Typically, partnership taxation involves calculating a distribution of unrealized receivables or substantially appreciated inventory that is disproportionate, especially under Internal Revenue Code (IRC) Section 751(b). The objective of this section is to deter partners from using distributions to turn ordinary income into capital gains. The following is a general breakdown:

Determine whether or not the partnership has any inventory or unrealized receivables.

• Unrealized receivables encompass accounts receivable for taxpayers who pay with cash or rights to reimbursement for goods and services.
• Inventory that is significantly valued includes inventory that has an FMV that exceeds 120% of its adjusted basis.

Determine the partner's shares that are pre- and post-distributed.

Estimate the partner's share of the partnership's usual income assets (unrealized receivables and substantially appreciated inventory) prior to and after the distribution.

Identify the disproportionate change:

Check if the partner's share of the ordinary income assets has fluctuated significantly as a result of the distribution. The partner's share of these items decreasing while other partners retain their shares is what happens.

Acknowledge any potential gains or losses.

Recognizing ordinary income may be necessary for the partner if the distribution results in a disproportionate change. The reduction in the partner's share of the ordinary income assets is the cause of the recognized gain or loss.

Here is an example for the explanation:

• The M & M partnership has given an income distribution to Mac, a partner who owes half of the partnership's interest.
• The FMV of  $6,000 and adjusted basis of $4,000. Building FMV $100,000 and adjusted basis $40,000.
• The distribution was based on unrealized receipts and had a significant appreciation for inventory.
• Section 1250 had a recapture potential of $55,000 in the building.

What are the tax consequences of his distribution on M&M?

Partnerships do not recognize any gain from sharing property with a partner if there is not a disproportionate distribution of unrealized receiveables or substantially appreciated inventory.

What is disproportionate distribution?

It is commonly expected that a partner's share of the partnership's assets will correspond with their ownership interest. If the distribution results in a substantial imbalance in their share of these specific assets compared to other partners, it is considered disproportionate.

In general, a partner's share of the partnership's assets should correspond to their ownership interest. If the distribution creates a significant disparity between their share of these specific assets and other partners, it is considered disproportionate.

When a partner receives a distribution that changes their share of the partnership's ordinary income assets, it is known as a scenario in partnership taxation called disproportionate distribution. Comparing to other partners, unrealized receivables or substantially appreciated inventory are comparable in terms of performance.

Imagine that a partnership has unrealized receivables and inventory that are ordinary income assets. If one partner receives a distribution that decreases their share of these assets while other partners retain their shares, this could trigger a disproportionate distribution under Internal Revenue Code Section 751(b).

Is distribution of disproportion is taxable?

A taxable event can be a result of disproportionate distributions.  Specifically for the partner who will be receiving the distribution. Under IRC Section 751(b). In the event of such distribution, the partner may be required to recognize ordinary income if their share of the partnership's ordinary income assets decreases. For example, receivables that have not been realized or inventory that has been significantly valued.