alpha-Diazo esters containing an amido group in the gamma-position have been found to undergo a rhodium(II)-catalyzed transformation, producing five-membered ammonium or carbonyl ylides depending on the reaction conditions used. In the absence of an external dipolarophile, ammonium ylides are the exclusive products formed. In most cases these ylides cannot be isolated as they readily undergo sigmatropic rearrangement or fragmentation reactions. In the presence of typical dipolarophiles such as DMAD or N-phenylmaleimide, cycloaddition products derived from cyclic carbonyl ylide dipoles are formed as the major products. The rhodium carbenoid intermediate generated in these reactions can either attack the lone pair of electrons on the amide nitrogen (ammonium ylide formation) or the lone pair of electrons on the carbonyl oxygen (carbonyl ylide formation). The experimental observations reflect a catalyst-promoted system of equilibria with a clear-cut thermodynamic bias. To examine the underlying mechanism in detail, density functional theory (DFT) calculations were performed on all plausible intermediates, including the full dirhodium tetracarboxylate functionality. A semiquantitative energy manifold is developed that rationalizes the empirical observations and provides a detailed picture of the role of the dirhodium(II) catalyst.