Question

Disproportionate distribution can occur in which of the following situations? A partnership has 100 % capital...

Disproportionate distribution can occur in which of the following situations?
A partnership has 100 % capital assets
The partnership only owns inventory
The partnership has 100% ordinary assets
The partnership has a combination of ordinary and capital sssets
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Answer #1

ANSWER - The partnership has a combination of ordinary and capital assets.

Explanation :- Section 751(b) was designed for distribution transactions that affect the percentage ownership of ordinary income property. This provision is intended to ensure that gain inherent in ordinary assets will be taxed as ordinary income. Thus, the purpose of Section 751(b) is to prevent:

  1. the conversion of partnership ordinary income into capital gain, and

  2. the shifting among partners of ordinary income property.
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