26 U.S.C. § 731 — Extent of recognition of gain or loss on dis-

Page 1876 TITLE 26—INTERNAL REVENUE CODE § 731 any gain or loss recognized by the partnership on the disposition of such property during the 5- year period beginning on the date of such con- tribution shall be treated as ordinary income or ordinary loss, as the case may be. (c) Contributions of capital loss property In the case of any property which— (1) was contributed by a partner to the part- nership, and (2) was a capital asset in the hands of such partner immediately before such contribution, any loss recognized by the partnership on the disposition of such property during the 5-year period beginning on the date of such contribu- tion shall be treated as a loss from the sale of a capital asset to the extent that, immediately be- fore such contribution, the adjusted basis of such property in the hands of the partner ex- ceeded the fair market value of such property. (d) Definitions For purposes of this section— (1) Unrealized receivable The term ‘‘unrealized receivable’’ has the meaning given such term by section 751(c) (de- termined by treating any reference to the partnership as referring to the partner). (2) Inventory item The term ‘‘inventory item’’ has the meaning given such term by section 751(d) (determined by treating any reference to the partnership as referring to the partner and by applying sec- tion 1231 without regard to any holding period therein provided). (3) Substituted basis property (A) In general If any property described in subsection (a), (b), or (c) is disposed of in a nonrecognition transaction, the tax treatment which applies to such property under such subsection shall also apply to any substituted basis property resulting from such transaction. A similar rule shall also apply in the case of a series of non-recognition transactions. (B) Exception for stock in C corporation Subparagraph (A) shall not apply to any stock in a C corporation received in an ex- change described in section 351. (Added Pub. L. 98–369, div. A, title I, § 74(a), July 18, 1984, 98 Stat. 592; amended Pub. L. 104–188, title I, § 1704(t)(63), Aug. 20, 1996, 110 Stat. 1890; Pub. L. 105–34, title X, § 1062(b)(3), Aug. 5, 1997, 111 Stat. 947.) Editorial Notes AMENDMENTS 1997—Subsec. (d)(2). Pub. L. 105–34 substituted ‘‘sec- tion 751(d)’’ for ‘‘section 751(d)(2)’’. 1996—Subsec. (d)(3)(B). Pub. L. 104–188 substituted ‘‘Subparagraph’’ for ‘‘Subparagaph’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title X, § 1062(c), Aug. 5, 1997, 111 Stat. 947, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section and sections 731, 732, 735, and 751 of this title] shall apply to sales, exchanges, and distributions after the date of the enactment of this Act [Aug. 5, 1997]. ‘‘(2) BINDING CONTRACTS.—The amendments made by this section shall not apply to any sale or exchange pursuant to a written binding contract in effect on June 8, 1997, and at all times thereafter before such sale or exchange.’’ EFFECTIVE DATE Pub. L. 98–369, div. A, title I, § 74(d)(1), July 18, 1984, 98 Stat. 594, provided that: ‘‘The amendment made by subsection (a) [enacting this section] shall apply to property contributed to a partnership after March 31, 1984, in taxable years ending after such date.’’ SUBPART B—DISTRIBUTIONS BY A PARTNERSHIP Sec. 731. Extent of recognition of gain or loss on dis- tribution. 732. Basis of distributed property other than money. 733. Basis of distributee partner’s interest. 734. Adjustment to basis of undistributed partner- ship property where section 754 election or substantial basis reduction. 735. Character of gain or loss on disposition of dis- tributed property. 736. Payments to a retiring partner or a deceased partner’s successor in interest. 737. Recognition of precontribution gain in case of certain distributions to contributing part- ner. Editorial Notes AMENDMENTS 2004—Pub. L. 108–357, title VIII, § 833(c)(5)(B), Oct. 22, 2004, 118 Stat. 1592, substituted ‘‘Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction’’ for ‘‘Optional adjustment to basis of undistributed partnership prop- erty’’ in item 734. 1992—Pub. L. 102–486, title XIX, § 1937(b)(3), Oct. 24, 1992, 106 Stat. 3033, added item 737. § 731. Extent of recognition of gain or loss on dis- tribution (a) Partners In the case of a distribution by a partnership to a partner— (1) gain shall not be recognized to such part- ner, except to the extent that any money dis- tributed exceeds the adjusted basis of such partner’s interest in the partnership imme- diately before the distribution, and (2) loss shall not be recognized to such part- ner, except that upon a distribution in liquida- tion of a partner’s interest in a partnership where no property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner’s interest in the partnership over the sum of— (A) any money distributed, and (B) the basis to the distributee, as deter- mined under section 732, of any unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)). Any gain or loss recognized under this sub- section shall be considered as gain or loss from Page 1877 TITLE 26—INTERNAL REVENUE CODE § 731 the sale or exchange of the partnership interest of the distributee partner. (b) Partnerships No gain or loss shall be recognized to a part- nership on a distribution to a partner of prop- erty, including money. (c) Treatment of marketable securities (1) In general For purposes of subsection (a)(1) and section 737— (A) the term ‘‘money’’ includes market- able securities, and (B) such securities shall be taken into ac- count at their fair market value as of the date of the distribution. (2) Marketable securities For purposes of this subsection: (A) In general The term ‘‘marketable securities’’ means financial instruments and foreign currencies which are, as of the date of the distribution, actively traded (within the meaning of sec- tion 1092(d)(1)). (B) Other property Such term includes— (i) any interest in— (I) a common trust fund, or (II) a regulated investment company which is offering for sale or has out- standing any redeemable security (as de- fined in section 2(a)(32) of the Invest- ment Company Act of 1940) of which it is the issuer, (ii) any financial instrument which, pur- suant to its terms or any other arrange- ment, is readily convertible into, or ex- changeable for, money or marketable secu- rities, (iii) any financial instrument the value of which is determined substantially by reference to marketable securities, (iv) except to the extent provided in reg- ulations prescribed by the Secretary, any interest in a precious metal which, as of the date of the distribution, is actively traded (within the meaning of section 1092(d)(1)) unless such metal was produced, used, or held in the active conduct of a trade or business by the partnership, (v) except as otherwise provided in regu- lations prescribed by the Secretary, inter- ests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of marketable securities, money, or both, and (vi) to the extent provided in regulations prescribed by the Secretary, any interest in an entity not described in clause (v) but only to the extent of the value of such in- terest which is attributable to marketable securities, money, or both. (C) Financial instrument The term ‘‘financial instrument’’ includes stocks and other equity interests, evidences of indebtedness, options, forward or futures contracts, notional principal contracts, and derivatives. (3) Exceptions (A) In general Paragraph (1) shall not apply to the dis- tribution from a partnership of a marketable security to a partner if— (i) the security was contributed to the partnership by such partner, except to the extent that the value of the distributed se- curity is attributable to marketable secu- rities or money contributed (directly or in- directly) to the entity to which the dis- tributed security relates, (ii) to the extent provided in regulations prescribed by the Secretary, the property was not a marketable security when ac- quired by such partnership, or (iii) such partnership is an investment partnership and such partner is an eligible partner thereof. (B) Limitation on gain recognized In the case of a distribution of marketable securities to a partner, the amount taken into account under paragraph (1) shall be re- duced (but not below zero) by the excess (if any) of— (i) such partner’s distributive share of the net gain which would be recognized if all of the marketable securities of the same class and issuer as the distributed se- curities held by the partnership were sold (immediately before the transaction to which the distribution relates) by the part- nership for fair market value, over (ii) such partner’s distributive share of the net gain which is attributable to the marketable securities of the same class and issuer as the distributed securities held by the partnership immediately after the transaction, determined by using the same fair market value as used under clause (i). Under regulations prescribed by the Sec- retary, all marketable securities held by the partnership may be treated as marketable securities of the same class and issuer as the distributed securities. (C) Definitions relating to investment part- nerships For purposes of subparagraph (A)(iii): (i) Investment partnership The term ‘‘investment partnership’’ means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of— (I) money, (II) stock in a corporation, (III) notes, bonds, debentures, or other evidences of indebtedness, (IV) interest rate, currency, or equity notional principal contracts, (V) foreign currencies, (VI) interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded Page 1878 TITLE 26—INTERNAL REVENUE CODE § 731 on or subject to the rules of a board of trade or commodity exchange, (VII) other assets specified in regula- tions prescribed by the Secretary, or (VIII) any combination of the fore- going. (ii) Exception for certain activities A partnership shall not be treated as en- gaged in a trade or business by reason of— (I) any activity undertaken as an in- vestor, trader, or dealer in any asset de- scribed in clause (i), or (II) any other activity specified in reg- ulations prescribed by the Secretary. (iii) Eligible partner (I) In general The term ‘‘eligible partner’’ means any partner who, before the date of the dis- tribution, did not contribute to the part- nership any property other than assets described in clause (i). (II) Exception for certain nonrecognition transactions The term ‘‘eligible partner’’ shall not include the transferor or transferee in a nonrecognition transaction involving a transfer of any portion of an interest in a partnership with respect to which the transferor was not an eligible partner. (iv) Look-thru of partnership tiers Except as otherwise provided in regula- tions prescribed by the Secretary— (I) a partnership shall be treated as en- gaged in any trade or business engaged in by, and as holding (instead of a part- nership interest) a proportionate share of the assets of, any other partnership in which the partnership holds a partner- ship interest, and (II) a partner who contributes to a partnership an interest in another part- nership shall be treated as contributing a proportionate share of the assets of the other partnership. If the preceding sentence does not apply under such regulations with respect to any interest held by a partnership in another partnership, the interest in such other partnership shall be treated as if it were specified in a subclause of clause (i). (4) Basis of securities distributed (A) In general The basis of marketable securities with re- spect to which gain is recognized by reason of this subsection shall be— (i) their basis determined under section 732, increased by (ii) the amount of such gain. (B) Allocation of basis increase Any increase in basis attributable to the gain described in subparagraph (A)(ii) shall be allocated to marketable securities in pro- portion to their respective amounts of unre- alized appreciation before such increase. (5) Subsection disregarded in determining basis of partner’s interest in partnership and of basis of partnership property Sections 733 and 734 shall be applied as if no gain were recognized, and no adjustment were made to the basis of property, under this sub- section. (6) Character of gain recognized In the case of a distribution of a marketable security which is an unrealized receivable (as defined in section 751(c)) or an inventory item (as defined in section 751(d)), any gain recog- nized under this subsection shall be treated as ordinary income to the extent of any increase in the basis of such security attributable to the gain described in paragraph (4)(A)(ii). (7) Regulations The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this subsection, in- cluding regulations to prevent the avoidance of such purposes. (d) Exceptions This section shall not apply to the extent oth- erwise provided by section 736 (relating to pay- ments to a retiring partner or a deceased part- ner’s successor in interest), section 751 (relating to unrealized receivables and inventory items), and section 737 (relating to recognition of precontribution gain in case of certain distribu- tions). (Aug. 16, 1954, ch. 736, 68A Stat. 245; Pub. L. 102–486, title XIX, § 1937(b)(2), Oct. 24, 1992, 106 Stat. 3033; Pub. L. 103–465, title VII, § 741(a), Dec. 8, 1994, 108 Stat. 5006; Pub. L. 105–34, title X, § 1062(b)(3), Aug. 5, 1997, 111 Stat. 947.) Editorial Notes REFERENCES IN TEXT Section 2(a)(32) of the Investment Company Act of 1940, referred to in subsec. (c)(2)(B)(i)(II), is classified to section 80a–2(a)(32) of Title 15, Commerce and Trade. AMENDMENTS 1997—Subsecs. (a)(2)(B), (c)(6). Pub. L. 105–34 sub- stituted ‘‘section 751(d)’’ for ‘‘section 751(d)(2)’’. 1994—Subsecs. (c), (d). Pub. L. 103–465 added subsec. (c) and redesignated former subsec. (c) as (d). 1992—Subsec. (c). Pub. L. 102–486 substituted ‘‘, section 751’’ for ‘‘and section 751’’ and inserted be- fore period at end ‘‘, and section 737 (relating to rec- ognition of precontribution gain in case of certain dis- tributions)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to sales, ex- changes, and distributions after Aug. 5, 1997, but not applicable to any sale or exchange pursuant to a writ- ten binding contract in effect on June 8, 1997, and at all times thereafter before such sale or exchange, see sec- tion 1062(c) of Pub. L. 105–34, set out as a note under section 724 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Pub. L. 103–465, title VII, § 741(c), Dec. 8, 1994, 108 Stat. 5009, provided that: ‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section Page 1879 TITLE 26—INTERNAL REVENUE CODE § 732 [amending this section and section 737 of this title] shall apply to distributions after the date of the enact- ment of this Act [Dec. 8, 1994]. ‘‘(2) CERTAIN DISTRIBUTIONS BEFORE JANUARY 1, 1995.— The amendments made by this section shall not apply to any marketable security distributed before January 1, 1995, by the partnership which held such security on July 27, 1994. ‘‘(3) DISTRIBUTIONS IN LIQUIDATION OF PARTNER’S IN- TEREST.—The amendments made by this section shall not apply to the distribution of a marketable security in liquidation of a partner’s interest in a partnership if— ‘‘(A) such liquidation is pursuant to a written con- tract which was binding on July 15, 1994, and at all times thereafter before the distribution, and ‘‘(B) such contract provides for the purchase of such interest not later than a date certain for— ‘‘(i) a fixed value of marketable securities that are specified in the contract, or ‘‘(ii) other property. The preceding sentence shall not apply if the partner has the right to elect that such distribution be made other than in marketable securities. ‘‘(4) DISTRIBUTIONS IN COMPLETE LIQUIDATION OF PUB- LICLY TRADED PARTNERSHIPS.— ‘‘(A) IN GENERAL.—The amendments made by this section shall not apply to the distribution of a mar- ketable security in a qualified partnership liquida- tion if— ‘‘(i) the marketable securities were received by the partnership in a nonrecognition transaction in exchange for substantially all of the assets of the partnership, ‘‘(ii) the marketable securities are distributed by the partnership within 90 days after their receipt by the partnership, and ‘‘(iii) the partnership is liquidated before the be- ginning of the 1st taxable year of the partnership beginning after December 31, 1997. ‘‘(B) QUALIFIED PARTNERSHIP LIQUIDATION.—For pur- poses of subparagraph (A), the term ‘qualified part- nership liquidation’ means— ‘‘(i) a complete liquidation of a publicly traded partnership (as defined in section 7704(b) of the In- ternal Revenue Code of 1986) which is an existing partnership (as defined in section 10211(c)(2) of the Revenue Act of 1987 [Pub. L. 100–203, set out as an Effective Date note under section 7704 of this title]), and ‘‘(ii) a complete liquidation of a partnership which is related to a partnership described in clause (i) if such liquidation is related to a complete liq- uidation of the partnership described in clause (i). ‘‘(5) MARKETABLE SECURITIES.—For purposes of this subsection, the term ‘marketable securities’ has the meaning given such term by section 731(c) of the Inter- nal Revenue Code of 1986, as added by this section.’’ EFFECTIVE DATE OF 1992 AMENDMENT Amendment by Pub. L. 102–486 applicable to distribu- tions on or after June 25, 1992, see section 1937(c) of Pub. L. 102–486, set out as a note under section 704 of this title. § 732. Basis of distributed property other than money (a) Distributions other than in liquidation of a partner’s interest (1) General rule The basis of property (other than money) distributed by a partnership to a partner other than in liquidation of the partner’s interest shall, except as provided in paragraph (2), be its adjusted basis to the partnership imme- diately before such distribution. (2) Limitation The basis to the distributee partner of prop- erty to which paragraph (1) is applicable shall not exceed the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction. (b) Distributions in liquidation The basis of property (other than money) dis- tributed by a partnership to a partner in liquida- tion of the partner’s interest shall be an amount equal to the adjusted basis of such partner’s in- terest in the partnership reduced by any money distributed in the same transaction. (c) Allocation of basis (1) In general The basis of distributed properties to which subsection (a)(2) or (b) is applicable shall be allocated— (A)(i) first to any unrealized receivables (as defined in section 751(c)) and inventory items (as defined in section 751(d)) in an amount equal to the adjusted basis of each such property to the partnership, and (ii) if the basis to be allocated is less than the sum of the adjusted bases of such prop- erties to the partnership, then, to the extent any decrease is required in order to have the adjusted bases of such properties equal the basis to be allocated, in the manner provided in paragraph (3), and (B) to the extent of any basis remaining after the allocation under subparagraph (A), to other distributed properties— (i) first by assigning to each such other property such other property’s adjusted basis to the partnership, and (ii) then, to the extent any increase or decrease in basis is required in order to have the adjusted bases of such other dis- tributed properties equal such remaining basis, in the manner provided in paragraph (2) or (3), whichever is appropriate. (2) Method of allocating increase Any increase required under paragraph (1)(B) shall be allocated among the properties— (A) first to properties with unrealized ap- preciation in proportion to their respective amounts of unrealized appreciation before such increase (but only to the extent of each property’s unrealized appreciation), and (B) then, to the extent such increase is not allocated under subparagraph (A), in propor- tion to their respective fair market values. (3) Method of allocating decrease Any decrease required under paragraph (1)(A) or (1)(B) shall be allocated— (A) first to properties with unrealized de- preciation in proportion to their respective amounts of unrealized depreciation before such decrease (but only to the extent of each property’s unrealized depreciation), and (B) then, to the extent such decrease is not allocated under subparagraph (A), in propor- tion to their respective adjusted bases (as adjusted under subparagraph (A)). (d) Special partnership basis to transferee For purposes of subsections (a), (b), and (c), a partner who acquired all or a part of his interest by a transfer with respect to which the election provided in section 754 is not in effect, and to