26 U.S. Code § 731 - Extent of recognition of gain or loss on distribution
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In the case of a distribution by a partnership to a partner—
(1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest in the partnership immediately before the distribution, and
(2) loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner’s interest in a partnership where no property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner’s interest in the partnership over the sum of—
(B) the basis to the distributee, as determined under section 732, of any unrealized receivables (as defined in section 751 (c)) and inventory (as defined in section 751 (d)).
Any gain or loss recognized under this subsection shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner.
No gain or loss shall be recognized to a partnership on a distribution to a partner of property, including money.
(c) Treatment of marketable securities
(1) In general
For purposes of subsection (a)(1) andsection 737—
(2) Marketable securities
For purposes of this subsection:
(A) In general
(B) Other property
Such term includes—
(i) any interest in—
(ii) any financial instrument which, pursuant to its terms or any other arrangement, is readily convertible into, or exchangeable for, money or marketable securities,
(iii) any financial instrument the value of which is determined substantially by reference to marketable securities,
(iv) except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal which, as of the date of the distribution, is actively traded (within the meaning of section 1092 (d)(1)) unless such metal was produced, used, or held in the active conduct of a trade or business by the partnership,
(v) except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of marketable securities, money, or both, and
(A) In general
Paragraph (1) shall not apply to the distribution from a partnership of a marketable security to a partner if—
(i) the security was contributed to the partnership by such partner, except to the extent that the value of the distributed security is attributable to marketable securities or money contributed (directly or indirectly) to the entity to which the distributed security relates,
(ii) to the extent provided in regulations prescribed by the Secretary, the property was not a marketable security when acquired by such partnership, or
(B) Limitation on gain recognized
In the case of a distribution of marketable securities to a partner, the amount taken into account under paragraph (1) shall be reduced (but not below zero) by the excess (if any) of—
(i) such partner’s distributive share of the net gain which would be recognized if all of the marketable securities of the same class and issuer as the distributed securities held by the partnership were sold (immediately before the transaction to which the distribution relates) by the partnership for fair market value, over
(ii) such partner’s distributive share of the net gain which is attributable to the marketable securities of the same class and issuer as the distributed securities held by the partnership immediately after the transaction, determined by using the same fair market value as used under clause (i).
Under regulations prescribed by the Secretary, all marketable securities held by the partnership may be treated as marketable securities of the same class and issuer as the distributed securities.
(C) Definitions relating to investment partnerships
For purposes of subparagraph (A)(iii):
(i) Investment partnership The term “investment partnership” means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of—
(VI) interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange,
(ii) Exception for certain activities A partnership shall not be treated as engaged in a trade or business by reason of—
(I) any activity undertaken as an investor, trader, or dealer in any asset described in clause (i), or
(iii) Eligible partner
(I) In general The term “eligible partner” means any partner who, before the date of the distribution, did not contribute to the partnership any property other than assets described in clause (i).
(iv) Look-thru of partnership tiers Except as otherwise provided in regulations prescribed by the Secretary—
(I) a partnership shall be treated as engaged in any trade or business engaged in by, and as holding (instead of a partnership interest) a proportionate share of the assets of, any other partnership in which the partnership holds a partnership interest, and
(II) a partner who contributes to a partnership an interest in another partnership shall be treated as contributing a proportionate share of the assets of the other partnership.If the preceding sentence does not apply under such regulations with respect to any interest held by a partnership in another partnership, the interest in such other partnership shall be treated as if it were specified in a subclause of clause (i).
(4) Basis of securities distributed
(A) In general
The basis of marketable securities with respect to which gain is recognized by reason of this subsection shall be—
(i) their basis determined under section 732, increased by
(5) Subsection disregarded in determining basis of partner’s interest in partnership and of basis of partnership property
(6) Character of gain recognized
In the case of a distribution of a marketable security which is an unrealized receivable (as defined in section 751 (c)) or an inventory item (as defined in section 751 (d)), any gain recognized under this subsection shall be treated as ordinary income to the extent of any increase in the basis of such security attributable to the gain described in paragraph (4)(A)(ii).
This section shall not apply to the extent otherwise provided by section 736 (relating to payments to a retiring partner or a deceased partner’s successor in interest), section 751 (relating to unrealized receivables and inventory items), and section 737 (relating to recognition of precontribution gain in case of certain distributions).
Source(Aug. 16, 1954, ch. 736, 68A Stat. 245; Pub. L. 102–486, title XIX, § 1937(b)(2),Oct. 24, 1992, 106 Stat. 3033; Pub. L. 103–465, title VII, § 741(a),Dec. 8, 1994, 108 Stat. 5006; Pub. L. 105–34, title X, § 1062(b)(3),Aug. 5, 1997, 111 Stat. 947.)
References in Text
Section 2(a)(32) of the Investment Company Act of 1940, referred to in subsec. (c)(2)(B)(i)(II), is classified to section 80a–2 (a)(32) of Title 15, Commerce and Trade.
1997—Subsecs. (a)(2)(B), (c)(6). Pub. L. 105–34substituted “section 751 (d)” for “section 751 (d)(2)”.
1994—Subsecs. (c), (d). Pub. L. 103–465added subsec. (c) and redesignated former subsec. (c) as (d).
1992—Subsec. (c). Pub. L. 102–486substituted “, section 751” for “and section 751” and inserted before period at end “, and section 737 (relating to recognition of precontribution gain in case of certain distributions)”.
Effective Date of 1997 Amendment
Amendment by Pub. L. 105–34applicable 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) ofPub. L. 105–34, set out as a note under section 724 of this title.
Effective Date of 1994 Amendment
“(1) In general.—Except as otherwise provided in this subsection, the amendments made by this section [amending this section and section 737 of this title] shall apply to distributions after the date of the enactment of this Act [Dec. 8, 1994].
“(2) Certain distributions before january 1, 1995.—The amendments made by this section shall not apply to any marketable security distributed before January 1, 1995, by the partnership which held such security on July 27, 1994.
“(3) Distributions in liquidation of partner’s interest.—The amendments made by this section shall not apply to the distribution of a marketable security in liquidation of a partner’s interest in a partnership if—
“(A) such liquidation is pursuant to a written contract which was binding on July 15, 1994, and at all times thereafter before the distribution, and
“(B) such contract provides for the purchase of such interest not later than a date certain for—
“(i) a fixed value of marketable securities that are specified in the contract, or
“(ii) other property.The preceding sentence shall not apply if the partner has the right to elect that such distribution be made other than in marketable securities.
“(4) Distributions in complete liquidation of publicly traded partnerships.—
“(A) In general.—The amendments made by this section shall not apply to the distribution of a marketable security in a qualified partnership liquidation if—
“(i) the marketable securities were received by the partnership in a nonrecognition transaction in exchange for substantially all of the assets of the partnership,
“(ii) the marketable securities are distributed by the partnership within 90 days after their receipt by the partnership, and
“(iii) the partnership is liquidated before the beginning of the 1st taxable year of the partnership beginning after December 31, 1997.
“(B) Qualified partnership liquidation.—For purposes of subparagraph (A), the term ‘qualified partnership liquidation’ means—
“(i) a complete liquidation of a publicly traded partnership (as defined in section 7704(b) of the Internal Revenue Code of 1986) which is an existing partnership (as defined in section 10211(c)(2) of the Revenue Act of 1987 [Pub. L. 100–203, set out as an Effective Date note under section 7704 of this title]), and
“(ii) a complete liquidation of a partnership which is related to a partnership described in clause (i) if such liquidation is related to a complete liquidation of the partnership described in clause (i).
“(5) Marketable securities.—For purposes of this subsection, the term ‘marketable securities’ has the meaning given such term by section 731(c) of the Internal Revenue Code of 1986, as added by this section.”
Effective Date of 1992 Amendment