§735 Character of gain or loss on disposition of distributed property

Summary

When a partner gets certain partnership property and later sells or otherwise disposes of it, the gain or loss is treated as ordinary income or ordinary loss in these cases: for unrealized receivables (certain rights to payments) and for inventory items (goods held for sale) if those inventory items are sold or exchanged within 5 years of the distribution. When figuring how long the partner held property received from the partnership, include the time the partnership held it — except when deciding the 5-year rule for inventory. If the property is passed along in a tax-free exchange, the same ordinary-income/loss rule applies to the new property that replaces it, and through a series of such exchanges, but not to C corporation stock received in a section 351 exchange.