reflect the modern concept of revaluations and section 704(c) allocations. While section 751(b) is sometimes viewed mainly as concerned with the character of income, it also has a significant impact on the timing of gain recognition.