BPA Partnership is an equal partnership in which each of the partners has a basis in her partnership interest of $20,000. BPA reports the following balance sheet: Basis FMVInventory$40,000 $60,000Land20,000 30,000Total$60,000 $90,000 Brooke, capital$20,000Penelope, capital20,000Amanda, capital20,000Total$60,000a. Identify the hot assets if Brooke decides to sell her interest in BPA.b. Are these assets "hot" for purposes of distributions?c. If BPA distributes the land to Brooke in complete liquidation of her partnership interest, what tax issues should be considered?

Question

What will be an ideal response?

Answer 1

a. Inventory is considered "hot" for purposes of a sale of partnership interests.
b. Yes, the inventory is also considered "hot" for distribution purposes.
c. If BPA distributes the land to Brooke, the distribution would be a disproportionate distribution because Brooke would receive more than her share of the cold assets. Brooke would be treated as having sold her share of hot assets to BPA in exchange for cold assets. The deemed sale would generate ordinary income to Brooke.

§751(a) includes unrealized receivables and inventory items as hot assets for purposes of a sale of partnership interest. However, for distributions, §751(b) defines hot assets as substantially appreciated inventory and unrealized receivables. BPA's inventory is considered substantially appreciated because its fair market value exceeds its basis by more than 120 percent.