# 26 U.S.C. § 735: Character of gain or loss on disposition of distributed property

Source: OLRC release point 119-134 <https://uscode.house.gov/us/usc/119-134/t26/s735>. Cite pinpoints as 26 U.S.C. § 735(a)(1).

## § 735(a) Sale or exchange of certain distributed property

**§ 735(a)(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.

**§ 735(a)(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.

## § 735(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.

## § 735(c) Special rules

**§ 735(c)(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).

**§ 735(c)(2) Substituted basis property.**

**§ 735(c)(2)(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.

**§ 735(c)(2)(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.

## Regulations

- [Treas. Reg. § 1.735-1](/26/reg/1.735-1.md): Character of gain or loss on disposition of distributed property. (interprets § 735)

## Leading cases

- [McCauslen v. Commissioner, 45 T.C. 588 (1966)](https://www.courtlistener.com/opinion/4701943/mccauslen-v-commissioner/)
- [Wilmont Fleming Engineering Co. v. Commissioner, 65 T.C. 847 (1976)](https://www.courtlistener.com/opinion/4704204/wilmont-fleming-engineering-co-v-commissioner/)
- [Requard v. Commissioner, T.C. Memo. 1966-141](https://www.courtlistener.com/opinion/4823159/requard-v-commissioner/)

## Connections

Cites: § 351 Transfer to corporation controlled by transferor; § 751 Unrealized receivables and inventory items; § 1223 Holding period of property; § 1231 Property used in the trade or business and involuntary conversions

Cited by: § 1223 Holding period of property

## Amendments

- 1954-08-16: [Act Aug. 16, 1954, ch. 763](/26/act/1954-ch763.md), 68A Stat. 247
- 1976-10-04: [Pub. L. 94-455](/26/act/94-455.md), 90 Stat. 1792
- 1984-07-18: [Pub. L. 98-369](/26/act/98-369.md), 98 Stat. 593
- 1997-08-05: [Pub. L. 105-34](/26/act/105-34.md), 111 Stat. 947