26 U.S.C. § 743 — Special rules where section 754 election or

Page 1884 TITLE 26—INTERNAL REVENUE CODE § 741 ship, such property shall not be taken into ac- count under subsection (a)(1) and shall not be taken into account in determining the amount of the net precontribution gain. If the prop- erty distributed consists of an interest in an entity, the preceding sentence shall not apply to the extent that the value of such interest is attributable to property contributed to such entity after such interest had been contrib- uted to the partnership. (2) Coordination with section 751 This section shall not apply to the extent section 751(b) applies to such distribution. (e) Marketable securities treated as money For treatment of marketable securities as money for purposes of this section, see section 731(c). (Added Pub. L. 102–486, title XIX, § 1937(a), Oct. 24, 1992, 106 Stat. 3032; amended Pub. L. 103–465, title VII, § 741(b), Dec. 8, 1994, 108 Stat. 5009; Pub. L. 104–188, title I, § 1704(j)(8), Aug. 20, 1996, 110 Stat. 1882; Pub. L. 105–34, title X, § 1063(a), Aug. 5, 1997, 111 Stat. 947.) Editorial Notes AMENDMENTS 1997—Subsec. (b)(1). Pub. L. 105–34 substituted ‘‘7 years’’ for ‘‘5 years’’. 1996—Pub. L. 104–188 provided that section 1937(a) of Pub. L. 102–486, shall be applied as if ‘‘Subpart B’’ ap- peared instead of ‘‘Subpart C’’. Section 1937(a) of Pub. L. 102–486 directed amendment of subpart C of this part by adding this section at the end thereof. 1994—Subsec. (c)(1). Pub. L. 103–465, § 741(b)(1), amend- ed last sentence generally. Prior to amendment, last sentence read as follows: ‘‘Except for purposes of deter- mining the amount recognized under subsection (a), such increase shall be treated as occurring imme- diately before the distribution.’’ Subsec. (e). Pub. L. 103–465, § 741(b)(2), added subsec. (e). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to property contributed to a partnership after June 8, 1997, but not applicable to any property contributed pursuant to a written binding contract in effect on June 8, 1997, and at all times thereafter before such contribution if such contract provides for the contribution of a fixed amount of property, see section 1063(b) of Pub. L. 105–34, set out as a note under section 704 of this title. EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–465 applicable to distribu- tions after Dec. 8, 1994, and not applicable to certain distributions before Jan. 1, 1995, distributions in liq- uidation of partner’s interest, or distributions in com- plete liquidation of publicly traded partnerships, see section 741(c) of Pub. L. 103–465, set out as a note under section 731 of this title. EFFECTIVE DATE Section applicable to distributions on or after June 25, 1992, see section 1937(c) of Pub. L. 102–486, set out as an Effective Date of 1992 Amendment note under sec- tion 704 of this title. SUBPART C—TRANSFERS OF INTERESTS IN A PARTNERSHIP Sec. 741. Recognition and character of gain or loss on sale or exchange. Sec. 742. Basis of transferee partner’s interest. 743. Special rules where section 754 election or substantial built-in loss. Editorial Notes AMENDMENTS 2004—Pub. L. 108–357, title VIII, § 833(b)(6)(B), Oct. 22, 2004, 118 Stat. 1591, substituted ‘‘Special rules where section 754 election or substantial built-in loss’’ for ‘‘Optional adjustment to basis of partnership property’’ in item 743. § 741. Recognition and character of gain or loss on sale or exchange In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or ex- change of a capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items). (Aug. 16, 1954, ch. 736, 68A Stat. 248; Pub. L. 107–147, title IV, § 417(12), Mar. 9, 2002, 116 Stat. 56.) Editorial Notes AMENDMENTS 2002—Pub. L. 107–147 struck out ‘‘which have appre- ciated substantially in value’’ after ‘‘inventory items’’. § 742. Basis of transferee partner’s interest The basis of an interest in a partnership ac- quired other than by contribution shall be deter- mined under part II of subchapter O (sec. 1011 and following). (Aug. 16, 1954, ch. 736, 68A Stat. 249.) § 743. Special rules where section 754 election or substantial built-in loss (a) General rule The basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner unless the election provided by section 754 (relating to optional adjustment to basis of partnership property) is in effect with respect to such partnership or unless the part- nership has a substantial built-in loss imme- diately after such transfer. (b) Adjustment to basis of partnership property In the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which the election provided in section 754 is in effect or which has a substantial built-in loss immediately after such transfer shall— (1) increase the adjusted basis of the part- nership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property, or (2) decrease the adjusted basis of the part- nership property by the excess of the trans- feree partner’s proportionate share of the ad- justed basis of the partnership property over the basis of his interest in the partnership. Page 1885 TITLE 26—INTERNAL REVENUE CODE § 743 Under regulations prescribed by the Secretary, such increase or decrease shall constitute an ad- justment to the basis of partnership property with respect to the transferee partner only. A partner’s proportionate share of the adjusted basis of partnership property shall be deter- mined in accordance with his interest in part- nership capital and, in the case of property con- tributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share. In the case of an adjustment under this subsection to the basis of partnership property subject to depletion, any depletion allowable shall be determined sepa- rately for the transferee partner with respect to his interest in such property. (c) Allocation of basis The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules pro- vided in section 755. (d) Substantial built-in loss (1) In general For purposes of this section, a partnership has a substantial built-in loss with respect to a transfer of an interest in the partnership if— (A) the partnership’s adjusted basis in the partnership property exceeds by more than $250,000 the fair market value of such prop- erty, or (B) the transferee partner would be allo- cated a loss of more than $250,000 if the part- nership assets were sold for cash equal to their fair market value immediately after such transfer. (2) Regulations The Secretary shall prescribe such regula- tions as may be appropriate to carry out the purposes of paragraph (1) and section 734(d), including regulations aggregating related partnerships and disregarding property ac- quired by the partnership in an attempt to avoid such purposes. (e) Alternative rules for electing investment partnerships (1) No adjustment of partnership basis For purposes of this section, an electing in- vestment partnership shall not be treated as having a substantial built-in loss with respect to any transfer occurring while the election under paragraph (6)(A) is in effect. (2) Loss deferral for transferee partner In the case of a transfer of an interest in an electing investment partnership, the trans- feree partner’s distributive share of losses (without regard to gains) from the sale or ex- change of partnership property shall not be al- lowed except to the extent that it is estab- lished that such losses exceed the loss (if any) recognized by the transferor (or any prior transferor to the extent not fully offset by a prior disallowance under this paragraph) on the transfer of the partnership interest. (3) No reduction in partnership basis Losses disallowed under paragraph (2) shall not decrease the transferee partner’s basis in the partnership interest. (4) Certain basis reductions treated as losses In the case of a transferee partner whose basis in property distributed by the partner- ship is reduced under section 732(a)(2), the amount of the loss recognized by the trans- feror on the transfer of the partnership inter- est which is taken into account under para- graph (2) shall be reduced by the amount of such basis reduction. (5) Electing investment partnership For purposes of this subsection, the term ‘‘electing investment partnership’’ means any partnership if— (A) the partnership makes an election to have this subsection apply, (B) the partnership would be an invest- ment company under section 3(a)(1)(A) of the Investment Company Act of 1940 but for an exemption under paragraph (1) or (7) of sec- tion 3(c) of such Act, (C) such partnership has never been en- gaged in a trade or business, (D) substantially all of the assets of such partnership are held for investment, (E) at least 95 percent of the assets con- tributed to such partnership consist of money, (F) no assets contributed to such partner- ship had an adjusted basis in excess of fair market value at the time of contribution, (G) all partnership interests of such part- nership are issued by such partnership pur- suant to a private offering before the date which is 24 months after the date of the first capital contribution to such partnership, (H) the partnership agreement of such partnership has substantive restrictions on each partner’s ability to cause a redemption of the partner’s interest, and (I) the partnership agreement of such part- nership provides for a term that is not in ex- cess of 15 years. The election described in subparagraph (A), once made, shall be irrevocable except with the consent of the Secretary. (6) Regulations The Secretary shall prescribe such regula- tions as may be appropriate to carry out the purposes of this subsection, including regula- tions for applying this subsection to tiered partnerships. (f) Exception for securitization partnerships (1) No adjustment of partnership basis For purposes of this section, a securitization partnership shall not be treated as having a substantial built-in loss with respect to any transfer. (2) Securitization partnership For purposes of paragraph (1), the term ‘‘securitization partnership’’ means any part- nership the sole business activity of which is to issue securities which provide for a fixed principal (or similar) amount and which are primarily serviced by the cash flows of a dis- crete pool (either fixed or revolving) of receiv- ables or other financial assets that by their terms convert into cash in a finite period, but Page 1886 TITLE 26—INTERNAL REVENUE CODE § 751 only if the sponsor of the pool reasonably be- lieves that the receivables and other financial assets comprising the pool are not acquired so as to be disposed of. (Aug. 16, 1954, ch. 736, 68A Stat. 249; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–369, div. A, title I, § 71(b), July 18, 1984, 98 Stat. 589; Pub. L. 108–357, title VIII, § 833(b)(1)–(4)(A), (5), (6)(A), Oct. 22, 2004, 118 Stat. 1589, 1591; Pub. L. 115–97, title I, §§ 13502(a), 13504(b)(2), Dec. 22, 2017, 131 Stat. 2141, 2142.) Editorial Notes REFERENCES IN TEXT Section 3(a)(1)(A), (c)(1), (7) of the Investment Com- pany Act of 1940, referred to in subsec. (e)(5)(B), is clas- sified to section 80a–3(a)(1)(A), (c)(1), (7) of Title 15, Commerce and Trade. AMENDMENTS 2017—Subsec. (d)(1). Pub. L. 115–97, § 13502(a), amended par. (1) generally. Prior to amendment, text read as fol- lows: ‘‘For purposes of this section, a partnership has a substantial built-in loss with respect to a transfer of an interest in a partnership if the partnership’s adjusted basis in the partnership property exceeds by more than $250,000 the fair market value of such property.’’ Subsec. (e)(4) to (7). Pub. L. 115–97, § 13504(b)(2), redes- ignated pars. (5) to (7) as (4) to (6), respectively, and struck out former par. (4). Prior to amendment, text of par. (4) read as follows: ‘‘This subsection shall be ap- plied without regard to any termination of a partner- ship under section 708(b)(1)(B).’’ 2004—Pub. L. 108–357, § 833(b)(6)(A), substituted ‘‘Spe- cial rules where section 754 election or substantial built-in loss’’ for ‘‘Optional adjustment to basis of part- nership property’’ in section catchline. Subsec. (a). Pub. L. 108–357, § 833(b)(1), inserted ‘‘or unless the partnership has a substantial built-in loss immediately after such transfer’’ before period at end. Subsec. (b). Pub. L. 108–357, § 833(b)(2), inserted ‘‘or which has a substantial built-in loss immediately after such transfer’’ after ‘‘section 754 is in effect’’ in intro- ductory provisions. Subsec. (d). Pub. L. 108–357, § 833(b)(3), added subsec. (d). Subsec. (e). Pub. L. 108–357, § 833(b)(4)(A), added sub- sec. (e). Subsec. (f). Pub. L. 108–357, § 833(b)(5), added subsec. (f). 1984—Subsec. (b). Pub. L. 98–369 substituted ‘‘property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share’’ for ‘‘an agreement described in section 704(c)(2) (relating to effect of partnership agreement on contributed property), such share shall be determined by taking such agreement into account’’ in penultimate sentence. 1976—Subsec. (b). Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 13502(b), Dec. 22, 2017, 131 Stat. 2141, provided that: ‘‘The amendments made by this section [amending this section] shall apply to transfers of partnership interests after December 31, 2017.’’ Amendment by section 13504(b)(2) of Pub. L. 115–97 ap- plicable to partnership taxable years beginning after Dec. 31, 2017, see section 13504(c) of Pub. L. 115–97, set out as a note under section 168 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title VIII, § 833(d)(2), Oct. 22, 2004, 118 Stat. 1592, provided that: ‘‘(A) IN GENERAL.—Except as provided in subpara- graph (B), the amendments made by subsection (b) [amending this section and section 6031 of this title] shall apply to transfers after the date of the enactment of this Act [Oct. 22, 2004]. ‘‘(B) TRANSITION RULE.—In the case of an electing in- vestment partnership which is in existence on June 4, 2004, section 743(e)(6)(H) [now 743(e)(5)(H)] of the Inter- nal Revenue Code of 1986, as added by this section, shall not apply to such partnership and section 743(e)(6)(I) [now 743(e)(5)(I)] of such Code, as so added, shall be ap- plied by substituting ‘20 years’ for ‘15 years’.’’ EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable with respect to property contributed to the partnership after Mar. 31, 1984, in taxable years ending after such date, see sec- tion 71(c) of Pub. L. 98–369, set out as a note under sec- tion 704 of this title. SUBPART D—PROVISIONS COMMON TO OTHER SUBPARTS Sec. 751. Unrealized receivables and inventory items. 752. Treatment of certain liabilities. 753. Partner receiving income in respect of dece- dent. 754. Manner of electing optional adjustment to basis of partnership property. 755. Rules for allocation of basis. § 751. Unrealized receivables and inventory items (a) Sale or exchange of interest in partnership The amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his inter- est in the partnership attributable to— (1) unrealized receivables of the partnership, or (2) inventory items of the partnership, shall be considered as an amount realized from the sale or exchange of property other than a capital asset. (b) Certain distributions treated as sales or ex- changes (1) General rule To the extent a partner receives in a dis- tribution— (A) partnership property which is— (i) unrealized receivables, or (ii) inventory items which have appre- ciated substantially in value, in exchange for all or a part of his interest in other partnership property (including money), or (B) partnership property (including money) other than property described in subparagraph (A)(i) or (ii) in exchange for all or a part of his interest in partnership prop- erty described in subparagraph (A)(i) or (ii), such transactions shall, under regulations pre- scribed by the Secretary, be considered as a sale or exchange of such property between the distributee and the partnership (as constituted after the distribution). (2) Exceptions Paragraph (1) shall not apply to— (A) a distribution of property which the distributee contributed to the partnership, or