§732 — Title 26 Internal Revenue Code | U.S. Code

Summary

When a partnership gives you property other than money, you normally take over the partnership's own tax basis in that property. But your basis can't be more than the basis of your partnership interest minus any money you got in the same deal. If the property comes when your whole partnership interest is being closed out, your basis in it equals your interest's remaining basis after subtracting any money received. When you get several properties at once, the basis is divided up in a set order: first to unrealized receivables and inventory items, then to the other properties, with specific rules that spread any needed increase or decrease based on each property's unrealized gain or loss and fair market value. If you got your interest by a transfer when no section 754 election was in effect, and you receive property within 2 years after that transfer, you can elect to use the basis the property would have had under section 743(b). These rules don't apply where the distribution is treated as a sale or exchange under section 751(b). A separate rule applies when a corporate partner receives stock of a corporation it controls: the stock's inside basis may have to be reduced, and any reduction that can't be absorbed is taxed to the corporate partner as long-term capital gain.

Title 26, §732

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)The 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)The 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)The 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)(1)The 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)Any 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)Any 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)For 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)This 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)(1)If—

(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,

(2)Paragraph (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)(A)The 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)No 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)If 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)For purposes of this subsection, the term “control” means ownership of stock meeting the requirements of section 1504(a)(2).

(6)For 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)If 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)The 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.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1999—Subsec. (f). Pub. L. 106–170 added subsec. (f). 1997—Subsec. (c). Pub. L. 105–34, § 1061(a), amended heading and text of subsec. (c) generally. Prior to amendment, text read as follows: “The basis of distributed properties to which subsection (a)(2) or subsection (b) is applicable shall be allocated— “(1) first to any unrealized receivables (as defined in section 751(c)) and inventory items (as defined in section 751(d)(2)) in an amount equal to the adjusted basis of each such property to the partnership (or if the basis to be allocated is less than the sum of the adjusted bases of such properties to the partnership, in proportion to such bases), and “(2) to the extent of any remaining basis, to any other distributed properties in proportion to their adjusted bases to the partnership.” Subsec. (c)(1)(A)(i). Pub. L. 105–34, § 1062(b)(3), substituted “section 751(d)” for “section 751(d)(2)”. 1976—Subsec. (d). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

Statutory Notes and Related Subsidiaries

Effective Date

of 1999 Amendment Pub. L. 106–170, title V, § 538(b), Dec. 17, 1999, 113 Stat. 1940, provided that: “(1) In general.—Except as provided in paragraph (2), the amendment made by this section [amending this section] shall apply to distributions made after

July 14, 1999. “(2) Partnerships in existence on

July 14, 1999.—In the case of a corporation which is a partner in a partnership as of

July 14, 1999, the amendment made by this section shall apply to any distribution made (or treated as made) to such partner from such partnership after

June 30, 2001, except that this paragraph shall not apply to any distribution after the date of the enactment of this Act [Dec. 17, 1999] unless the partner makes an election to have this paragraph apply to such distribution on the partner’s return of Federal income tax for the taxable year in which such distribution occurs.”

Effective Date

of 1997 Amendment Pub. L. 105–34, title X, § 1061(b), Aug. 5, 1997, 111 Stat. 946, provided that: “The amendment made by subsection (a) [amending this section] shall apply to distributions after the date of the enactment of this Act [Aug. 5, 1997].” Amendment by section 1062(b)(3) of Pub. L. 105–34 applicable to sales, exchanges, and distributions after Aug. 5, 1997, but not applicable to any sale or exchange pursuant to a written binding contract in effect on June 8, 1997, and at all times thereafter before such sale or exchange, see section 1062(c) of Pub. L. 105–34, set out as a note under section 724 of this title.

§732 Basis of Distributed Property Other Than Money

Summary

Title 26, §732

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Citations & Metadata