---
kind: "section"
citation: "26 U.S.C. § 724"
title: "26"
title_heading: "Internal Revenue Code"
number: "724"
heading: "Character of gain or loss on contributed unrealized receivables, inventory items, and capital loss property"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/724"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter K — Partners and Partnerships"
  - "Part II — Contributions, Distributions, and Transfers"
  - "Subpart A — Contributions to a Partnership"
---

# §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](/usc/26/317.md?p=a) which—
  - (1) was contributed to the [partnership](/usc/26/761.md?p=a) by a [partner](/usc/26/761.md?p=b), and
  - (2) was an unrealized receivable in the hands of such [partner](/usc/26/761.md?p=b) immediately before such contribution,

  any gain or loss recognized by the [partnership](/usc/26/761.md?p=a) on the [disposition](/usc/26/424.md?p=c-1) of such [property](/usc/26/317.md?p=a) shall be treated as ordinary income or ordinary loss, as the case may be.

- (b) **Contributions of inventory items—** In the case of any [property](/usc/26/317.md?p=a) which—
  - (1) was contributed to the [partnership](/usc/26/761.md?p=a) by a [partner](/usc/26/761.md?p=b), and
  - (2) was an inventory item in the hands of such [partner](/usc/26/761.md?p=b) immediately before such contribution,

  any gain or loss recognized by the [partnership](/usc/26/761.md?p=a) on the [disposition](/usc/26/424.md?p=c-1) of such [property](/usc/26/317.md?p=a) 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.

- (c) **Contributions of capital loss property—** In the case of any [property](/usc/26/317.md?p=a) which—
  - (1) was contributed by a [partner](/usc/26/761.md?p=b) to the [partnership](/usc/26/761.md?p=a), and
  - (2) was a [capital asset](/usc/26/1221.md?p=a) in the hands of such [partner](/usc/26/761.md?p=b) immediately before such contribution,

  any loss recognized by the [partnership](/usc/26/761.md?p=a) on the [disposition](/usc/26/424.md?p=c-1) of such [property](/usc/26/317.md?p=a) 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](/usc/26/1221.md?p=a) to the extent that, immediately before such contribution, the adjusted basis of such [property](/usc/26/317.md?p=a) in the hands of the [partner](/usc/26/761.md?p=b) exceeded the fair market [value](/usc/26/851.md?p=c-4) of such [property](/usc/26/317.md?p=a).

- (d) **Definitions—** For purposes of this section—
  - (1) **Unrealized receivable—** The term “unrealized receivable” has the meaning given such term by [section 751(c)](/usc/26/751.md?p=c) (determined by treating any reference to the [partnership](/usc/26/761.md?p=a) as referring to the [partner](/usc/26/761.md?p=b)).
  - (2) **Inventory item—** The term “inventory item” has the meaning given such term by [section 751(d)](/usc/26/751.md?p=d) (determined by treating any reference to the [partnership](/usc/26/761.md?p=a) as referring to the [partner](/usc/26/761.md?p=b) and by applying [section 1231](/usc/26/1231.md) without regard to any holding period therein provided).
  - (3) **Substituted basis property—**
    - (A) **In general—** If any [property](/usc/26/317.md?p=a) described in subsection [(a)](#a), [(b)](#b), or [(c)](#c) is disposed of in a nonrecognition transaction, the tax treatment which applies to such [property](/usc/26/317.md?p=a) under such subsection shall also apply to any substituted basis [property](/usc/26/317.md?p=a) resulting from such transaction. A similar rule shall also apply in the case of a series of non-recognition transactions.
    - (B) **Exception for stock in C corporation—** [Subparagraph (A)](#d-3-A) shall not apply to any [stock](/usc/26/1504.md?p=a-4) in a [C corporation](/usc/26/1361.md?p=a-2) received in an exchange described in section 351.

## Source credit

(Added Pub. L. 98–369, div. A, title I, § 74(a), July 18, 1984, 98 Stat. 592; amended Pub. L. 104–188, title I, § 1704(t)(63), Aug. 20, 1996, 110 Stat. 1890; Pub. L. 105–34, title X, § 1062(b)(3), Aug. 5, 1997, 111 Stat. 947.)

## Notes

### Editorial Notes

### Amendments

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

1996—Subsec. (d)(3)(B). Pub. L. 104–188 substituted “Subparagraph” for “Subparagaph”.

### Statutory Notes and Related Subsidiaries

### Effective Date of 1997 Amendment

Pub. L. 105–34, title X, § 1062(c), Aug. 5, 1997, 111 Stat. 947, provided that: In general.—The amendments made by this section [amending this section and sections 731, 732, 735, and 751 of this title] shall apply to sales, exchanges, and distributions after the date of the enactment of this Act [Aug. 5, 1997]. Binding contracts.—The amendments made by this section shall not apply to any sale or exchange pursuant to a written binding contract in effect on June 8, 1997, and at all times thereafter before such sale or exchange.”

### Effective Date

Pub. L. 98–369, div. A, title I, § 74(d)(1), July 18, 1984, 98 Stat. 594, provided that: “The amendment made by subsection (a) [enacting this section] shall apply to property contributed to a partnership after March 31, 1984, in taxable years ending after such date.”