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Title 26 — Internal Revenue CodeRelease 119-73

§737 Recognition of precontribution gain in case of certain distributions to contributing partner

Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter K— - Partners and Partnerships › Part PART II— - CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS › Subpart Subpart B— - Distributions by a Partnership › § 737

Last updated Apr 6, 2026|Official source

Summary

When a partnership gives a partner a distribution, the partner must report a gain. The gain is the smaller of two amounts. One amount is how much the fair market value of any noncash property received is more than the partner’s adjusted basis in the partnership right before the distribution, after lowering that basis by any cash the partner got (but not below zero). The other amount is the partner’s net precontribution gain. Net precontribution gain means the gain the partner would have had under section 704(c)(1)(B) if all property the partner contributed within 7 years and that the partnership still held had been treated as distributed. The partner’s basis in the partnership goes up by any gain reported, treated as if it happened just before the distribution. The partnership must also adjust its basis in contributed property to reflect the gain. Do not count property that the partner originally contributed when doing these calculations. This rule does not apply where section 751(b) applies. For when marketable securities count as cash, see section 731(c).

Full Legal Text

Title 26, §737

Internal Revenue Code — Source: USLM XML via OLRC

(a)In 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.
(b)For 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,
(c)(1)The 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)Appropriate 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)(1)If 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)This section shall not apply to the extent section 751(b) applies to such distribution.
(e)For treatment of marketable securities as money for purposes of this section, see section 731(c).

Legislative History

Notes & Related Subsidiaries

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” appeared 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), amended last sentence generally. Prior to amendment, last sentence read as follows: “Except for purposes of determining the amount recognized under subsection (a), such increase shall be treated as occurring immediately before the distribution.” Subsec. (e). Pub. L. 103–465, § 741(b)(2), added subsec. (e).

Statutory Notes and Related Subsidiaries

Effective Date

of 1997 AmendmentAmendment 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 AmendmentAmendment by Pub. L. 103–465 applicable to distributions after Dec. 8, 1994, and not applicable to certain distributions before Jan. 1, 1995, distributions in liquidation of partner’s interest, or distributions in complete 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 section 704 of this title.

Reference

Citations & Metadata

Citation

26 U.S.C. § 737

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73