Internal Revenue Code:Sec. 731. Extent of recognition of gain or loss on distribution

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Contents


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.
 

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