26 U.S.C. § 735 — Character of gain or loss on disposition of

Page 1882 TITLE 26—INTERNAL REVENUE CODE § 735 Subsec. (b). Pub. L. 109–135, § 403(bb)(2), reenacted heading without change and amended introductory pro- visions generally. Prior to amendment, introductory provisions read as follows: ‘‘In the case of a distribu- tion of property to a partner, a partnership, with re- spect to which the election provided in section 754 is in effect or unless there is a substantial basis reduction, shall—’’. 2004—Pub. L. 108–357, § 833(c)(5)(A), substituted ‘‘Ad- justment to basis of undistributed partnership property where section 754 election or substantial basis reduc- tion’’ for ‘‘Optional adjustment to basis of undistrib- uted partnership property’’ in section catchline. Subsec. (a). Pub. L. 108–357, § 833(c)(1), inserted ‘‘or unless there is a substantial basis reduction’’ before pe- riod at end. Subsec. (b). Pub. L. 108–357, § 833(c)(2), inserted ‘‘or unless there is a substantial basis reduction’’ after ‘‘section 754 is in effect’’ in introductory provisions. Subsec. (d). Pub. L. 108–357, § 833(c)(3), added subsec. (d). Subsec. (e). Pub. L. 108–357, § 833(c)(4), added subsec. (e). 1984—Subsec. (b). Pub. L. 98–369 inserted at end ‘‘Paragraph (1)(B) shall not apply to any distributed property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect.’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title VIII, § 833(d)(3), Oct. 22, 2004, 118 Stat. 1592, provided that: ‘‘The amendments made by subsection (c) [amending this section] shall apply to distributions after the date of the enactment of this Act [Oct. 22, 2004].’’ EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title I, § 78(b), July 18, 1984, 98 Stat. 597, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to dis- tributions after March 1, 1984, in taxable years ending after such date.’’ § 735. Character of gain or loss on disposition of distributed property (a) Sale or exchange of certain distributed prop- erty (1) Unrealized receivables Gain or loss on the disposition by a dis- tributee partner of unrealized receivables (as defined in section 751(c)) distributed by a part- nership, shall be considered as ordinary in- come or as ordinary loss, as the case may be. (2) Inventory items Gain or loss on the sale or exchange by a dis- tributee partner of inventory items (as defined in section 751(d)) distributed by a partnership shall, if sold or exchanged within 5 years from the date of the distribution, be considered as ordinary income or as ordinary loss, as the case may be. (b) Holding period for distributed property In determining the period for which a partner has held property received in a distribution from a partnership (other than for purposes of sub- section (a)(2)), there shall be included the hold- ing period of the partnership, as determined under section 1223, with respect to such prop- erty. (c) Special rules (1) Waiver of holding periods contained in sec- tion 1231 For purposes of this section, section 751(d) (defining inventory item) shall be applied without regard to any holding period in sec- tion 1231(b). (2) Substituted basis property (A) In general If any property described in subsection (a) is disposed of in a nonrecognition trans- action, 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 nonrecognition 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. (Aug. 16, 1954, ch. 763, 68A Stat. 247; Pub. L. 94–455, title XIX, § 1901(b)(3)(D), Oct. 4, 1976, 90 Stat. 1792; Pub. L. 98–369, div. A, title I, § 74(b), July 18, 1984, 98 Stat. 593; Pub. L. 105–34, title X, § 1062(b)(3), Aug. 5, 1997, 111 Stat. 947.) Editorial Notes AMENDMENTS 1997—Subsecs. (a)(2), (c)(1). Pub. L. 105–34 substituted ‘‘section 751(d)’’ for ‘‘section 751(d)(2)’’. 1984—Subsec. (c). Pub. L. 98–369 added subsec. (c). 1976—Subsec. (a)(1), (2). Pub. L. 94–455 substituted ‘‘as ordinary income or as ordinary loss, as the case may be’’ for ‘‘gain or loss from the sale or exchange of prop- erty other than a capital asset’’. 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 1984 AMENDMENT Pub. L. 98–369, div. A, title I, § 74(d)(2), July 18, 1984, 98 Stat. 594, provided that: ‘‘The amendment made by subsection (b) [amending this section] shall apply to property distributed after March 31, 1984, in taxable years ending after such date.’’ EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. § 736. Payments to a retiring partner or a de- ceased partner’s successor in interest (a) Payments considered as distributive share or guaranteed payment Payments made in liquidation of the interest of a retiring partner or a deceased partner shall,