PUBLIC LAW 98-369—JULY 18, 1984 "(1) was contributed by a partner to the partnership, and "(2) was a capital asset in the hands of such partner immediately before such contribution, any loss recognized by the partnership on the disposition of such property 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 to the extent that, immediately before such contribution, the adjusted basis of such property in the hands of the partner exceeded the fair market value of such property. "(d) DEFINITIONS.—For purposes of this section— "(1) UNREALIZED RECEIVABLE.—The term 'unrealized receivable' has the meaning given such term by section 751(c) (determined by treating any reference to the partnership as referring to the partner). "(2) INVENTORY ITEM.—The term 'inventory item' has the meaning given such term by section 751(d)(2) (determined by treating any reference to the partnership as referring to the partner and by applying section 1231 without regard to any holding period therein provided).
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"(3) SUBSTITUTED BASIS PROPERTY.—
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"(A) IN GENERAL.—If any property described in subsection (a), (b), or (c) 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 non-recognition transactions. "(B) EXCEPTION FOR STOCK IN CORPORATION.—Subpara-
gaph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351." (b) AMENDMENT OF SECTION 735.—Section 735 (relating to charac- 26 USC 735. ter of gain or loss on disposition of distributed property) is amended by adding at the end thereof the following new subsection: "(c) SPECIAL RULES.— "(1) WAIVER OF HOLDING PERIODS CONTAINED IN SECTION
1231.—For purposes of this section, section 751(d)(2) (defining inventory item) shall be applied without regard to any holding period in section 1231(b). "(2) SUBSTITUTED BASIS PROPERTY.—
"(A) IN GENERAL.—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) EXCEPTION FOR STOCK IN CORPORATION.—Subpara-
graph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351." (c) CLERICAL AMENDMENT.—The table of sections for subpart A of part II of subchapter K of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 724. Character of gain or loss on contributed unrealized receivables, inventory items, and capital loss property." (d) EFFECTIVE DATES.—
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