If a partner sells or exchanges his or her interest in a partnership, the sale is treated as a sale or exchange of a capital asset under Code Section 741..But, under Code Section 751, ordinary income treatment applies on the sale or exchange of a partnership interest to amounts received that are attributable to the partnership's unrealized receivables and inventory (sometimes called “section 751 property” or “hot assets”). . This ordinary income treatment is intended to reduce opportunities for tax avoidance that could arise from a partner's sale of a partnership interest in order to get capital gain on the sale of the interest instead of the ordinary income that would result from sale of the underlying assets by the partnership. For this reason, Code Section 751 is sometimes called the “collapsible partnership” rule.
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