26 U.S.C. § 735 (INTERNAL REVENUE CODE)
§ 735. Character of gain or loss on disposition of distributed property
(a) Sale or exchange of certain distributed property
(1) Unrealized receivables
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) Inventory items
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) Holding period for distributed property
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) Special rules
(1) Waiver of holding periods contained in section 1231
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) Substituted basis property
(A) In general
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) Exception for stock in C corporation
Subparagraph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351.
(Aug. 16, 1954, ch. 763, 68A Stat. 247; Pub. L. 94–455, title XIX, § 1901(b)(3)(D), Oct. 4, 1976, 90 Stat. 1792; Pub. L. 98–369, div. A, title I, § 74(b), July 18, 1984, 98 Stat. 593; Pub. L. 105–34, title X, § 1062(b)(3), Aug. 5, 1997, 111 Stat. 947.)
heading: Amendments
text: 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”.
heading: Effective Date of 1997 Amendment
text: 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.
heading: Effective Date of 1984 Amendment
text: 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.”
heading: Effective Date of 1976 Amendment
text: Amendment 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.