Internal Revenue Code:Sec. 731. Extent of recognition of gain or loss on distribution
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
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
Statute
Sec. 731. Extent of recognition of gain or loss on distribution
(a) Partners
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 -
(A) any money distributed, and
(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.
(b) Partnerships
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) and section 737 -
(A) the term ''money'' includes marketable securities, and
(B) such securities shall be taken into account at their fair
market value as of the date of the distribution.
(2) Marketable securities
For purposes of this subsection:
(A) In general
The term ''marketable securities'' means financial
instruments and foreign currencies which are, as of the date of
the distribution, actively traded (within the meaning of
section 1092(d)(1)).
(B) Other property
Such term includes -
(i) any interest in -
(I) a common trust fund, or
(II) a regulated investment company which is offering for
sale or has outstanding any redeemable security (as defined
in section 2(a)(32) of the Investment Company Act of 1940)
of which it is the issuer,
(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
(vi) to the extent provided in regulations prescribed by
the Secretary, any interest in an entity not described in
clause (v) but only to the extent of the value of such
interest which is attributable to marketable securities,
money, or both.
(C) Financial instrument
The term ''financial instrument'' includes stocks and other
equity interests, evidences of indebtedness, options, forward
or futures contracts, notional principal contracts, and
derivatives.
(3) Exceptions
(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
(iii) such partnership is an investment partnership and
such partner is an eligible partner thereof.
(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 -
(I) money,
(II) stock in a corporation,
(III) notes, bonds, debentures, or other evidences of
indebtedness,
(IV) interest rate, currency, or equity notional
principal contracts,
(V) foreign currencies,
(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,
(VII) other assets specified in regulations prescribed by
the Secretary, or
(VIII) any combination of the foregoing.
(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
(II) any other activity specified in regulations
prescribed by the Secretary.
(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).
(II) Exception for certain nonrecognition transactions
The term ''eligible partner'' shall not include the
transferor or transferee in a nonrecognition transaction
involving a transfer of any portion of an interest in a
partnership with respect to which the transferor was not an
eligible partner.
(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
(ii) the amount of such gain.
(B) Allocation of basis increase
Any increase in basis attributable to the gain described in
subparagraph (A)(ii) shall be allocated to marketable
securities in proportion to their respective amounts of
unrealized appreciation before such increase.
(5) Subsection disregarded in determining basis of partner's
interest in partnership and of basis of partnership property
Sections 733 and 734 shall be applied as if no gain were
recognized, and no adjustment were made to the basis of property,
under this subsection.
(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).
(7) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this
subsection, including regulations to prevent the avoidance of
such purposes.
(d) Exceptions
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).
Sources
(Aug. 16, 1954, ch. 736, 68A Stat. 245; Pub. L. 102-486, title XIX,
Sec. 1937(b)(2), Oct. 24, 1992, 106 Stat. 3033; Pub. L. 103-465,
title VII, Sec. 741(a), Dec. 8, 1994, 108 Stat. 5006; Pub. L.
105-34, title X, Sec. 1062(b)(3), Aug. 5, 1997, 111 Stat. 947.)
References in Text
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.
Miscellaneous
AMENDMENTS
1997 - Subsecs. (a)(2)(B), (c)(6). Pub. L. 105-34 substituted
''section 751(d)'' for ''section 751(d)(2)''.
1994 - Subsecs. (c), (d). Pub. L. 103-465 added subsec. (c) and
redesignated former subsec. (c) as (d).
1992 - Subsec. (c). Pub. L. 102-486 substituted '', 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. 105-34 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 1994 AMENDMENT
Section 741(c) of Pub. L. 103-465 provided that:
''(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
Amendment by Pub. L. 102-486 applicable to distributions on or
after June 25, 1992, see section 1937(c) of Pub. L. 102-486, set
out as a note under section 704 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 168, 197, 734, 737, 751,
1245, 1250 of this title; title 11 section 548.
