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Title 26, Internal Revenue CodeRelease 119-110

§737 Recognition of Precontribution Gain in Case of Certain Distributions to Contributing Partner

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

Last updated Sep 22, 2026|Official source

Summary

When a partnership gives a partner property that is not money, the partner may have to report a gain. The gain the partner must report is the smaller of two amounts: (1) the extra value of the property received over the partner’s adjusted partnership basis after lowering that basis by any cash received, or (2) the partner’s “net precontribution gain.” The net precontribution gain means the net gain that would have been recognized if property the partner had contributed to the partnership within the last 7 years and still held by the partnership had been given to someone else. The partner’s basis in the partnership goes up by the amount of this recognized gain, and the partnership must adjust its basis in the contributed property. Property the partner previously contributed is ignored for these tests. This rule does not apply where a different rule about unrealized receivables and inventory items (section 751(b)) applies. Marketable securities can be treated as money under the other rule.

Full Legal Text

Title 26, §737

Internal Revenue Code, Source: USLM XML via OLRC

(a)General rule
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)
(2)the net precontribution gain of the partner.
Gain recognized under the preceding sentence shall be in addition to any gain recognized under section 731. The character of such gain shall be determined by reference to the proportionate character of the net precontribution gain.
(b)Net precontribution gain (c) Basis rules
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,
had been distributed by such partnership to another partner.
(d)Exceptions
(1)Distributions of previously contributed property
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)Coordination with section 751
This section shall not apply to the extent section 751(b) applies to such distribution.
(e)Marketable securities treated as money
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

Sep 22, 2026

Release point: 119-110