Par. 3. Section 1.706-2 is added to read as follows:
(a) Allocable cash basis items prorated over period to which attributable —(1) In general. If during any taxable year of the partnership there is a change in any partner's interest in the partnership, then 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
(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.
(2) Allocable cash basis item. For purposes of this section, the term allocable cash basis item means any of the following items of deduction, loss, income, or gain with respect to which the partnership uses the cash receipts and disbursements method of accounting:
(i) Interest;
(ii) Taxes;
(iii) Payments for the use of property or for services (other than deductions for the transfer of an interest in the partnership in connection with the performance of services; such deductions generally must be allocated under the rules for extraordinary items in § 1.706-4(d));
(iv) Any allowable deduction that had been previously deferred under section 267(a)(2);
(v) Any deduction, loss, income, or gain item that accrues over time and that would, if not allocated as an allocable cash basis item, result in the significant misstatement of a partner's income.
(3) Items attributable to periods not within taxable year. If any portion of any allocable cash basis item is attributable to—
(i) Any period before the beginning of the taxable year, such portion shall be assigned under paragraph (a)(1)(i) of this section to the first day of the taxable year, or
(ii) Any period after the close of the taxable year, such portion shall be assigned under paragraph (a)(1)(i) of this section to the last day of the taxable year.
(4) Treatment of deductible items attributable to prior periods. If any portion of a deductible cash basis item is assigned under paragraph (a)(3)(i) of this section to the first day of any taxable year—
(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
(ii) Any amount allocated under paragraph (a)(4)(i) of this section to a person who is not a partner in the partnership on such first day shall be capitalized by the partnership and allocated among partnership assets under the principles of section 755 (applying the principles of § 1.755-1(b) for partners who sold or exchanged their interest, and the principles of § 1.755-1(c) for partners who received a distribution from the partnership in exchange for their interest).
(b) Example 1.
On January 1, 2015, A, B, and C are equal one-third partners in PRS, a calendar year partnership that uses the cash receipts and disbursements method of accounting. On July 1, 2015, A sells her entire interest in PRS to D. On December 1, 2015, PRS pays a $12,000 interest expense that is attributable to every day in PRS's taxable year. Assume the de minimis exception of paragraph (c) of this section does not apply, and that the $12,000 interest expense must be allocated under the rules of paragraph (a) of this section. A was a partner in PRS for 181 days, and D was a partner in PRS for 184 days, including on July 1 pursuant to paragraph (a)(1)(ii) of this section. Under paragraph (a) of this section, A is entitled to 181/365 of her otherwise allocable share of deductions for the $12,000 interest expense, and D is entitled to 184/365 of his otherwise allocable share of deductions for the $12,000 interest expense. Thus, PRS allocates the interest expense deductions $1,983.56 to A, $2,016.44 to D, and $4,000 to each B and C.
Example 2.
In 2015, E, F, and G are equal one-third partners in PRS, a calendar year partnership that uses the cash receipts and disbursements method of accounting. On December 31, 2015, E sells her entire interest in PRS to H. In November 2016, PRS makes a $6,000 payment for the use of property that is attributable to the period from January 1, 2015 to December 31, 2016. Assume the de minimis exception of paragraph (c) of this section does not apply, and that the $6,000 payment for the use of property must be allocated under the rules of paragraph (a) of this section. Under paragraph (a)(3)(i) of this section, half of the $6,000 expense is attributable to 2015 and must be assigned to January 1, 2016. Of this $3,000 assigned to January 1, 2016, one-third is allocable to each E, F, and G under paragraph (a)(4)(i) of this section. However, because E is not a partner in 2016, PRS must capitalize E's $1,000 share of the expense under paragraph (a)(4)(ii) of this section. Because E sold her interest to H, PRS must treat the capitalized $1,000 similar to a section 743(b) adjustment for H allocated among PRS's property under the principles of § 1.755-1(b).
Example 3.
Assume the same facts as Example 2, except that on December 31, 2015, PRS distributed property to E in complete redemption of E's interest, and H never becomes a partner in PRS. PRS must capitalize E's $1,000 share of the expense under paragraph (a)(4)(ii) of this section. However, because E was redeemed, PRS must instead treat the capitalized $1,000 similar to a section 734(b) common basis adjustment allocated among PRS's property under the principles of § 1.755-1(c).
(c) De minimis exception. An item described in paragraph (a)(2) of this section will not be subject to the rules of this section if, for the partnership's taxable year the total amount of the particular class of allocable cash basis items described in paragraph (a)(2)(i) through (v) of this section (but in no event counting an item more than once) is less than five percent of the partnership's gross income, including tax-exempt income described in section 705(a)(1)(B), in the case of income or gain items, or gross expenses and losses, including section 705(a)(2)(B) expenditures, in the case of losses and expense items; and the total amount of allocable cash basis items from all classes of allocable cash basis items amounting to less than five percent of the partnership's gross income, including tax-exempt income described in section 705(a)(1)(B), in the case of income or gain items, or gross expenses and losses, including section 705(a)(2)(B) expenditures, in the case of losses and expense items, does not exceed $10 million in the taxable year, determined by treating all such allocable cash basis items as positive amounts.
(d) Effective/applicability date. This section applies to taxable years beginning on or after the date of publication of the Treasury decision adopting these rules as a final regulation in the Federal Register .