26 U.S.C. § 724: Character of gain or loss on contributed unrealized receivables, inventory items, and capital loss property

(a) Contributions of unrealized receivables In the case of any property which—

“any gain or loss recognized by the partnership on the disposition of such property” Closing words

Textual readingALL OF= gain or loss treated as ordinary

(1) was contributed to the partnership by a partner, and

(2) was an unrealized receivable in the hands of such partner immediately before such contribution,

any gain or loss recognized by the partnership on the disposition of such property shall be treated as ordinary income or ordinary loss, as the case may be.

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(b) Contributions of inventory items In the case of any property which—

“any gain or loss recognized by the partnership on the disposition of such property” Closing words

“during the 5-year period beginning on the date of such contribution” Closing words

Textual readingALL OF= ordinary income or ordinary loss treatment

(1) was contributed to the partnership by a partner, and

(2) was an inventory item in the hands of such partner immediately before such contribution,

any gain or loss recognized by the partnership on the disposition of such property during the 5-year period beginning on the date of such contribution shall be treated as ordinary income or ordinary loss, as the case may be.

Cases: Glade Creek Partners, LLC, Sequatchie Holdings, LLC, Tax Matters Partner v. Commissioner (T.C. 2023); Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner v. Commissioner (T.C. 2024); Mill Road 36 Henry, LLC, MR36 Manager, LLC, Tax Matters Partner v. Commissioner (T.C. 2023)

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“any loss recognized by the partnership on the disposition of such property” Closing words

“during the 5-year period beginning on the date of such contribution” Closing words

“to the extent that, immediately before such contribution, the adjusted basis of such property in the hands of the partner exceeded the fair market value of such property.” Closing words

Textual readingALL OF= loss treated as capital loss

(1) was contributed by a partner to the partnership, and

(2) was a capital asset in the hands of such partner immediately before such contribution,

any loss recognized by the partnership on the disposition of such property during the 5-year period beginning on the date of such contribution shall be treated as a loss from the sale of a capital asset to the extent that, immediately before such contribution, the adjusted basis of such property in the hands of the partner exceeded the fair market value of such property.

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(d) Definitions For purposes of this section—

(1) Unrealized receivable The term “unrealized receivable” has the meaning given such term by section 751(c) (determined by treating any reference to the partnership as referring to the partner).

(2) Inventory item The term “inventory item” has the meaning given such term by section 751(d) (determined by treating any reference to the partnership as referring to the partner and by applying section 1231 without regard to any holding period therein provided).

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34 substituted “section 751(d)” for “section 751(d)(2)”.

(3) Substituted basis property

(A) In general If any property described in subsection (a), (b), or (c) 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 non-recognition transactions.

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(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.

Amended 1996

1996 Pub. L. 104-188 Pub. L. 104–188 substituted “Subparagraph” for “Subparagaph”.