(A) In general Paragraph (1) shall not apply to the distribution from a partnership of a marketable security to a partner if
(i) the security was contributed to the partnership by such partner, except to the extent that the value of the distributed security is attributable to marketable securities or money contributed (directly or indirectly) to the entity to which the distributed security relates,
(ii) to the extent provided in regulations prescribed by the Secretary, the property was not a marketable security when acquired by such partnership, or
(iii) such partnership is an investment partnership and such partner is an eligible partner thereof.
(B) Limitation on gain recognized In the case of a distribution of marketable securities to a partner, the amount taken into account under paragraph (1) shall be reduced (but not below zero) by the excess (if any) of
(i) such partners distributive share of the net gain which would be recognized if all of the marketable securities of the same class and issuer as the distributed securities held by the partnership were sold (immediately before the transaction to which the distribution relates) by the partnership for fair market value, over
(ii) such partners distributive share of the net gain which is attributable to the marketable securities of the same class and issuer as the distributed securities held by the partnership immediately after the transaction, determined by using the same fair market value as used under clause (i).
Under regulations prescribed by the Secretary, all marketable securities held by the partnership may be treated as marketable securities of the same class and issuer as the distributed securities.
(C) Definitions relating to investment partnerships For purposes of subparagraph (A)(iii):
(i) Investment partnership The term investment partnership means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of
(I) money,
(II) stock in a corporation,
(III) notes, bonds, debentures, or other evidences of indebtedness,
(IV) interest rate, currency, or equity notional principal contracts,
(V) foreign currencies,
(VI) interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange,
(VII) other assets specified in regulations prescribed by the Secretary, or
(VIII) any combination of the foregoing.
(ii) Exception for certain activities A partnership shall not be treated as engaged in a trade or business by reason of
(I) any activity undertaken as an investor, trader, or dealer in any asset described in clause (i), or
(II) any other activity specified in regulations prescribed by the Secretary.
(iii) Eligible partner
(I) In general The term eligible partner means any partner who, before the date of the distribution, did not contribute to the partnership any property other than assets described in clause (i).
(II) Exception for certain nonrecognition transactions The term eligible partner shall not include the transferor or transferee in a nonrecognition transaction involving a transfer of any portion of an interest in a partnership with respect to which the transferor was not an eligible partner.
(iv) Look-thru of partnership tiers Except as otherwise provided in regulations prescribed by the Secretary
(I) a partnership shall be treated as engaged in any trade or business engaged in by, and as holding (instead of a partnership interest) a proportionate share of the assets of, any other partnership in which the partnership holds a partnership interest, and
(II) a partner who contributes to a partnership an interest in another partnership shall be treated as contributing a proportionate share of the assets of the other partnership.
If the preceding sentence does not apply under such regulations with respect to any interest held by a partnership in another partnership, the interest in such other partnership shall be treated as if it were specified in a subclause of clause (i).