§ 735. Character of gain or loss on disposition of distributed property

• (a)
  • (1) 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.
  • (2) 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.
• (b) 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.
• (c)
  • (1) For purposes of this section, section 751(d) (defining inventory item) shall be applied without regard to any holding period in section 1231(b).
  • (2)
    • (A) 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.
    • (B) Subparagraph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351.