26 U.S.C. § 732 — Basis of distributed property other than money

(a) Nonliquidating distributions. (1) Except for paragraph (2), property other than money distributed to a partner outside liquidation has the partnership’s adjusted basis immediately before distribution. (2) That basis cannot exceed the partner’s adjusted interest basis minus money distributed in the same transaction. (b) Liquidation. Property other than money distributed in liquidation has a basis equal to the partner’s adjusted interest basis minus money distributed in the same transaction. (c) Allocation. For property covered by (a)(2) or (b), first assign basis to unrealized receivables and inventory items at their partnership adjusted bases. If the available basis is smaller, reduce those bases under paragraph (3). Apply remaining basis to other property, first at each property’s partnership basis and then adjust it under paragraph (2) or (3) so totals equal the remaining basis. (2) An increase goes first to property with unrealized appreciation, in proportion to that appreciation and only up to each property’s appreciation. Any remainder goes in proportion to fair market value. (3) A decrease goes first to property with unrealized depreciation, in proportion to that depreciation and only up to each property’s depreciation. Any remainder goes in proportion to adjusted bases after the first allocation. (d) Transferee. A partner who acquired all or part of an interest by a transfer for which the section 754 election is not in effect may elect under the Secretary’s regulations, when receiving property other than money within two years, to use the basis the property would have if section 743(b) applied. If, at transfer, partnership property’s fair market value exceeded 110 percent of its adjusted basis, regulations may require this treatment even after two years. (e) Exception. This section does not apply to the extent section 751(b) treats a distribution as a property sale or exchange. (f) Corporate partner. If a corporation receives partnership stock in another corporation, controls that distributed corporation immediately or later, and the partnership’s stock basis before distribution exceeds the corporate partner’s stock basis after distribution, the excess reduces the distributed corporation’s property basis under (c), at the time of control or the distribution as specified. (2) This does not apply when control is not immediate and the corporate partner proves to the Secretary that the distribution was not part of a plan to acquire control. (3) The reduction cannot exceed the distributed corporation’s total property basis plus money minus the corporate partner’s stock basis, and no property’s reduction can exceed that property’s unreduced basis. (4) If the required reduction still exceeds the distributed corporation’s property bases, the excess is long-term capital gain to the corporate partner and increases its stock basis. (5) “Control” means stock ownership meeting section 1504(a)(2); this section does not define it. (6) A corporation that acquires, other than from a partnership, stock whose basis is determined by this section is treated as receiving a partnership distribution. (7) If the distributed corporation holds stock in a corporation it controls, apply this subsection to that controlled corporation’s property and repeat for further controlled corporations. (8) The Secretary must issue regulations, including to avoid double counting and abuse.