26 U.S.C. § 731 — Extent of recognition of gain or loss on distribution

(a) Partners. On a partnership^* distribution, a partner^* recognizes no gain except money exceeding the partner’s adjusted partnership-interest basis immediately before distribution. The partner recognizes no loss except in a liquidation where only money, unrealized receivables^*, and inventory are distributed: loss equals the interest’s adjusted basis minus the money and the section 732 basis of those receivables and inventory. Recognized gain or loss is treated as from selling or exchanging the partnership interest. (b) Partnerships. A partnership recognizes no gain or loss when distributing any property, including money, to a partner. (c) Marketable securities. (1) For subsection (a)(1) and section 737, “money” includes marketable securities, valued at fair market value on distribution. (2) “Marketable securities” means actively traded financial instruments and foreign currencies. It includes interests in a common trust fund^* or qualifying regulated investment company; instruments readily convertible into or exchangeable for money or securities; instruments whose value substantially refers to securities; certain actively traded precious-metal interests; interests in entities whose assets substantially consist of securities or money; and, as regulations provide, the portion of other entity interests attributable to securities or money. “Financial instrument” includes stocks and other equity interests, debt evidence, options, forward or futures contracts, notional-principal contracts, and derivatives. (3) Exceptions. The marketable-security rule does not apply to a security contributed by the partner, except to value attributable to securities or money contributed to the related entity; property that regulations say was not marketable when acquired; or a distribution by an investment partnership to an eligible partner. The counted amount for a marketable-security distribution is reduced, not below zero, by the partner’s share of net gain from hypothetically selling all same-class, same-issuer securities immediately before the transaction minus the partner’s share of gain attributable to those securities held immediately after, using the same fair market value. Regulations may treat all partnership securities as the same class and issuer. An “investment partnership” is a partnership that has never engaged in a trade or business^* and whose assets have always substantially consisted by value of money, corporate stock^*, notes, bonds, debentures, certain actively traded financial instruments, currencies, precious metals, derivatives, or combinations of these. Investor, trader, or dealer activity in those assets, and other regulatory activities, does not itself count as a trade or business. An “eligible partner” generally is a partner who contributed none of the listed assets’ other property; it excludes a transferor or transferee in a nonrecognition transfer if the transferor was not eligible. Unless regulations provide otherwise, tiered partnerships are treated as conducting the businesses and holding proportionate assets of lower-tier partnerships, and a partner contributing an interest in another partnership is treated as contributing a proportionate share of that partnership’s assets. (4) The basis of a distributed marketable security on which gain is recognized is its section 732 basis plus that gain. The increase is allocated among securities in proportion to their unrealized appreciation. (5) Sections 733 and 734 apply as though this subsection caused no gain and no property-basis adjustment. (6) Gain on a marketable security that is an unrealized receivable or inventory item is ordinary income to the extent of the basis increase from the recognized gain. (7) The Secretary^* must issue regulations to carry out this subsection and prevent avoidance. (d) Exceptions. This section does not apply to the extent sections 736, 751, or 737 provide otherwise. “Marketable securities,” “financial instrument,” “investment partnership,” and “eligible partner” have the meanings and conditions stated above; this section does not otherwise define them.