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TITLE 26-INTERNAL REVENUE CODE property to a partner unless the election, pro- vided in section 754 (relating to optional adjust- ment to basis of partnership property), is in effect with respect to such partnership. (b) Method of adjustment In the case of a distribution of property to a partner, a partnership, with respect to which the election provided in section 754 is in effect, shall- (1) increase the adjusted basis of partner- ship property by- (A) the amount of any gain recognized to the distributee partner with respect to such distribution under section 731(a)(1), and (B) in the case of distributed property to which section 732(a)(2) or (b) applies, the excess of the adjusted basis of the distribut- ed property to the partnership immediately before the distribution (as adjusted by sec- tion 732(d)) over the basis of the distributed property to the distributee, as determined under section 732, or (2) decrease the adjusted basis of partner- ship property by- (A) the amount of any loss recognized to the distributee partner with respect to such distribution under section 731(a)(2), and (B) in the case of distributed property to which section 732(b) applies, the excess of the basis of the distributed property to the distributee, as determined under section 732, over the adjusted basis of the distribut- ed property to the partnership immediately before such distribution (as adjusted by sec- tion 732(d)). (c) Allocation of basis The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules pro- vided in section 755. (Aug. 16, 1954, ch. 736, 68A Stat. 247.) SECTION RsnERRuu TO IN OTIM SECTIONS This section is referred to in sections 754, 755 of this title. § 735. Character of gain or loss on disposition of dis- tributed property (a) Sale or exchange of certain distributed property (I) Unrealized receivables Gain or loss on the disposition by a distribu- tee partner of unrealized receivables (as de- fined in section 751(c)) distributed by a part- nership, shall be considered as ordinary income or as ordinary loss, as the case may be. (2) Inventory items Gain or loss on the sale or exchange by a distributee partner of inventory items (as de- fined in section 751(d)(2)) 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) Holding period for distributed property In determining the period for which a part- ner 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 deter- mined under section 1223, with respect to such property. (Aug. 16, 1954, ch. 763, 68A Stat. 247; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(3)(D), 90 Stat. 1792.) AMENDmENTS 1976-Subsec. (a)(1), (2). Pub. L. 94-455 substituted "as ordinary income or as ordinary loss, as the case may be" for "gain or loss from the sale or exchange of property other than a capital asset". EFFECTIVE DATE or 1976 AMENDMENT Amendment of subsec. (a)(1), (2) by Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. § 736. Payments to a retiring partner or a deceased partner's successor In Interest (a) Payments considered as distributive share or guaranteed payment Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered- (1) as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or (2) as a guaranteed payment described in section 707(c) if the amount thereof is deter- mined without regard to the income of the partnership. (b) Payments for Interest in partnership (1) General rule Payments made in liquidation of the inter- est of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsec- tion (a). (2) Special rules For purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for- (A) unrealized receivables of the partner- ship (as defined In section 751(c)), or (B) good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will. (Aug. 16, 1954, ch. 736, 68A Stat. 248; Oct. 4, 1976, Pub. L, 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b)(1). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CROSS RzErFcEs Extent of recognition of gain or loss on distribution, see section 731 of this title. Partner receiving income in respect of decedent, see section 753 of this title. § 735 Page 490