WHERE DO YOU SEE THIS ANYWHERE IN THE CODE OR REGULATIONS?
This is the tax code referenced: 26 U.S. Code Section 731 (a)(2). Specifically, it says: "loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner’s interest in a partnership etc". This is the website used: https://www.law.cornell.edu/uscode/text/26/731.
From this tax section, 731(a)(1) is about the gain shall not be recognized and 731(a)(2) is about the loss. If gain shall not be recognized (but will need to lower the partner's basis in the partnership or until the basis is zero), I am assuming the loss shouldn't be recognized either, and hence my earlier question of how to handle such loss properly.
I had read this tax codes (few levels up) and don't see there's a way to recognize such loss except in liquidation of a partner's interest.
