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property to the new partnership is an exchange. Section 721
provides that "No gain or loss shall be recognized to a
partnership or to any of its partners in the case of a
contribution of property to the partnership in exchange for an
interest in the partnership."
Respondent's reliance on section 731 is misplaced. The
purpose of the above-quoted portion of section 731 is to
characterize the gain or loss recognized on partnership
distributions as capital or ordinary in nature. See sec. 1.731-
1(a)(3), Income Tax Regs. Section 741 provides for the
characterization of income or loss from the sale or exchange of a
partnership interest as capital, except as provided in section
751 (relating to unrealized receivables and inventory items that
have substantially appreciated in value). Section 731(a), in
turn, subjects the tax consequences of partnership distributions
to the gain or loss characterization rule of section 741.
Moreover, section 731(a) provisions apply to nonliquidating and
liquidating distributions. It would be inappropriate to treat
partners who receive current distributions from a partnership as
selling their partnership interests, which respondent's argument
would seem to require. Rather, a partner who receives a
nonliquidating distribution is treated as selling his partnership
interest only for purposes of characterizing the gain recognized
by the partner.
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