§724 Character of Gain or Loss on Contributed Unrealized Receivables, Inventory Items, and Capital Loss Property

Summary

When a partner gives certain kinds of property to a partnership, the tax result when the partnership later sells that property follows special rules. If the partner contributed an "unrealized receivable," any gain or loss on a later sale is treated as ordinary income or ordinary loss (not capital). If the partner contributed an "inventory item," any gain or loss on a sale during the five years after the contribution is treated as ordinary income or loss. If the partner contributed a capital asset that had a built-in loss (the partner's tax basis was higher than the fair market value right before giving it), and the partnership sells it within five years, that loss is treated as a capital loss up to the amount of that built-in loss. Definitions: "unrealized receivable" — see section 751(c); "inventory item" — see section 751(d); "substituted basis property" — property received in a tax-free swap replaces the original for these rules, except not when the swap gives C-corporation stock under section 351.