USC Subpart B

in effect

26 U.S.C. § 731 Extent of recognition of gain or loss on distribution

(a) PartnersIn the case of a distribution by a partnership to a partner—(1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest in the partnership immediately before the distribution, and (2) loss shall not be recognized to such partner, except that upon a distribution in liquidation 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 determined 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 subsection shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner. (b) PartnershipsNo gain or loss shall be recognized to a partnership on a distribution to a partner of property, including money. (c) Treatment of marketable securities(1) In generalFor purposes of subsection (a)(1) and section 737—(A) the term “money” includes marketable securities, and (B) such securities shall be taken into account at their fair market value as of the date of the distribution. (2) Marketable securitiesFor purposes of this subsection:(A) In generalThe term “marketable securities” means financial instruments and foreign currencies which are, as of the date of the distribution, actively traded (within the meaning of section 1092(d)(1)). (B) Other propertySuch term includes—(i) any interest in—(I) a common trust fund, or (II) a regulated investment company which is offering for sale or has outstanding any redeemable security (as defined in section 2(a)(32) of the Investment Company Act of 1940) of which it is the issuer, (ii) any financial instrument which, pursuant to its terms or any other arrangement, is readily convertible into, or exchangeable for, money or marketable securities, (iii) any financial instrument the value of which is determined substantially by reference to marketable securities, (iv) except to the extent provided in regulations 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 regulations prescribed by the Secretary, interests 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 interest which is attributable to marketable securities, money, or both. (C) Financial instrumentThe 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 generalParagraph (1) shall not apply to the distribution 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 security is attributable to marketable securities or money contributed (directly or indirectly) to the entity to which the distributed security relates, (ii) to the extent provided in regulations prescribed by the Secretary, the property was not a marketable security when acquired by such partnership, or (iii) such partnership is an investment partnership and such partner is an eligible partner thereof. (B) Limitation on gain recognizedIn the case of a distribution of marketable securities to a partner, the amount taken into account under paragraph (1) shall be reduced (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 securities held by the partnership were sold (immediately before the transaction to which the distribution relates) by the partnership 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 Secretary, 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 partnershipsFor purposes of subparagraph (A)(iii):(i) Investment partnershipThe 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 on or subject to the rules of a board of trade or commodity exchange, (VII) other assets specified in regulations prescribed by the Secretary, or (VIII) any combination of the foregoing. (ii) Exception for certain activitiesA partnership shall not be treated as engaged in a trade or business by reason of—(I) any activity undertaken as an investor, trader, or dealer in any asset described in clause (i), or (II) any other activity specified in regulations prescribed by the Secretary. (iii) Eligible partner(I) In generalThe term “eligible partner” means any partner who, before the date of the distribution, did not contribute to the partnership any property other than assets described in clause (i). (II) Exception for certain nonrecognition transactionsThe 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 tiersExcept as otherwise provided in regulations prescribed by the Secretary—(I) a partnership shall be treated as engaged in any trade or business engaged in by, and as holding (instead of a partnership interest) a proportionate share of the assets of, any other partnership in which the partnership holds a partnership interest, and (II) a partner who contributes to a partnership an interest in another partnership 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 generalThe basis of marketable securities with respect 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 increaseAny increase in basis attributable to the gain described in subparagraph (A)(ii) shall be allocated to marketable securities in proportion to their respective amounts of unrealized appreciation before such increase. (5) Subsection disregarded in determining basis of partner’s interest in partnership and of basis of partnership propertySections 733 and 734 shall be applied as if no gain were recognized, and no adjustment were made to the basis of property, under this subsection. (6) Character of gain recognizedIn 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 recognized 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) RegulationsThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations to prevent the avoidance of such purposes. (d) ExceptionsThis section shall not apply to the extent otherwise provided by section 736 (relating to payments to a retiring partner or a deceased partner’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 distributions).

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

(a) Distributions other than in liquidation of a partner’s interest(1) General ruleThe 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 immediately before such distribution. (2) LimitationThe basis to the distributee partner of property 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 liquidationThe basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner’s interest shall be an amount equal to the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction. (c) Allocation of basis(1) In generalThe 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 properties 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 distributed properties equal such remaining basis, in the manner provided in paragraph (2) or (3), whichever is appropriate. (2) Method of allocating increaseAny increase required under paragraph (1)(B) shall be allocated among the properties—(A) first to properties with unrealized appreciation 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 proportion to their respective fair market values. (3) Method of allocating decreaseAny decrease required under paragraph (1)(A) or (1)(B) shall be allocated—(A) first to properties with unrealized depreciation 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 proportion to their respective adjusted bases (as adjusted under subparagraph (A)). (d) Special partnership basis to transfereeFor 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 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 Secretary, to treat as the adjusted partnership basis of such property the adjusted basis such property 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 subsection in the case of a distribution to a transferee 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 percent of its adjusted basis to the partnership. (e) ExceptionThis 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 unrealized receivables and inventory items). (f) Corresponding adjustment to basis of assets of a distributed corporation controlled by a corporate partner(1) In generalIf—(A) a corporation (hereafter in this subsection referred to as the “corporate partner”) receives a distribution from a partnership of stock in another corporation (hereafter 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 thereafter, 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 subsection (c)) the basis of property held by the distributed corporation at such time (or, if the corporate partner does not control the distributed corporation at such time, at the time the corporate partner first has such control). (2) Exception for certain distributions before control acquiredParagraph (1) shall not apply to any distribution of stock in the distributed corporation 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 arrangement to acquire control of the distributed corporation. (3) Limitations on basis reduction(A) In generalThe amount of the reduction under paragraph (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 exceeds the corporate partner’s adjusted basis in the stock of the distributed corporation. (B) Reduction not to exceed adjusted basis of propertyNo reduction under paragraph (1) in the basis of any property shall exceed the adjusted basis of such property (determined without regard to such reduction). (4) Gain recognition where reduction limitedIf the amount of any reduction under paragraph (1) (determined after the application of paragraph (3)(A)) exceeds the aggregate adjusted 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) ControlFor purposes of this subsection, the term “control” means ownership of stock meeting the requirements of section 1504(a)(2). (6) Indirect distributionsFor purposes of paragraph (1), if a corporation 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 reference to subsection (a)(2) or (b), the corporation shall be treated as receiving a distribution of such stock from a partnership. (7) Special rule for stock in controlled corporationIf the property held by a distributed corporation is stock in a corporation which the distributed 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) RegulationsThe Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations to avoid double counting and to prevent the abuse of such purposes.

26 U.S.C. § 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 partner’s interest, the adjusted basis to such partner of his interest in the partnership shall be reduced (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.

26 U.S.C. § 734 Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction

(a) General ruleThe basis of partnership property shall not be adjusted as the result of a distribution of property 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 adjustmentIn 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 excess of the adjusted basis of the distributed property to the partnership immediately before the distribution (as adjusted by section 732(d)) over the basis of the distributed property 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 before such distribution (as adjusted by section 732(d)). 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. (c) Allocation of basisThe allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules provided in section 755. (d) Substantial basis reduction(1) In generalFor purposes of this section, there is a substantial basis reduction with respect to a distribution if the sum of the amounts described in subparagraphs (A) and (B) of subsection (b)(2) exceeds $250,000. (2) RegulationsFor regulations to carry out this subsection, see section 743(d)(2). (e) Exception for securitization partnershipsFor purposes of this section, a securitization partnership (as defined in section 743(f)) shall not be treated as having a substantial basis reduction with respect to any distribution of property to a partner.

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

(a) Sale or exchange of certain distributed property(1) Unrealized receivablesGain or loss on the disposition by a distributee partner of unrealized receivables (as defined in section 751(c)) distributed by a partnership, shall be considered as ordinary income or as ordinary loss, as the case may be. (2) Inventory itemsGain or loss on the sale or exchange by a distributee 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 propertyIn determining the period for which a partner has held property received in a distribution from a partnership (other than for purposes of subsection (a)(2)), there shall be included the holding period of the partnership, as determined under section 1223, with respect to such property. (c) Special rules(1) Waiver of holding periods contained in section 1231For purposes of this section, section 751(d) (defining inventory item) shall be applied without regard to any holding period in section 1231(b). (2) Substituted basis property(A) In generalIf any property described in subsection (a) 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 nonrecognition transactions. (B) Exception for stock in C corporationSubparagraph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351.

26 U.S.C. § 736 Payments to a retiring partner or a deceased partner’s successor in interest

(a) Payments considered as distributive share or guaranteed paymentPayments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered—(1) as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or (2) as a guaranteed payment described in section 707(c) if the amount thereof is determined without regard to the income of the partnership. (b) Payments for interest in partnership(1) General rulePayments made in liquidation of the interest of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsection (a). (2) Special rulesFor purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for—(A) unrealized receivables of the partnership (as defined in section 751(c)), or (B) good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will. (3) Limitation on application of paragraph (2)Paragraph (2) shall apply only if—(A) capital is not a material income-producing factor for the partnership, and (B) the retiring or deceased partner was a general partner in the partnership.

26 U.S.C. § 737 Recognition of precontribution gain in case of certain distributions to contributing partner

(a) General ruleIn the case of any distribution by a partnership to a partner, such partner shall be treated as recognizing gain in an amount equal to the lesser of—(1) the excess (if any) of (A) the fair market value of property (other than money) received in the distribution over (B) the adjusted basis of such partner’s interest in the partnership immediately before the distribution reduced (but not below zero) by the amount of money received in the distribution, or (2) the net precontribution gain of the partner. Gain recognized under the preceding sentence shall be in addition to any gain recognized under section 731. The character of such gain shall be determined by reference to the proportionate character of the net precontribution gain. (b) Net precontribution gainFor purposes of this section, the term “net precontribution gain” means the net gain (if any) which would have been recognized by the distributee partner under section 704(c)(1)(B) if all property which—(1) had been contributed to the partnership by the distributee partner within 7 years of the distribution, and (2) is held by such partnership immediately before the distribution, had been distributed by such partnership to another partner. (c) Basis rules(1) Partner’s interestThe adjusted basis of a partner’s interest in a partnership shall be increased by the amount of any gain recognized by such partner under subsection (a). For purposes of determining the basis of the distributed property (other than money), such increase shall be treated as occurring immediately before the distribution. (2) Partnership’s basis in contributed propertyAppropriate adjustments shall be made to the adjusted basis of the partnership in the contributed property referred to in subsection (b) to reflect gain recognized under subsection (a). (d) Exceptions(1) Distributions of previously contributed propertyIf any portion of the property distributed consists of property which had been contributed by the distributee partner to the partnership, such property shall not be taken into account under subsection (a)(1) and shall not be taken into account in determining the amount of the net precontribution gain. If the property 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 contributed to the partnership. (2) Coordination with section 751This section shall not apply to the extent section 751(b) applies to such distribution. (e) Marketable securities treated as moneyFor treatment of marketable securities as money for purposes of this section, see section 731(c).