26 U.S.C. § 732 — Basis of distributed property other than

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 Page 1880 TITLE 26—INTERNAL REVENUE CODE § 732 whom a distribution of property (other than money) is made with respect to the transferred interest within 2 years after such transfer, may elect, under regulations prescribed by the Sec- retary, to treat as the adjusted partnership basis of such property the adjusted basis such prop- erty would have if the adjustment provided in section 743(b) were in effect with respect to the partnership property. The Secretary may by regulations require the application of this sub- section in the case of a distribution to a trans- feree partner, whether or not made within 2 years after the transfer, if at the time of the transfer the fair market value of the partnership property (other than money) exceeded 110 per- cent of its adjusted basis to the partnership. (e) Exception This section shall not apply to the extent that a distribution is treated as a sale or exchange of property under section 751(b) (relating to unreal- ized receivables and inventory items). (f) Corresponding adjustment to basis of assets of a distributed corporation controlled by a corporate partner (1) In general If— (A) a corporation (hereafter in this sub- section referred to as the ‘‘corporate part- ner’’) receives a distribution from a partner- ship of stock in another corporation (here- after in this subsection referred to as the ‘‘distributed corporation’’), (B) the corporate partner has control of the distributed corporation immediately after the distribution or at any time there- after, and (C) the partnership’s adjusted basis in such stock immediately before the distribution exceeded the corporate partner’s adjusted basis in such stock immediately after the distribution, then an amount equal to such excess shall be applied to reduce (in accordance with sub- section (c)) the basis of property held by the distributed corporation at such time (or, if the corporate partner does not control the distrib- uted corporation at such time, at the time the corporate partner first has such control). (2) Exception for certain distributions before control acquired Paragraph (1) shall not apply to any dis- tribution of stock in the distributed corpora- tion if— (A) the corporate partner does not have control of such corporation immediately after such distribution, and (B) the corporate partner establishes to the satisfaction of the Secretary that such distribution was not part of a plan or ar- rangement to acquire control of the distrib- uted corporation. (3) Limitations on basis reduction (A) In general The amount of the reduction under para- graph (1) shall not exceed the amount by which the sum of the aggregate adjusted bases of the property and the amount of money of the distributed corporation ex- ceeds the corporate partner’s adjusted basis in the stock of the distributed corporation. (B) Reduction not to exceed adjusted basis of property No reduction under paragraph (1) in the basis of any property shall exceed the ad- justed basis of such property (determined without regard to such reduction). (4) Gain recognition where reduction limited If the amount of any reduction under para- graph (1) (determined after the application of paragraph (3)(A)) exceeds the aggregate ad- justed bases of the property of the distributed corporation— (A) such excess shall be recognized by the corporate partner as long-term capital gain, and (B) the corporate partner’s adjusted basis in the stock of the distributed corporation shall be increased by such excess. (5) Control For purposes of this subsection, the term ‘‘control’’ means ownership of stock meeting the requirements of section 1504(a)(2). (6) Indirect distributions For purposes of paragraph (1), if a corpora- tion acquires (other than in a distribution from a partnership) stock the basis of which is determined (by reason of being distributed from a partnership) in whole or in part by ref- erence to subsection (a)(2) or (b), the corpora- tion shall be treated as receiving a distribu- tion of such stock from a partnership. (7) Special rule for stock in controlled corpora- tion If the property held by a distributed corpora- tion is stock in a corporation which the dis- tributed corporation controls, this subsection shall be applied to reduce the basis of the property of such controlled corporation. This subsection shall be reapplied to any property of any controlled corporation which is stock in a corporation which it controls. (8) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the purposes of this subsection, including regula- tions to avoid double counting and to prevent the abuse of such purposes. (Aug. 16, 1954, ch. 736, 68A Stat. 246; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 105–34, title X, §§ 1061(a), 1062(b)(3), Aug. 5, 1997, 111 Stat. 945, 947; Pub. L. 106–170, title V, § 538(a), Dec. 17, 1999, 113 Stat. 1939.) Editorial Notes AMENDMENTS 1999—Subsec. (f). Pub. L. 106–170 added subsec. (f). 1997—Subsec. (c). Pub. L. 105–34, § 1061(a), amended heading and text of subsec. (c) generally. Prior to amendment, text read as follows: ‘‘The basis of distrib- uted properties to which subsection (a)(2) or subsection (b) is applicable shall be allocated— ‘‘(1) first to any unrealized receivables (as defined in section 751(c)) and inventory items (as defined in Page 1881 TITLE 26—INTERNAL REVENUE CODE § 734 section 751(d)(2)) in an amount equal to the adjusted basis of each such property to the partnership (or if the basis to be allocated is less than the sum of the adjusted bases of such properties to the partnership, in proportion to such bases), and ‘‘(2) to the extent of any remaining basis, to any other distributed properties in proportion to their ad- justed bases to the partnership.’’ Subsec. (c)(1)(A)(i). Pub. L. 105–34, § 1062(b)(3), sub- stituted ‘‘section 751(d)’’ for ‘‘section 751(d)(2)’’. 1976—Subsec. (d). Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1999 AMENDMENT Pub. L. 106–170, title V, § 538(b), Dec. 17, 1999, 113 Stat. 1940, provided that: ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the amendment made by this section [amending this section] shall apply to distributions made after July 14, 1999. ‘‘(2) PARTNERSHIPS IN EXISTENCE ON JULY 14, 1999.—In the case of a corporation which is a partner in a part- nership as of July 14, 1999, the amendment made by this section shall apply to any distribution made (or treated as made) to such partner from such partnership after June 30, 2001, except that this paragraph shall not apply to any distribution after the date of the enactment of this Act [Dec. 17, 1999] unless the partner makes an election to have this paragraph apply to such distribu- tion on the partner’s return of Federal income tax for the taxable year in which such distribution occurs.’’ EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title X, § 1061(b), Aug. 5, 1997, 111 Stat. 946, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to dis- tributions after the date of the enactment of this Act [Aug. 5, 1997].’’ Amendment by section 1062(b)(3) of Pub. L. 105–34 ap- plicable to sales, exchanges, and distributions after Aug. 5, 1997, but not applicable 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, see section 1062(c) of Pub. L. 105–34, set out as a note under section 724 of this title. § 733. Basis of distributee partner’s interest In the case of a distribution by a partnership to a partner other than in liquidation of a part- ner’s interest, the adjusted basis to such partner of his interest in the partnership shall be re- duced (but not below zero) by— (1) the amount of any money distributed to such partner, and (2) the amount of the basis to such partner of distributed property other than money, as determined under section 732. (Aug. 16, 1954, ch. 736, 68A Stat. 247.) § 734. Adjustment to basis of undistributed part- nership property where section 754 election or substantial basis reduction (a) General rule The basis of partnership property shall not be adjusted as the result of a distribution of prop- erty to a partner unless the election, provided in section 754 (relating to optional adjustment to basis of partnership property), is in effect with respect to such partnership or unless there is a substantial basis reduction with respect to such distribution. (b) Method of adjustment In the case of a distribution of property to a partner by a partnership with respect to which the election provided in section 754 is in effect or with respect to which there is a substantial basis reduction, the partnership shall— (1) increase the adjusted basis of partnership property by— (A) the amount of any gain recognized to the distributee partner with respect to such distribution under section 731(a)(1), and (B) in the case of distributed property to which section 732(a)(2) or (b) applies, the ex- cess of the adjusted basis of the distributed property to the partnership immediately be- fore the distribution (as adjusted by section 732(d)) over the basis of the distributed prop- erty to the distributee, as determined under section 732, or (2) decrease the adjusted basis of partnership property by— (A) the amount of any loss recognized to the distributee partner with respect to such distribution under section 731(a)(2), and (B) in the case of distributed property to which section 732(b) applies, the excess of the basis of the distributed property to the distributee, as determined under section 732, over the adjusted basis of the distributed property to the partnership immediately be- fore such distribution (as adjusted by section 732(d)). Paragraph (1)(B) shall not apply to any distrib- uted property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect. (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 basis reduction (1) In general For purposes of this section, there is a sub- stantial basis reduction with respect to a dis- tribution if the sum of the amounts described in subparagraphs (A) and (B) of subsection (b)(2) exceeds $250,000. (2) Regulations For regulations to carry out this subsection, see section 743(d)(2). (e) Exception for securitization partnerships For purposes of this section, a securitization partnership (as defined in section 743(f)) shall not be treated as having a substantial basis re- duction with respect to any distribution of prop- erty to a partner. (Aug. 16, 1954, ch. 736, 68A Stat. 247; Pub. L. 98–369, div. A, title I, § 78(a), July 18, 1984, 98 Stat. 597; Pub. L. 108–357, title VIII, § 833(c)(1)–(5)(A), Oct. 22, 2004, 118 Stat. 1591, 1592; Pub. L. 109–135, title IV, § 403(bb), Dec. 21, 2005, 119 Stat. 2630.) Editorial Notes AMENDMENTS 2005—Subsec. (a). Pub. L. 109–135, § 403(bb)(1), inserted ‘‘with respect to such distribution’’ before period at end.