Legal Definitions - collapsible partnership

A collapsible partnership is a type of partnership where partners intend to dissolve it before they realize any income. This type of partnership is formed with the intention of avoiding taxes on unrealized receivables or inventory that has increased substantially in value. However, any partner's gain resulting from such assets will be treated by the IRS as ordinary income rather than as capital gain.

For example, if two partners form a collapsible partnership to invest in a real estate property and sell it before any income is realized, any gain resulting from the sale will be treated as ordinary income by the IRS.