Cases: United States v. Little, 753 F.2d 1420 (9th Cir. 1985); Snell v. United States, 680 F.2d 545 (8th Cir. 1982); Moore v. Commissioner, 70 T.C. 1024 (1978)
Final rules 7
(a) Year in which partnership income is includible In computing the taxable income of a partner for a taxable year, the inclusions required by section 702 and section 707(c) with respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner.
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(b) Taxable year
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 806(a)(3), struck out “Adoption of” before “taxable year” in heading.
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(1) Partnership’s taxable year
Amended 1976, 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 806(a)(1), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “The taxable year of a partnership shall be determined as though the partnership were a taxpayer. A partnership may not change to, or adopt, a taxable year other than that of all its principal partners unless it establishes, to the satisfaction of the Secretary, a business purpose therefor.”
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
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(A) Partnership treated as taxpayer The taxable year of a partnership shall be determined as though the partnership were a taxpayer.
(B) Taxable year determined by reference to partners Except as provided in subparagraph (C), a partnership shall not have a taxable year other than—
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(i) the majority interest taxable year (as defined in paragraph (4)),
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(e)(1)(A), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: “the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent,”.
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(ii) if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or
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(iii) if there is no taxable year described in clause (i) or (ii), the calendar year unless the Secretary by regulations prescribes another period.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(e)(2), substituted “unless the Secretary by regulations prescribes another period” for “or such other period as the Secretary may prescribe in regulations”.
(C) Business purpose A partnership may have a taxable year not described in subparagraph (B) if it establishes, to the satisfaction of the Secretary, a business purpose therefor. For purposes of this subparagraph, any deferral of income to partners shall not be treated as a business purpose.
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(2) Partner’s taxable year A partner may not change to a taxable year other than that of a partnership in which he is a principal partner unless he establishes, to the satisfaction of the Secretary, a business purpose therefor.
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
(3) Principal partner For the purpose of this subsection, a principal partner is a partner having an interest of 5 percent or more in partnership profits or capital.
(4) Majority interest taxable year; limitation on required changes
Amended 1986, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(e)(1)(B), substituted “Majority interest taxable year; limitation on required changes” for “Application of majority interest rule” in heading and amended text generally. Prior to amendment, text read as follows: “Clause (i) of paragraph (1)(B) shall not apply to any taxable year of a partnership unless the period which constitutes the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent has been the same for—
“(A) the 3-taxable year period of such partner or partners ending on or before the beginning of such taxable year of the partnership, or
“(B) if the partnership has not been in existence during all of such 3-taxable year period, the taxable years of such partner or partners ending with or within the period of existence.
This paragraph shall apply without regard to whether the same partners or interests are taken into account in determining the 50 percent interest during any period.”
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 806(a)(2), added par. (4).
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(A) Majority interest taxable year defined For purposes of paragraph (1)(B)(i)—
(i) In general The term “majority interest taxable year” means the taxable year (if any) which, on each testing day, constituted the taxable year of 1 or more partners having (on such day) an aggregate interest in partnership profits and capital of more than 50 percent.
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(ii) Testing days The testing days shall be—
(I) the 1st day of the partnership taxable year (determined without regard to clause (i)), or
(II) the days during such representative period as the Secretary may prescribe.
(B) Further change not required for 3 years Except as provided in regulations necessary to prevent the avoidance of this section, if, by reason of paragraph (1)(B)(i), the taxable year of a partnership is changed, such partnership shall not be required to change to another taxable year for either of the 2 taxable years following the year of change.
(5) Application with other sections Except as provided in regulations, for purposes of determining the taxable year to which a partnership is required to change by reason of this subsection, changes in taxable years of other persons required by this subsection, section 441(i), section 584(i), section 644, or section 1378(a) shall be taken into account.
Amended 1988, 1997, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141 substituted “section 584(i)” for “section 584(h)”.
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 507(b)(2), substituted “section 644” for “section 645”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(e)(3), added par. (5).
(c) Closing of partnership year
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(1) General rule Except in the case of a termination of a partnership and except as provided in paragraph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner’s interest in the partnership, or the sale or exchange of a partner’s interest in the partnership.
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(2) Treatment of dispositions
Amended 1976, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1246(b), substituted “Treatment of dispositions” for “Partner who retires or sells interest in partnership” as heading.
- 1976 Pub. L. 94-455 Pub. L. 94–455, §§ 213(c)(1), 1906(b)(13)(A), substituted “or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift, or otherwise)” for “or with respect to a partner whose interest is reduced”, in par. (B), and struck out “or his delegate” after “Secretary” in par. (A).
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(A) Disposition of entire interest The taxable year of a partnership shall close with respect to a partner whose entire interest in the partnership terminates (whether by reason of death, liquidation, or otherwise).
Amended 1984, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1246(a), amended heading and text of subpar. (A) generally. Prior to amendment, text read as follows: “The taxable year of a partnership shall close—
“(i) with respect to a partner who sells or exchanges his entire interest in a partnership, and
“(ii) with respect to a partner whose interest is liquidated, except that the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership’s taxable year.”
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 72(b)(1), struck out last sentence providing that such partner’s distributive share of item described in section 702(a) for such year shall be determined, under regulations prescribed by the Secretary, for the period ending with such sale, exchange, or liquidation.
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(B) Disposition of less than entire interest The taxable year of a partnership shall not close (other than at the end of a partnership’s taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift, or otherwise).
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 72(b)(2), struck out “, but such partner’s distributive share of items described in section 702(a) shall be determined by taking into account his varying interests in the partnership during the taxable year” after “otherwise)”.
(d) Determination of distributive share when partner’s interest changes
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 72(a), added subsec. (d).
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(1) In general Except as provided in paragraphs (2) and (3), if during any taxable year of the partnership there is a change in any partner’s interest in the partnership, each partner’s distributive share of any item of income, gain, loss, deduction, or credit of the partnership for such taxable year shall be determined by the use of any method prescribed by the Secretary by regulations which takes into account the varying interests of the partners in the partnership during such taxable year.
(2) Certain cash basis items prorated over period to which attributable
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(A) In general If during any taxable year of the partnership there is a change in any partner’s interest in the partnership, then (except to the extent provided in regulations) each partner’s distributive share of any allocable cash basis item shall be determined—
(i) by assigning the appropriate portion of such item to each day in the period to which it is attributable, and
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1805(a)(1)(A), substituted “such item” for “each such item”.
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(ii) by allocating the portion assigned to any such day among the partners in proportion to their interests in the partnership at the close of such day.
(B) Allocable cash basis item For purposes of this paragraph, the term “allocable cash basis item” means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting:
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1805(a)(1)(B), in introductory provisions, struck out “which are described in paragraph (1) and” after “the following items”.
(i) Interest.
(ii) Taxes.
(iii) Payments for services or for the use of property.
(iv) Any other item of a kind specified in regulations prescribed by the Secretary as being an item with respect to which the application of this paragraph is appropriate to avoid significant misstatements of the income of the partners.
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(C) Items attributable to periods not within taxable year If any portion of any allocable cash basis item is attributable to—
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(i) any period before the beginning of the taxable year, such portion shall be assigned under subparagraph (A)(i) to the first day of the taxable year, or
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1805(a)(2), substituted “the first day of the taxable year” for “the first day of such taxable year”.
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(ii) any period after the close of the taxable year, such portion shall be assigned under subparagraph (A)(i) to the last day of the taxable year.
(D) Treatment of deductible items attributable to prior periods If any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of any taxable year—
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(i) such portion shall be allocated among persons who are partners in the partnership during the period to which such portion is attributable in accordance with their varying interests in the partnership during such period, and
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(ii) any amount allocated under clause (i) to a person who is not a partner in the partnership on such first day shall be capitalized by the partnership and treated in the manner provided for in section 755.
(3) Items attributable to interest in lower tier partnership prorated over entire taxable year If—
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(A) during any taxable year of the partnership there is a change in any partner’s interest in the partnership (hereinafter in this paragraph referred to as the “upper tier partnership”), and
(B) such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the “lower tier partnership”),
then (except to the extent provided in regulations) each partner’s distributive share of any item of the upper tier partnership attributable to the lower tier partnership shall be determined by assigning the appropriate portion (determined by applying principles similar to the principles of subparagraphs (C) and (D) of paragraph (2)) of each such item to the appropriate days during which the upper tier partnership is a partner in the lower tier partnership and by allocating the portion assigned to any such day among the partners in proportion to their interests in the upper tier partnership at the close of such day.
(4) Taxable year determined without regard to subsection (c)(2)(A) For purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A).