26 U.S.C. § 751 — Unrealized receivables and inventory items

(a) Sale or exchange of interest in partnership^*. Money or the fair market value of property that a partner^* receives for all or part of a partnership interest is treated as an amount realized from selling or exchanging property that is not a capital asset to the extent the interest is attributable to (1) the partnership’s “unrealized receivables” or (2) its inventory items. This section does not define “capital asset.”

(b) Certain distributions treated as sales or exchanges. (1) General rule. To the extent a partner receives in a distribution either (A) partnership property that is (i) unrealized receivables or (ii) inventory items that have substantially increased in value, in exchange for all or part of the partner’s interest in other partnership property, including money, or (B) partnership property, including money, other than property described in (A)(i) or (ii), in exchange for all or part of the partner’s interest in property described in (A)(i) or (ii), the transaction must, under the Secretary’s regulations, be treated as a sale or exchange of that property between the recipient partner and the partnership as it exists after the distribution. (2) Exceptions. Paragraph (1) does not apply to (A) property the recipient contributed to the partnership or (B) payments described in section 736(a) to a retiring partner or to a successor in interest of a deceased partner. (3) Substantial appreciation. (A) Inventory items have substantially increased in value if their fair market value is more than 120 percent of the partnership’s adjusted basis in the property. (B) Inventory property is excluded from that test if a principal purpose for acquiring it was to avoid this subsection’s inventory-item rules.

(c) Unrealized receivables. For this subchapter, “unrealized receivables” includes, to the extent not previously includible in income under the partnership’s accounting method, any rights, contractual or otherwise, to payment for (1) goods delivered or to be delivered, to the extent the proceeds would be treated as received from selling or exchanging property other than a capital asset, or (2) services rendered or to be rendered. This section does not define “unrealized receivables”; it gives the listed meaning. For this section and sections 731, 732, and 741, but not section 736, the term also includes mining property defined in section 617(f)(2); DISC^* stock^* described in section 992(a); section 1245 property defined in section 1245(a)(3); stock in certain foreign corporations described in section 1248; section 1250 property defined in section 1250(c); farm land defined in section 1252(a); franchises, trademarks, and trade names referred to in section 1253(a); and oil, gas, or geothermal property described in section 1254. For each, only the amount is included that would be treated as gain covered by section 617(d)(1), 995(c), 1245(a), 1248(a), 1250(a), 1252(a), 1253(a), or 1254(a), respectively, if the partnership had sold the property at fair market value when the transaction described in this section or section 731, 732, or 741 occurred. For this section and sections 731, 732, and 741, but not section 736, the term also includes market discount bonds defined in section 1278 and short-term obligations defined in section 1283, but only to the extent that a sale by the partnership at fair market value at the relevant time would produce ordinary income.

(d) Inventory items. For this subchapter, “inventory items” means (1) partnership property of the kind described in section 1221(a)(1); (2) other partnership property that, if sold or exchanged by the partnership, would be property other than a capital asset and other than property described in section 1231; and (3) other property held by the partnership that, if held by the selling or recipient partner, would be property of the kind described in (1) or (2). This section does not define “inventory items” beyond this stated meaning.

(e) Limit on tax from deemed sales of section 1248 stock. When this section and sections 731 and 741 are applied to an amount resulting from the reference to section 1248(a) in the second sentence of subsection (c), and the taxpayer^* is an individual, the tax on that amount is limited in the way provided by section 1248(b) for gain from certain sales or exchanges of stock in certain foreign corporations.

(f) Special rules for tiered partnerships and similar arrangements. To decide whether partnership property is (1) an unrealized receivable or (2) an inventory item, the partnership is treated as owning its proportionate share of property of every other partnership in which it is a partner. Under regulations, similar rules also apply to interests in trusts.