Distributions to retiring partners.

RRA Changes to Partnership Rules and Amortization of Goodwill Create Complex Tax Problems

The Revenue Reconciliation Act of 1993 (RRA) modified the tax treatment of distributions to retiring or deceased partners under Sec. 736. At first glance, these provisions appear to be of relatively minor importance, but as Part I of this article will illustrate, they may have a significant effect on tax planning for Sec. 736 distributions.

The RRA also adopted uniform amortization rules for intangible assets. These rules have broad applicability; they are not limited to transactions between partnerships and partners, but do have some special ramifications for distributions to retiring or deceased partners. Part II of this article, to be published in May, will explore the most important aspects of the amortization provisions as they relate to distributions to retiring or deceased partners.

Overview of Sec. 736

Sec. 736 governs the treatment of liquidating payments made by a partnership to a retiring or deceased partner or the successor in interest of the deceased partner. Although either cash or property may be used to make these payments, most are made in cash. Throughout this article, it is assumed that the payments will be made solely in cash.

Sec. 736 separates liquidating payments into two classes: Sec. 736(b) payments, made in exchange for the retiring or deceased partner's interest in partnership property, and Sec. 736(a) payments not in exchange for the partner's interest in partnership property.

A special rule applies to payments in exchange for the distribute partner's interest in two specific types of partnership property. Under pre-RRA law, payments in exchange for the partner's interest in unrealized receivables and unstated goodwill were always treated as Sec. 736(a) payments (rather than Sec. 736(b) payments).(1) In essence, such payments were treated as not being in exchange for partnership property. Unstated goodwill is goodwill that is not provided for in the partnership agreement and does not have an existing basis on the partnership tax books. For Sec. 736 purposes, the prior law definition of unrealized receivables included not only cash-basis receivables, but also depreciation recapture and other miscellaneous provisions defined in Sec. 751(c).

Under the RRA, distributions in exchange for the distributee's share of certain types of previously defined unrealized receivables will no longer be classified as Sec. 736(a) payments. Similarly, distributions in exchange for the distributee's share of all receivables and goodwill in many partnerships will also be classified as Sec. 736(b) payments. These law changes will be discussed in more detail later.

Once the amount of the Sec. 736(b) payments has been determined, these payments are taxed under Secs. 731, 732, 733 and 75l(b). The Sec. 751(b) component of the distribution should be calculated first, and results in the distributee partner recognizing ordinary income to the extent that the partner receives cash in exchange for his share of certain ordinary income-producing assets (as defined in Sec. 751) held by the partnership.

The remaining Sec. 736(b) distribution is treated as a return of the distributee partner's basis for his partnership interest. If this distribution is less than the partner's adjusted basis in the partnership, the partner recognizes a capital loss; if it exceeds the partner's adjusted basis for his partnership interest, the excess amount is taxed to the distributee partner as a capital gain.

While the amount of Sec. 736(b) payments can be specifically determined under the statute, the amount of Sec. 736(a) payments is merely the excess of the total Sec. 736 payments over the amount of the Sec. 736(b) payments. Sec. 736(a) payments are taxed to the distributee partner a either a distributive share of income or a guaranteed payment. Such payments are taxed as a distributive share if they are determined by reference to partnership income. The recipient partner receives a K-1, which contains the type(s) and amount(s) of partnership income being allocate to the partner. Sec. 736(a) distributive share payments are taxed to the distributee partner according to the character of the income earned by the partnership and passed to the partner on the K-1 Because the income is taxed to the retiring partner or a deceased partner's successor under Sec. 736(a), it is omitted from the K-1s of the continuing partners, thereby giving the continuing part ners the effect of a deduction for these items.

Sec. 736(a) payments are taxed to the distributee partner as guaranteed payments if the amount of the payments is determined without reference to partnership income, e.g., payments that are stated in a specific dollar amount or calculated as a percentage of gross sales. Such payments are deductible by the partnership and are taxed as ordinary income to the distributee partner.

Tax Planning Under Pre-RRA Law

Before the RRA's passage, Sec. 736 provided considerable flexibility in planning a liquidating distribution. In the typical situation, the continuing partners in the partnership were higher bracket taxpayers, while the retiring partner was dropping down into a lower marginal tax bracket. The partnership would usually negotiate for a larger amount of the payments to be classified under Sec. 736(a) and for a smaller amount of the payments to be classified under Sec. 736(b). If, for example, most of the Sec. 736(a) payments were guaranteed payments, the partnership and, therefore, the higher-bracket continuing partners would be able to deduct these payments. While the retiring partner should, theoretically, prefer Sec. 736(b) payments, many retiring partners were willing to give up Sec. 736(b) treatment for a larger total distribution that would then be taxed at the retiring partner's lower marginal tax bracket. Often, the net effect of this planning was to provide both the continuing partners and the retiring partner with more after-tax dollars and the Treasury with lower tax receipts from both parties.

The negotiated result was usually supportable under the pre-RRA Code and regulations. Sec. 736(b)(2) provided that payments made by the partnership to the retiring or deceased partner's successor for that partner's share of partnership unrealized receivables (as defined in Sec. 751(c)) and goodwill (except to the extent provided for in the partnership agreement) were to be treated as Sec. 736(a) payments. Therefore, if the negotiations provided that the payments were primarily for unrealized receivables (which included recapture potential under Secs. 1245 and 1250) and "unstated" goodwill, the amount of the Sec. 736(b) payments could be minimized.

The RRA changes are not so extensive as to eliminate the tax planning benefits of Sec. 736; they simply reduce the tax benefits previously available.

New Sec. 736(b)(3)

Sec. 36(b)(3)(2) modifies the application of Sec. 736(b)(2) by providing that Sec. 736(b)(2)(A) applies only to distributions to general partners in partnerships in which capital is not a material income-producing factor. Accordingly, only partnerships that are making distributions to general partners in service partnerships will be in a position to treat unrealized receivables and unstated goodwill as deductible Sec. 736(a) payments. Partnership distributions in exchange for a limited partner's interest in unrealized receivables or unstated goodwill will not be deductible by the partnership; nor will partnership distributions in exchange for any partner's interest in unrealized receivables or unstated goodwill in a capital-intensive partnership.

Neither the RRA nor the committee reports addressed the definition of a limited partner or a general partner. Presumably, state law will make this distinction. It is also unclear whether owners of a limited liability company (LLC) will be treated as limited or general partners under this rule. While LLC owners, in general, have limited liability, they typically participate in the operations of a service-oriented LLC in much the same manner as general partners. If the restrictive provisions of new Sec. 736(b)(3) are applied to LLCs, it will typically make Sec. 736 distributions more costly to the LLC than the cost of an equivalent before-tax distribution by a general partnership.

The RRA House Report briefly addressed how to determine if capital is a material income-producing factor in the partnership. Present and prior law contain the principles for making this determination.(3) However, the House Report provided that capital is not a material income-producing factor when "substantially all the gross income of the business consists of fees, commissions, or other compensation for personal services performed by an individual." Accordingly, capital will not be a material income-producing factor for accountants, doctors, dentists, architects and other professionals who practice in partnership form provided that any capital used in their practice is "merely incidental" to the performance of professional services. The committee report noted that capital may be merely incidental to the performance of professional services even though the practitioner may have a substantial capital investment in professional equipment or in the physical plant constituting the professional practice office.

Amendments to Sec. 751(c)

Sec. 751(c) defines unrealized receivables very broadly, to include not only cash basis receivables but also various ordinary income items recognizable under other Code provisions. While this expansive definition is retained for purposes of Secs. 731 (distributions) and 741 (sales and exchanges), it is considerably narrowed by the RRA for purposes of applying Sec. 736 to rights to payment for goods delivered or to be delivered, or for services rendered or to be rendered, when the ordinary income has not yet been recognized under the partnership's method of accounting. For example, under previous law, the amount paid for the distributee partner's share of Sec. 1245 and 1250 recapture was treated as an unrealized receivable and, therefore, a Sec. 736(a) payment. This change will have the effect of eliminating all recapture potential from the definition of unrealized receivables, thereby making all payments to a retiring partner for his interest in the partnership's depreciable property Sec. 736(b) payments.(4)

This change in the definition of unrealized receivables applies in all Sec. 736 distributions, including those made to general partners in service partnerships. It eliminates the planning opportunity previously available under which the continuing partnership could first make a Sec. 736(a) distribution to the retiring partner for the retiring partner's share of recapture potential and then effectively deduct the acquisition of a portion of the retiring partner's interest in a depreciable asset.

General Partner in a Service Partnership

* Partner treatment

The service partner in a general partnership will not be significantly affected by the new provisions. Sec. 736(b)(3) will not apply to such partners, thereby retaining most of the flexibility allowed in prior law for determining the amount of Sec. 736(a) and (b) payments. The modified definition of unrealized receivables under Sec. 751(c) will affect the amount of unrealized receivables, since many items, including recapture potential, are no longer included as unrealized receivables in Sec. 736 distributions. This modification to the law should generally reduce the distributee partner's share of partnership unrealized receivables under Sec. 751(c) and, therefore, will probably reduce the amount of payments that can be properly classified under Sec. 736(a). The resultant increase in the amount of Sec. 736(b) payments, however, will not affect the amount of ordinary income to be recognized by the distributee partner. Recapture potential is still considered to be an unrealized receivable under the Sec. 741 distribution rules. When the tax consequences of the Sec. 736(b) distribution are determined, Secs. 741 and 751(b) will require the distributee partner to recognize the same amount of ordinary income as if the payments for the recapture had been classified under Sec. 736(a).

* Partnership treatment

The changes in the law will have a more significant effect on the partnership. By excluding recapture from the definition of unrealized receivables, the typical partnership distribution will involve more Sec. 736(b) payments and fewer Sec. 736(a) payments than under prior law. This relative increase in the amount of Sec. 736(b) payments reduces the amount of direct or indirect deductions available to the partnership and the continuing partners. It also eliminates the planning opportunity available under prior law that effectively allowed the partnership a deduction for the cost of the distributee partner's share of recapture potential. On the other hand, the inclusion of depreciation recapture as an unrealized receivable for purposes of Secs. 731 and 751 results in the distributee partner's share of recapture potential taking a "cost" basis to the "purchasing" partnership in the Sec. 751(b) transaction. This result will allow the partnership to step up the basis of the depreciable asset for the "cost" of the recapture purchased from the distributee partner. This "step-up" portion can be recovered under Sec. 167 or 168 (depending on the underlying partnership asset(s) involved)

Example 1: RST, Ltd., is a general partnership in which capital is not a material income-producing factor. RST liquidates the interest of S, a general partner, in a Sec. 736 distribution. As of the date of the liquidating distribution RST's assets consisted of the following:

                               Basis      Value
Cash                         $150,000   $150,000
Accounts receivable                 0    120,000
Depreciable
  Sec. 1245 property
  (initial basis $100,000)     45,000     90,000
Total                        $195,000   $360,000

S owned a one-third interest in partnership profits and capital. His basis, immediately before the distribution, was $65,000. The partnership values its goodwill at $90,000, and makes S a lump-sum cash payment of $150,000 in the liquidation of S's interest. Under either prior or current law, RST could elect to treat the payment to S for his share of partnership goodwill as a Sec. 736(a) payment or as a Sec. 736(b) payment. Assume that RST does not treat goodwill as partnership property. Regardless of the treatment of the payment for goodwill, RST will need to determine how much of the payment to S is in exchange for his interest in "partnership property," which excludes "unrealized receivables." Under prior law, the partnership property, within the meaning of Sec. 736(b), would be as follows:

Total value                                $360,000
Less unrealized receivables
  Accounts receivable         $(120,000)
  Depreciation recapture        (45,000)   (165,000)
Total                                       195,000
S's share (1/3)                            $ 65,000

Under the RRA, the value of S's interest in partnership property would include depreciation recapture, since that portion of the value is no longer treated as an unrealized receivable. The value of S's interest in partnership property would be:

Total value                   $360,000
Less unrealized receivables
  Accounts receivable         (120,000)
Total                          240,000
S's share (1/3)               $ 80,000

The tax treatment to S under both old and new law would be:

                             Old law     New law
Payments in exchange
  for interest in
  partnership property:
    Total amount received   $ 65,000    $ 80,000
    Less S's basis           (65,000)    (65,000)
    Gain to S                      0      15,000
Payments treated as
  income to S                 85,000      70,000
Total income and gain
  to S                        85,000      85,000
Recovery of S's basis         65,000      65,000
Total payments              $150,000    $150,000

The only change from S's point of view is one of classification. His ordinary income under either law would be $85,000. Under prior law, the ordinary income would be the result of characterizing all payments that exceeded his basis in his partnership interest as ordinary income under Sec. 736(a). The new law would change $15,000 of this total to a payment in exchange for his interest in partnership property. The gain resulting from this reclassification would be ordinary income, since the partnership asset that resulted in the gain is depreciation recapture.

The most significant difference under the new law is the partnership's treatment. Under prior law, RST would claim the entire Sec. 736(a) payment of $85,000 as an ordinary deduction. Under new law, RST may claim only $70,000 as an ordinary deduction. The $15,000 payment attributable to S's portion of depreciation recapture would be treated as a payment for property. RST would be allowed a basis adjustment to its depreciable property if it had a Sec. 754 election in effect for the year. It could recover the cost of the basis adjustment through depreciation under the prescribed modified accelerated cost recovery system (MACRS) allowances.

Other Than General Partner or When Capital Is a Material Income-Producing Factor

* Partner-level treatment

The changes made by the RRA will have a moderate effect on the taxation of limited partners and general partners in a capital-intensive partnership. When such partners receive a liquidating distribution, it is clear that new Sec. 736(b)(3) will classify all of the payments received for the distributee's share of unrealized receivables and goodwill as Sec. 736(b) payments. This will result in the distributee partner being taxed under the normal distribution rules of Secs. 731, etc., on the amounts received for his interest in such partnership items. These rules require that the distributee partner recognize ordinary income under Sec. 751(b) to the extent the distributee partner gives up his share of unrealized receivables and substantially appreciated inventory. Sec. 751(c) defines unrealized receivables as under prior law for purposes of distributions under Sec. 731. Accordingly, under the RRA, the distributee partner will recognize ordinary income under the disproportionate distribution rules of Sec. 751(b) for amounts received in exchange for his share of both unrealized receivables and substantially appreciated inventory. Under prior law, the authority for ordinary income recognition would have been split between Sec. 736(a) (for unrealized receivables) and Sec. 751(b) (for substantially appreciated inventory).

When new Sec. 736(b)(3) is applied to the distribution, the portion that is in exchange for the distributee partner's share of goodwill will result in the distributee recognizing more capital gain (or less capital loss) and less ordinary income than under prior law. This result is not necessarily favorable to the distributee, however, when compared to prior law, since the partnership will lose the deduction for such payments. If the law change reduces the amount of total cash the partnership is willing to pay, the distributee partner may receive less net cash on an after-tax basis.

By reclassifying payments for the distributee partner's share of unrealized receivables and unstated goodwill as Sec. 736(b) payments, few payments, if any, will be classified as Sec. 736(a) payments. The primary payment that remains under Sec. 736(a) is a payment in the form of mutual insurance not determined by reference to any partnership asset.

* Partnership-level treatment

The tax treatment of the partnership that makes a liquidating distribution to a limited partner or to any partner in a capital-intensive partnership is modified considerably by the RRA. Distributions in exchange for the distributee partner's share of both unrealized receivables and goodwill are classified under the RRA as Sec. 736(b) distributions. (Under prior law, they were Sec. 736(a) payments.) As a result, the partnership and, therefore, the continuing partners will be unable to deduct the payments made for these reclassified items. The inability to deduct these payments for tax purposes will make the payments much more costly to the partnership. Partnerships will be more likely to negotiate for a lower amount of liquidating payments as compensation for losing the deduction for these items.

Example 2: Assume the same facts as in Example 1, except that capital is a material income-producing factor to RST. The tax treatment under old law would be exactly the same as that shown in Example 1. S would report ordinary income of $85,000, and RST would claim an ordinary deduction in the same amount.

Under the RRA, however, there would be three changes. First, RST's unrealized receivables would no longer include depreciation recapture. Second, the payment in exchange for S's share of unrealized accounts receivable is now considered a payment for partnership property under Sec. 736(b). Third, the payment in exchange for S's share of partnership goodwill must now be characterized as a Sec. 736(b) payment. From S's point of view, there may be an advantage to the treatment under the new law. He would report no ordinary income under Sec. 736(a). The portion of gain relating to his share of accounts receivable and depreciation recapture would be ordinary income under Sec.751 (b). His gain attributable to the value of partnership goodwill, however, would normally be characterized as a capital gain. Therefore, S's reported gain on the distribution would be:

                                           Character of gain
Payments in exchange for interest
  in partnership property
    Gain attributable to:
      Accounts receivable      $  40,000       Ordinary
      Depreciation recapture      15,000       Ordinary
      Goodwill                    30,000       Capital
Total gain                        85,000
Recovery of basis                 65,000
Total payments                 $ 150,000

RST would be unable to claim any ordinary deduction for the payment. If RST did not have a Sec. 754 election in effect, it would get no tax benefit from any of the payments. If it did have a Sec. 754 election in effect, it would step up the basis of the assets in the same amount as the gain reported by S. The step-up to accounts receivable should result in a short-term tax benefit, when the receivables are collected. The adjustment to the basis of the depreciable property would be recovered over the depreciable lives of the assets. The adjustment to goodwill, however, could be more complex. It may result in basis that can be amortized over 15 years. It may, however, be subject to the anti-churning rules, as discussed in Part II. In that case, it might be possible for RST to amortize the goodwill if S reported ordinary income, rather than capital gain, on the disposition of his share of goodwill. If, however, S owned (directly or indirectly) more than 20% of partnership capital or profits immediately before the distribution, RST would not be able to amortize the goodwill.

See the flowcharts on pages 241-242 for the classification and treatment of Sec. 736 payments.

Other Issues

* Definition of substantially appreciated

inventory

Excluding recapture potential from the definition of unrealized receivables may have an effect on the definition of inventory for purposes of determining whether the partnership inventory is substantially appreciated. Inventory is broadly defined under Sec. 751(d)(2). Regs. Sec. 1.751-1(d)(2) appears to provide that this broad definition of inventory includes unrealized receivables as defined in Sec. 751(d)(2)(B).(5) By excluding recapture potential from the definition of unrealized receivables for purposes of Sec. 736 classification, some may argue that Congress has excluded recapture potential from the definition of inventory for purposes of determining substantially appreciated inventory. In contrast, others (including the authors of this article) note that recapture potential is excluded from the definition of unrealized receivables and, therefore, inventory only for purposes of Sec. 736 classification. When the Sec. 751(b) calculation is made for substantially appreciated inventory, the governing rule is not Sec. 736 but Secs. 751(b), 751(d) and 731 and Regs. Sec. 1.751-1(d)(2). According to this reasoning, the RRA changes made to Secs. 736 and 751(a) will have no effect on the determination of substantially appreciated inventory under Sec. 751(d).

The RRA revised the definition of substantially appreciated inventory by eliminating the requirement of Sec. 751(d)(1)(B) that the fair market value (FMV) of the substantially appreciated inventory must exceed 10% of the FMV of all partnership assets, excluding money.

The RRA excluded from the definition of inventory any property acquired for the principal purpose of avoiding the 120% appreciation test of Sec. 751(d)(1)(A). This provision eliminates a previously available planning opportunity under which, immediately before the Sec. 736 distribution, the partnership would purchase a large amount of assets classified as inventory under Sec. 751(d)(2)'s broad definition. Since the purchased inventory would have had an identical cost basis and FMV, proper planning would allow the partnership to fail the 120% appreciation test and, therefore, not have substantially appreciated inventory when the Sec. 736(b) distribution is made. This avoided the application of Sec. 751(b) to the transaction and typically resulted in the distributee partner recognizing more capital gain and less ordinary income on the Sec. 736 distribution.

Transfer of Goodwill in a Distribution to a Retiring Partner

* Prior law

Under prior law, it was to the partnership's distinct advantage to treat payments in exchange for a retiring partner's share of partnership goodwill as Sec. 736(a) payments, and thus receive an ordinary deduction for these payments. A retiring partner might have a slight preference for treating the goodwill payments as Sec. 736(b) payments; the partner would be allowed to use this portion of the payments to reduce basis. If the payments under Sec. 736(b) exceeded the partner's basis in partnership property, the partner would report the excess as capital gain, except for any ordinary income required by Sec. 751(b).

* New law

The RRA made several significant changes to the permitted treatment of payments for goodwill in the Sec. 736 context. First, as noted above, payments in exchange for a partner's interest in goodwill must be treated as property payments under Sec. 736(b), unless the partner is a general partner and capital is not a material income-producing factor to the partnership. Second, the treatment to the continuing partnership of goodwill purchased as part of the Sec. 736(b) payment may now be amortizable over 15 years, although there are some significant restrictions on the ability of a partnership to claim this deduction. Third, the treatment of a Sec. 736(b) payment to the retiring partner is subject to a maximum tax rate of 28% if the payment is a capital gain, as opposed to 39.6% if the payment is ordinary income under Sec. 736(a). Under some circumstances, however, a portion of the partner's gain on a Sec. 736(b) payment may be ordinary income through the operation of Sec. 751(b).

When the retiring partner is a general partner, and capital is not a material income-producing factor of the partnership, it is still possible to negotiate the tax treatment of goodwill payments as under prior law. The partnership and the partner should be aware of the trade-offs under the new law in negotiating the tax treatment.

Example 3: ABC partnership is intending to retire the interest of partner A. A is a general partner and capital is not a material income-producing factor to the partnership. The partnership has agreed that A's share of partnership goodwill is approximately $100,000. The partnership has no other property and A has a zero basis in his partnership interest. Both A and the other partners are in the 39 6% income tax bracket. If the partnership agreement provides that payments for goodwill are Sec. 736(a) payments, A will report $100 000 of ordinary income, and pay tax of $39,600. A will have $60,400 after-tax cash from this arrangement. ABC will claim a corresponding deduction, and the remaining partners will collectively reduce their income taxes by $39,600. The after-tax cash outlay will be $60,400.

If the payments are treated as property payments under Sec. 736(b), A will report capital gain and pay tax at a rate of 28%. Therefore, to end up with $60,400 of after-tax cash, A should be willing to accept a reduced payment for his share of goodwill. A payment of exactly $83,889, taxed at the 28% capital gain rate, would result in a tax of $23,489, which would leave A with $60,400 of after-tax cash. This arrangement would reduce the pretax outlay by the continuing partners. If the goodwill could be amortized, under the antichurning rules, the continuing partnership would claim an ordinary deduction, resulting in aggregate tax savings of $33,220 (39.6% of $83,889). The net cash outlay would be $50,669 ($83,889 -- $33,220). The tax savings at the partnership level, however, would be spread over 15 years.

Transition Rules

* Changes to Sec. 736

The new rules that differentiate between a general partner in a service partnership from all other situations are effective for any partner retiring or dying after Jan. 4, 1993.(6) There will be no adjustment to any deferred payments that resulted from a partner's death or retirement on or before this date. Such payments will continue to be treated as Sec. 736(a) or Sec. 736(b) payments, as characterized by the partnership agreement under prior law. There is also an exception for any binding contract that was in effect on Jan. 4, 1993. Under this rule, even if the Sec. 736 distribution occurs after that date, the partnership may characterize the payments as Sec. 736(a) or Sec. 736(b) distributions, as it would have under prior law.(7)

The same effective dates apply to the changed definitions of unrealized receivables. Therefore, if a partner retires or dies after Jan. 4, 1993, even when he is a general partner in a service partnership, the Sec. 736(a) payments will not include the partner's share of depreciation recapture. For payments made to a deceased partner's successor in interest, it is the date of death, rather than the date of the distributions, that governs. Thus, if a partner died on or before Jan.4, 1993, the old rules will still govern the distribution, even though it may be several months, or even years, until the distribution actually occurs.

* Definition of substantially appreciated

inventory items

The new rules that repeal the prior 10% de minimis exception and disregard any inventory items purchased in order to avoid the substantial appreciation test are effective for any sale or distribution occurring after Apr. 30, 1993;(8) there is no binding contract exception to this rule. There may be some rather strange effects on Sec. 736 distributions from a partnership that has inventory items in addition to its unrealized receivables. First, a partner who retired after Jan.5, 1993, but before May 1, 1993, might be covered by the new Sec. 736 rules, but would avoid recognition of ordinary income on his share of inventory items if there was no substantial appreciation under prior law. Second, a partner (or successor in interest) who receives a Sec. 736 distribution after Apr. 30, 1993, although the distribution was subject to a death or binding contract before Jan. 5, 1993, could find that the characterization of the payments under Sec. 736 is subject to the old law, but the substantial appreciation tests for his share of partnership inventory items are subject to new law. (1) Sec. 736(b)(2). (2) Added by RRA Section 1326(a). (3) See, e.g, Secs. 402(c)(2) and 911(d), and old Sec. 1348(b)(A). (4) Other more obscure ordinary income provisions that were treated as unrealized receivables under Sec. 736 will no longer be considered as unrealized receivables for Sec. 736 purposes, e.g., market discount bonds (as defined in Sec. 1278) and short-term obligations (as defined in Sec. 1283). (5) The inclusion of unrealized receivables in the definition of inventory has been questioned and criticized by numerous commentators. See McKee, Nelson and Whitmire Federal Taxation of Partnerships and Partners (Boston: Warren, Gorham & Lamont, 2d Ed., 1990), at Vol. 2, [paragraph] 16.04[1][b]; Streuling, Boyd and Heller, Federal Taxation of Partners and Partnerships (Englewood Cliffs: Prentice-Hall, Inc., 1986), at 338-339. (6) RRA Section 13262(c)(1). (7) RRA Section 13262(c)(2). (8) RRA Section l3206(e)(2).

Robert W. Jamison, Ph.D., CPA Associate Professor of Accountancy University of Illinois at Urbana-Champaign Urbana, Ill.

James H. Boyd, Ph.D., CPA Professor of Accountancy Arizona State University Tempe, Ariz.