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

Summary

When a partner gets property from a partnership and then sells it, some kinds of gain or loss must be treated as ordinary income or ordinary loss. Rights to future payments ("unrealized receivables") are always ordinary. Goods held for sale ("inventory items") are ordinary if sold within 5 years of the distribution. Also, the partner’s time owning the property includes the partnership’s earlier holding time. If the property is moved in a tax-free swap, the same ordinary treatment passes to the new property. That rule does not apply to stock in a C corporation received in a special tax-free corporate exchange.

Title 26, §735

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)Gain 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)Gain 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)In 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)(1)For purposes of this section, section 751(d) (defining inventory item) shall be applied without regard to any holding period in section 1231(b).

(2)(A)If 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)Subparagraph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1997—Subsecs. (a)(2), (c)(1). Pub. L. 105–34 substituted “section 751(d)” for “section 751(d)(2)”. 1984—Subsec. (c). Pub. L. 98–369 added subsec. (c). 1976—Subsec. (a)(1), (2). Pub. L. 94–455 substituted “as ordinary income or as ordinary loss, as the case may be” for “gain or loss from the sale or exchange of property other than a capital asset”.

Statutory Notes and Related Subsidiaries

Effective Date

of 1997 AmendmentAmendment by 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.

Effective Date

of 1984 Amendment Pub. L. 98–369, div. A, title I, § 74(d)(2),

July 18, 1984, 98 Stat. 594, provided that: “The amendment made by subsection (b) [amending this section] shall apply to property distributed after

March 31, 1984, in taxable years ending after such date.”

Effective Date

of 1976 AmendmentAmendment by Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

§735 Character of Gain or Loss on Disposition of Distributed Property

Summary

Title 26, §735

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Effective Date

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