Frequently Asked Questions
Who is eligible for the Limitation on Tax for Deemed Sales of Section 1248 Stock?
Applies to individual partners when a partnership sale triggers ordinary income treatment due to the partnership's ownership of controlled foreign corporation (CFC) stock.
How does the Limitation on Tax for Deemed Sales of Section 1248 Stock work?
Limits the tax attributable to ordinary income amounts resulting from the sale of partnership interests that hold certain foreign corporation stock (Section 1248 stock) for individual partners.
What law authorizes the Limitation on Tax for Deemed Sales of Section 1248 Stock?
The Limitation on Tax for Deemed Sales of Section 1248 Stock is authorized under IRC §751(e) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §751
Source: Internal Revenue Code, Title 26, United States Code
§ 751. Unrealized receivables and inventory items(a) Sale or exchange of interest in partnershipThe amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his interest in the partnership attributable to—(1) unrealized receivables of the partnership, or
(2) inventory items of the partnership,
shall be considered as an amount realized from the sale or exchange of property other than a capital asset.
(b) Certain distributions treated as sales or exchanges(1) General ruleTo the extent a partner receives in a distribution—(A) partnership property which is—(i) unrealized receivables, or
(ii) inventory items which have appreciated substantially in value,
in exchange for all or a part of his interest in other partnership property (including money), or
(B) partnership property (including money) other than property described in subparagraph (A)(i) or (ii) in exchange for all or a part of his interest in partnership property described in subparagraph (A)(i) or (ii),
such transactions shall, under regulations prescribed by the Secretary, be considered as a sale or exchange of such property between the distributee and the partnership (as constituted after the distribution).
(2) ExceptionsParagraph (1) shall not apply to—(A) a distribution of property which the distributee contributed to the partnership, or
(B) payments, described in section 736(a), to a retiring partner or successor in interest of a deceased partner.
(3) Substantial appreciationFor purposes of paragraph (1)—(A) In generalInventory items of the partnership shall be considered to have appreciated substantially in value if their fair market value exceeds 120 percent of the adjusted basis to the partnership of such property.
(B) Certain property excludedFor purposes of subparagraph (A), there shall be excluded any inventory property if a principal purpose for acquiring such property was to avoid the provisions of this subsection relating to inventory items.
(c) Unrealized receivablesFor purposes of this subchapter, the term “unrealized receivables” includes, to the extent not previously includible in income under the method of accounting used by the partnership, any rights (contractual or otherwise) to payment for—(1) goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or
(2) services rendered, or to be rendered.
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