Rule Atlas
IRC § 751: Partnership Hot Assets: The Ordinary Income Trap (IRC § 751)
Under IRC § 751 (IRS / Treasury Circular 230), partnership Hot Assets: The Ordinary Income Trap (IRC § 751) establishes the authoritative rules tested on the IRS Enrolled Agent (EA). Master the critical rules for Section 751 hot assets. VoraPrep verifies every threshold, worked table, and practice question below against the current IRS Enrolled Agent (EA) blueprint.
Current Statutory Thresholds & Limits in Effect
Triggers deposit by the next banking day AND converts monthly depositors to semiweekly status for the remainder of the current and entire next calendar year.
Comprehensive Worked Example: Sale of Interest
| Asset | Adjusted Basis | Fair Market Value (FMV) |
|---|---|---|
| Cash | $60,000 | $60,000 |
| Unrealized Receivables | $0 | $90,000 |
| Inventory | $90,000 | $120,000 |
| Capital Asset (Land) | $30,000 | $30,000 |
| Total | $180,000 | $300,000 |
Patricia sells her one-third interest in the XYZ Partnership for $150,000 cash. Her adjusted basis in the partnership interest is $90,000. At the time of the sale, the partnership has no liabilities and the following assets: Unrealized Receivables: Basis $0, FMV $60,000 Inventory: Basis $60,000, FMV $90,000 Capital Assets: Basis $210,000, FMV $270,000 How much ordinary income must Patricia recognize from the sale of her partnership interest?
Comprehensive Worked Example: Sale of Interest
Priya is a one-third partner in the PQR Partnership. She sells her entire interest to a new partner, Sam, for $100,000 cash. Priya's outside basis in her interest is $60,000. The partnership uses the cash method of accounting and has no liabilities. Its balance sheet is as follows:
- | Asset | Adjusted Basis | Fair Market Value (FMV) | | --- | --- | --- | | Cash | $60,000 | $60,000 | | Unrealized Receivables | $0 | $90,000 | | Inventory | $90,000 | $120,000 | | Capital Asset (Land) | $30,000 | $30,000 | | Total | $180,000 | $300,000 |
- Let's calculate the character of Priya's gain.
- Step 1: Calculate Priya's Total Gain Amount Realized: $100,000 Adjusted Basis (Outside): $60,000 Total Gain: $100,000 - $60,000 = $40,000
- Step 2: Identify Hot Assets and Calculate Ordinary Income The hot assets are the Unrealized Receivables and the Inventory. Priya's Share of FMV of Hot Assets: Receivables: 1/3 $90,000 = $30,000 Inventory: 1/3 $120,000 = $40,000 Total FMV Share: $30,000 + $40,000 = $70,000 Priya's Share of Basis in Hot Assets: Receivables: 1/3 $0 = $0 Inventory: 1/3 $90,000 = $30,000 Total Basis Share: $0 + $30,000 = $30,000 Ordinary Income (Section 751 Gain): * $70,000 (FMV Share) - $30,000 (Basis Share) = $40,000
Common IRS Enrolled Agent (EA) Distractors on IRC § 751
- 1Every hot asset question on the SEE follows the same underlying structure. Use this 5-step decision framework and you'll rarely miss one:
- 2Watch for IRS Enrolled Agent (EA) distractors that swap calendar days vs. business days, or confuse gross vs. net phase-out thresholds.
- 3Distinguish mandatory statutory requirements ("shall / must") from permissive safe-harbor elections ("may").
- 4Verify effective dates and current-year inflation adjustments before computing dollar caps or penalty rates.
Frequently Asked Questions: IRC § 751
What is the core rule under IRC § 751 (Partnership Hot Assets: The Ordinary Income Trap (IRC § 751))?
Under IRC § 751 (IRS / Treasury Circular 230), partnership Hot Assets: The Ordinary Income Trap (IRC § 751) establishes the authoritative rules tested on the IRS Enrolled Agent (EA). Master the critical rules for Section 751 hot assets. VoraPrep verifies every threshold, worked table, and practice question below against the current IRS Enrolled Agent (EA) blueprint.
How is IRC § 751 tested on the IRS Enrolled Agent (EA)?
Every hot asset question on the SEE follows the same underlying structure. Use this 5-step decision framework and you'll rarely miss one: Watch for IRS Enrolled Agent (EA) distractors that swap calendar days vs. business days, or confuse gross vs. net phase-out thresholds.
Where can I practice IRS Enrolled Agent (EA) questions on Partnership Hot Assets: The Ordinary Income Trap (IRC § 751)?
Test yourself instantly with the free playable IRS Enrolled Agent (EA) question on this page, or launch VoraPrep's full IRS Enrolled Agent (EA) adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/ea-prep.