[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.735-1]

[Page 516]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.735-1  Character of gain or loss on disposition of distributed 
property.

    (a) Sale or exchange of distributed property--(1) Unrealized 
receivables. Any gain realized or loss sustained by a partner on a sale 
or exchange or other disposition of unrealized receivables (as defined 
in paragraph (c)(1) of Sec. 1.751-1) received by him in a distribution 
from a partnership shall be considered gain or loss from the sale or 
exchange of property other than a capital asset.
    (2) Inventory items. Any gain realized or loss sustained by a 
partner on a sale or exchange of inventory items (as defined in section 
751(d)(2)) received in a distribution from a partnership shall be 
considered gain or loss from the sale or exchange of property other than 
a capital asset if such inventory items are sold or exchanged within 5 
years from the date of the distribution by the partnership. The 
character of any gain or loss from a sale or exchange by the distributee 
partner of such inventory items after 5 years from the date of 
distribution shall be determined as of the date of such sale or exchange 
by reference to the character of the assets in his hands at that date 
(inventory items, capital assets, property used in a trade or business, 
etc.).
    (b) Holding period for distributed property. A partner's holding 
period for property distributed to him by a partnership shall include 
the period such property was held by the partnership. The provisions of 
this paragraph do not apply for the purpose of determining the 5-year 
period described in section 735(a)(2) and paragraph (a)(2) of this 
section. If the property has been contributed to the partnership by a 
partner, then the period that the property was held by such partner 
shall also be included. See section 1223(2). For a partnership's holding 
period for contributed property, see Sec. 1.723-1.
    (c) Effective date. Section 735(a) applies to any property 
distributed by a partnership to a partner after March 9, 1954. See 
section 771(b)(2) and paragraph (b)(2) of Sec. 1.771-1. However, see 
section 771(c).

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6832, 30 FR 
8574, July 7, 1965]