A proportionate distribution occurs when a partner receives
a pro-rata share of partnership assets and other property,
as specified in the partnership agreement based on the partners capital interests.
Prior lessons examine the tax implications of
proportionate non liquidating and liquidating distributions.
In contrast, the distribution is disproportionate when it does not
reflect a partner's proportionate share of partnership property.
A disproportionate distribution can be either non liquidating or liquidating.
Regardless of type, disproportionate distributions are governed by complex rules.
Thus in this lesson, you will learn about the general concepts
governing the tax treatment of disproportionate distributions.
After learning the concepts,
you will apply them to Sunchaser Shakery.
As mentioned, disproportionate distributions are governed by very complex tax rules.
Thus, to illustrate the concepts of these distributions,
let's consider a situation in which partners receive
either more or less of their pro-rata share of hot assets.
For this purpose, hot assets include
substantially appreciated inventory and unrealized receivables.
For inventory to be considered substantially appreciated,
it must have a fair market value in excess of
120% of the partnership's inside basis in the inventory.
Based on the aggregate concept,
each partner should recognize
their proportionate share of ordinary income from hot assets.
Thus, section 751 (b) maintains each partner's proportionate share of ordinary income,
even when the distribution is disproportionate.
More specifically, it recasts any transaction in which
a disproportionate distribution of hot assets is made, and makes it proportionate.
Basically, if the partner receives less than a proportionate share of hot assets,
the transaction is treated as if two separate events occurred.
One, the partnership made a distribution of some hot assets to the distributor partner,
and two, that partner immediately sold the hot assets back to the partnership.
The partner recognizes ordinary income on the sale of
the hot assets and the partnership takes a cost basis for the assets purchased.