§702 — Income and credits of partner
136 citing cases
Statute Text — 26 U.S.C. §702
In determining his income tax, each partner shall take into account separately his distributive share of the partnership’s—
gains and losses from sales or exchanges of capital assets held for not more than 1 year,
gains and losses from sales or exchanges of capital assets held for more than 1 year,
gains and losses from sales or exchanges of property described in section 1231 (relating to certain property used in a trade or business and involuntary conversions),
charitable contributions (as defined in section 170(c)),
dividends with respect to which section 1(h)(11) or part VIII of subchapter B applies,
taxes, described in section 901, paid or accrued to foreign countries and to possessions of the United States,
other items of income, gain, loss, deduction, or credit, to the extent provided by regulations prescribed by the Secretary, and
taxable income or loss, exclusive of items requiring separate computation under other paragraphs of this subsection.
The character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.
In any case where it is necessary to determine the gross income of a partner for purposes of this title, such amount shall include his distributive share of the gross income of the partnership.
For rules relating to procedures for determining the tax treatment of partnership items see subchapter C of chapter 63 (section 6221 and following).
Treasury Regulations
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Treas. Reg. §1.702-1Income and credits of partner
(a) General rule. Each partner is required to take into account separately in his return his distributive share, whether or not distributed, of each class or item of partnership income, gain, loss, deduction, or credit described in subparagraphs (1) through (9) of this paragraph. (For the taxable year in which a partner includes his distributive share of partnership taxable income, see section 706(a) and § 1.706-1(a). Such distributive share shall be determined as provided in section 704 and § 1.704-1.) Accordingly, in determining his income tax:
(1) Each partner shall take into account, as part of his gains and losses from sales or exchanges of capital assets held for not more than 1 year (6 months for taxable years beginning before 1977; 9 months for taxable years beginning in 1977), his distributive share of the combined net amount of such gains and losses of the partnership.
(2) Each partner shall take into account, as part of his gains and losses from sales or exchanges of capital assets held for more than 1 year (6 months for taxable years beginning before 1977; 9 months for taxable years beginning in 1977), his distributive share of the combined net amount of such gains and losses of the partnership. Each partner subject to section 1061 must take into account gains and losses from sales of capital assets held for more than one year as provided in section 1061 and §§ 1.1061-1 through 1.1061-6.
(3) Each partner shall take into account, as part of his gains and losses from sales or exchanges of property described in section 1231 (relating to property used in the trade or business and involuntary conversions), his distributive share of the combined net amount of such gains and losses of the partnership. The partnership shall not combine such items with items set forth in subparagraph (1) or (2) of this paragraph.
(4) Each partner shall take into account, as part of the charitable contributions paid by him, his distributive share of each class of charitable contributions paid by the partnership within the partnership's taxable year. Section 170 determines the extent to which such amount may be allowed as a deduction to the partner. For the definition of the term “charitable contribution”, see section 170(c).
(5) Each partner shall take into account, as part of the dividends received by him from domestic corporations, his distributive share of dividends received by the partnership, with respect to which the partner is entitled to a credit under section 34 (for dividends received on or before December 31, 1964), an exclusion under section 116, or a deduction under part VIII, subchapter B, chapter 1 of the Code.
(6) Each partner shall take into account, as part of his taxes described in section 901 which have been paid or accrued to foreign countries or to possessions of the United States, his distributive share of such taxes which have been paid or accrued by the partnership, according to its method of treating such taxes. A partner may elect to treat his total amount of such taxes, including his distributive share of such taxes of the partnership, as a deduction under section 164 or as a credit under section 901, subject to the provisions of sections 901 through 905.
(7) Each partner shall take into account, as part of the partially tax-exempt interest received by him on obligations of the United States or on obligations of instrumentalities of the United States, as described in section 35 or section 242, his distributive share of such partially tax-exempt interest received by the partnership. However, if the partnership elects to amortize premiums on bonds as provided in section 171, the amount received on such obligations by the partnership shall be reduced by the amortizable bond premium applicable to such obligations as provided in section 171(a)(3).
(8)(i) Each partner shall take into account separately, as part of any class of income, gain, loss, deduction, or credit, his distributive share of the following items: Recoveries of bad debts, prior taxes, and delinquency amounts (section 111); gains and losses from wagering transactions (section 165(d)); soil and water conservation expenditures (section 175); nonbusiness expenses as described in section 212; medical, dental, etc., expenses (section 213); expenses for care of certain dependents (section 214); alimony, etc., payments (section 215); amounts representing taxes and interest paid to cooperative housing corporations (section 216); intangible drilling and developments costs (section 263(c)); pre-1970 exploration expenditures (section 615); certain mining exploration expenditures (section 617); income, gain, or loss to the partnership under section 751(b); and any items of income, gain, loss, deduction, or credit subject to a special allocation under the partnership agreement which differs from the allocation of partnership taxable income or loss generally.
(ii) Each partner must also take into account separately the partner's distributive share of any partnership item which, if separately taken into account by any partner, would result in an income tax liability for that partner, or for any other person, different from that which would result if that partner did not take the item into account separately. Thus, if any partner is a controlled foreign corporation, as defined in section 957, items of income that would be gross subpart F income if separately taken into account by the controlled foreign corporation must be separately stated for all partners. Under section 911(a), if any partner is a bona fide resident of a foreign country who may exclude from gross income the part of the partner's distributive share which qualifies as earned income, as defined in section 911(b), the earned income of the partnership for all partners must be separately stated. Similarly, all relevant items of income or deduction of the partnership must be separately stated for all partners in determining the applicability of section 183 (relating to activities not engaged in for profit) and the recomputation of tax thereunder for any partner. This paragraph (a)(8)(ii) applies to taxable years beginning on or after July 23, 2002.
(iii) Each partner shall aggregate the amount of his separate deductions or exclusions and his distributive share of partnership deductions or exclusions separately stated in determining the amount allowable to him of any deduction or exclusion under subtitle A of the Code as to which a limitation is imposed. For example, partner A has individual domestic exploration expenditures of $300,000. He is also a member of the AB partnership which in 1971 in its first year of operation has foreign exploration expenditures of $400,000. A's distributable share of this item is $200,000. However, the total amount of his distributable share that A can deduct as exploration expenditures under section 617(a) is limited to $100,000 in view of the limitation provided in section 617(h). Therefore, the excess of $100,000 ($200,000 minus $100,000) is not deductible by A.
(9) Each partner shall also take into account separately his distributive share of the taxable income or loss of the partnership, exclusive of items requiring separate computations under subparagraphs (1) through (8) of this paragraph. For limitation on allowance of a partner's distributive share of partnership losses, see section 704(d) and paragraph (d) of § 1.704-1.
(b) Character of items constituting distributive share. The character in the hands of a partner of any item of income, gain, loss, deduction, or credit described in section 702(a)(1) through (8) shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership. For example, a partner's distributive share of gain from the sale of depreciable property used in the trade or business of the partnership shall be considered as gain from the sale of such depreciable property in the hands of the partner. Similarly, a partner's distributive share of partnership “hobby losses” (section 270) or his distributive share of partnership charitable contributions to organizations qualifying under section 170(b)(1)(A) retains such character in the hands of the partner.
(c) Gross income of a partner. (1) Where it is necessary to determine the amount or character of the gross income of a partner, his gross income shall include the partner's distributive share of the gross income of the partnership, that is, the amount of gross income of the partnership from which was derived the partner's distributive share of partnership taxable income or loss (including items described in section 702(a)(1) through (8)). For example, a partner is required to include his distributive share of partnership gross income:
(i) In computing his gross income for the purpose of determining the necessity of filing a return (section 6012 (a));
(ii) In determining the application of the provisions permitting the spreading of income for services rendered over a 36-month period (section 1301, as in effect for taxable years beginning before January 1, 1964);
(iii) In computing the amount of gross income received from sources within possessions of the United States (section 937).
(iv) In determining a partner's “gross income from farming” (sections 175 and 6073); and
(v) In determining whether the de minimis or full inclusion rules of section 954(b)(3) apply.
(2) In determining the applicability of the 6-year period of limitation on assessment and collection provided in section 6501(e) (relating to omission of more than 25 percent of gross income), a partner's gross income includes his distributive share of partnership gross income (as described in section 6501(e)(1)(A)(i)). In this respect, the amount of partnership gross income from which was derived the partner's distributive share of any item of partnership income, gain, loss, deduction, or credit (as included or disclosed in the partner's return) is considered as an amount of gross income stated in the partner's return for the purposes of section 6501(e). For example, A, who is entitled to one-fourth of the profits of the ABCD partnership, which has $10,000 gross income and $2,000 taxable income, reports only $300 as his distributive share of partnership profits. A should have shown $500 as his distributive share of profits, which amount was derived from $2,500 of partnership gross income. However, since A included only $300 on his return without explaining in the return the difference of $200, he is regarded as having stated in his return only $1,500 ($300/$500 of $2,500) as gross income from the partnership.
(d) Partners in community property States. If separate returns are made by a husband and wife domiciled in a community property State, and only one spouse is a member of the partnership, the part of his or her distributive share of any item or items listed in paragraph (a) (1) through (9) of this section which is community property, or which is derived from community property, should be reported by the husband and wife in equal proportions.
(e) Special rules on requirement to separately state meal, travel, and entertainment expenses. Each partner shall take into account separately his or her distributive share of meal, travel, and entertainment expenses paid or incurred after December 31, 1986, by partnerships that have taxable years beginning before January 1, 1987, and ending with or within partner's taxable years beginning on or after January 1, 1987. In addition, with respect to skybox rentals under section 274 (1) (2), each partner shall take into account separately his or her distributive share of rents paid or incurred after December 31, 1986, by partnerships that have taxable years beginning before January 1, 1989, and ending with or within partners' taxable years beginning on or after January 1, 1987.
(f) Cross—references. For special rules in accordance with the principles of section 702 applicable solely for the purpose of the tax imposed by section 56 (relating to the minimum tax for tax preferences) see § 1.58-2(a). In the case of a disposition of an oil or gas property by the partnership, see the rules contained in section 613A(c)(7)(D) and § 1.613A-3(e).
(g) Applicability date. The last sentence of paragraph (a)(2) of this section applies for the taxable years beginning on or after January 19, 2021.
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Treas. Reg. §1.702-1(a)General rule.
General rule. Each partner is required to take into account separately in his return his distributive share, whether or not distributed, of each class or item of partnership income, gain, loss, deduction, or credit described in subparagraphs (1) through (9) of this paragraph. (For the taxable year in which a partner includes his distributive share of partnership taxable income, see section 706(a) and § 1.706-1(a). Such distributive share shall be determined as provided in section 704 and § 1.704-1.) Accordingly, in determining his income tax:
(1) Each partner shall take into account, as part of his gains and losses from sales or exchanges of capital assets held for not more than 1 year (6 months for taxable years beginning before 1977; 9 months for taxable years beginning in 1977), his distributive share of the combined net amount of such gains and losses of the partnership.
(2) Each partner shall take into account, as part of his gains and losses from sales or exchanges of capital assets held for more than 1 year (6 months for taxable years beginning before 1977; 9 months for taxable years beginning in 1977), his distributive share of the combined net amount of such gains and losses of the partnership. Each partner subject to section 1061 must take into account gains and losses from sales of capital assets held for more than one year as provided in section 1061 and §§ 1.1061-1 through 1.1061-6.
(3) Each partner shall take into account, as part of his gains and losses from sales or exchanges of property described in section 1231 (relating to property used in the trade or business and involuntary conversions), his distributive share of the combined net amount of such gains and losses of the partnership. The partnership shall not combine such items with items set forth in subparagraph (1) or (2) of this paragraph.
(4) Each partner shall take into account, as part of the charitable contributions paid by him, his distributive share of each class of charitable contributions paid by the partnership within the partnership's taxable year. Section 170 determines the extent to which such amount may be allowed as a deduction to the partner. For the definition of the term “charitable contribution”, see section 170(c).
(5) Each partner shall take into account, as part of the dividends received by him from domestic corporations, his distributive share of dividends received by the partnership, with respect to which the partner is entitled to a credit under section 34 (for dividends received on or before December 31, 1964), an exclusion under section 116, or a deduction under part VIII, subchapter B, chapter 1 of the Code.
(6) Each partner shall take into account, as part of his taxes described in section 901 which have been paid or accrued to foreign countries or to possessions of the United States, his distributive share of such taxes which have been paid or accrued by the partnership, according to its method of treating such taxes. A partner may elect to treat his total amount of such taxes, including his distributive share of such taxes of the partnership, as a deduction under section 164 or as a credit under section 901, subject to the provisions of sections 901 through 905.
(7) Each partner shall take into account, as part of the partially tax-exempt interest received by him on obligations of the United States or on obligations of instrumentalities of the United States, as described in section 35 or section 242, his distributive share of such partially tax-exempt interest received by the partnership. However, if the partnership elects to amortize premiums on bonds as provided in section 171, the amount received on such obligations by the partnership shall be reduced by the amortizable bond premium applicable to such obligations as provided in section 171(a)(3).
(8)(i) Each partner shall take into account separately, as part of any class of income, gain, loss, deduction, or credit, his distributive share of the following items: Recoveries of bad debts, prior taxes, and delinquency amounts (section 111); gains and losses from wagering transactions (section 165(d)); soil and water conservation expenditures (section 175); nonbusiness expenses as described in section 212; medical, dental, etc., expenses (section 213); expenses for care of certain dependents (section 214); alimony, etc., payments (section 215); amounts representing taxes and interest paid to cooperative housing corporations (section 216); intangible drilling and developments costs (section 263(c)); pre-1970 exploration expenditures (section 615); certain mining exploration expenditures (section 617); income, gain, or loss to the partnership under section 751(b); and any items of income, gain, loss, deduction, or credit subject to a special allocation under the partnership agreement which differs from the allocation of partnership taxable income or loss generally.
(ii) Each partner must also take into account separately the partner's distributive share of any partnership item which, if separately taken into account by any partner, would result in an income tax liability for that partner, or for any other person, different from that which would result if that partner did not take the item into account separately. Thus, if any partner is a controlled foreign corporation, as defined in section 957, items of income that would be gross subpart F income if separately taken into account by the controlled foreign corporation must be separately stated for all partners. Under section 911(a), if any partner is a bona fide resident of a foreign country who may exclude from gross income the part of the partner's distributive share which qualifies as earned income, as defined in section 911(b), the earned income of the partnership for all partners must be separately stated. Similarly, all relevant items of income or deduction of the partnership must be separately stated for all partners in determining the applicability of section 183 (relating to activities not engaged in for profit) and the recomputation of tax thereunder for any partner. This paragraph (a)(8)(ii) applies to taxable years beginning on or after July 23, 2002.
(iii) Each partner shall aggregate the amount of his separate deductions or exclusions and his distributive share of partnership deductions or exclusions separately stated in determining the amount allowable to him of any deduction or exclusion under subtitle A of the Code as to which a limitation is imposed. For example, partner A has individual domestic exploration expenditures of $300,000. He is also a member of the AB partnership which in 1971 in its first year of operation has foreign exploration expenditures of $400,000. A's distributable share of this item is $200,000. However, the total amount of his distributable share that A can deduct as exploration expenditures under section 617(a) is limited to $100,000 in view of the limitation provided in section 617(h). Therefore, the excess of $100,000 ($200,000 minus $100,000) is not deductible by A.
(9) Each partner shall also take into account separately his distributive share of the taxable income or loss of the partnership, exclusive of items requiring separate computations under subparagraphs (1) through (8) of this paragraph. For limitation on allowance of a partner's distributive share of partnership losses, see section 704(d) and paragraph (d) of § 1.704-1.
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Treas. Reg. §1.702-1(b)Character of items constituting distributive share.
Character of items constituting distributive share. The character in the hands of a partner of any item of income, gain, loss, deduction, or credit described in section 702(a)(1) through (8) shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership. For example, a partner's distributive share of gain from the sale of depreciable property used in the trade or business of the partnership shall be considered as gain from the sale of such depreciable property in the hands of the partner. Similarly, a partner's distributive share of partnership “hobby losses” (section 270) or his distributive share of partnership charitable contributions to organizations qualifying under section 170(b)(1)(A) retains such character in the hands of the partner.
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Treas. Reg. §1.702-1(c)Gross income of a partner.
Gross income of a partner. (1) Where it is necessary to determine the amount or character of the gross income of a partner, his gross income shall include the partner's distributive share of the gross income of the partnership, that is, the amount of gross income of the partnership from which was derived the partner's distributive share of partnership taxable income or loss (including items described in section 702(a)(1) through (8)). For example, a partner is required to include his distributive share of partnership gross income:
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Treas. Reg. §1.702-1(d)Partners in community property States.
Partners in community property States. If separate returns are made by a husband and wife domiciled in a community property State, and only one spouse is a member of the partnership, the part of his or her distributive share of any item or items listed in paragraph (a) (1) through (9) of this section which is community property, or which is derived from community property, should be reported by the husband and wife in equal proportions.
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Treas. Reg. §1.702-1(e)Special rules on requirement to separately state meal, travel, and entertainment expenses.
Special rules on requirement to separately state meal, travel, and entertainment expenses. Each partner shall take into account separately his or her distributive share of meal, travel, and entertainment expenses paid or incurred after December 31, 1986, by partnerships that have taxable years beginning before January 1, 1987, and ending with or within partner's taxable years beginning on or after January 1, 1987. In addition, with respect to skybox rentals under section 274 (1) (2), each partner shall take into account separately his or her distributive share of rents paid or incurred after December 31, 1986, by partnerships that have taxable years beginning before January 1, 1989, and ending with or within partners' taxable years beginning on or after January 1, 1987.
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Treas. Reg. §1.702-1(f)Cross—references.
Cross—references. For special rules in accordance with the principles of section 702 applicable solely for the purpose of the tax imposed by section 56 (relating to the minimum tax for tax preferences) see § 1.58-2(a). In the case of a disposition of an oil or gas property by the partnership, see the rules contained in section 613A(c)(7)(D) and § 1.613A-3(e).
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Treas. Reg. §1.702-1(g)Applicability date.
Applicability date. The last sentence of paragraph (a)(2) of this section applies for the taxable years beginning on or after January 19, 2021.
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Treas. Reg. §1.702-1(i)§1.702-1(i)
In computing his gross income for the purpose of determining the necessity of filing a return (section 6012 (a));
(ii) In determining the application of the provisions permitting the spreading of income for services rendered over a 36-month period (section 1301, as in effect for taxable years beginning before January 1, 1964);
(iii) In computing the amount of gross income received from sources within possessions of the United States (section 937).
(iv) In determining a partner's “gross income from farming” (sections 175 and 6073); and
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Treas. Reg. §1.702-1(v)In determining whether the de minimis or full inclusion rules of section 954(b)(3) apply.
In determining whether the de minimis or full inclusion rules of section 954(b)(3) apply.
(2) In determining the applicability of the 6-year period of limitation on assessment and collection provided in section 6501(e) (relating to omission of more than 25 percent of gross income), a partner's gross income includes his distributive share of partnership gross income (as described in section 6501(e)(1)(A)(i)). In this respect, the amount of partnership gross income from which was derived the partner's distributive share of any item of partnership income, gain, loss, deduction, or credit (as included or disclosed in the partner's return) is considered as an amount of gross income stated in the partner's return for the purposes of section 6501(e). For example, A, who is entitled to one-fourth of the profits of the ABCD partnership, which has $10,000 gross income and $2,000 taxable income, reports only $300 as his distributive share of partnership profits. A should have shown $500 as his distributive share of profits, which amount was derived from $2,500 of partnership gross income. However, since A included only $300 on his return without explaining in the return the difference of $200, he is regarded as having stated in his return only $1,500 ($300/$500 of $2,500) as gross income from the partnership.
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Treas. Reg. §1.702-2Net operating loss deduction of partner
For the purpose of determining a net operating loss deduction under section 172, a partner shall take into account his distributive share of items of income, gain, loss, deduction, or credit of the partnership. The character of any such item shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership. See section 702(b) and paragraph (b) of § 1.702-1. To the extent necessary to determine the allowance under section 172(d)(4) of the nonbusiness deductions of a partner (arising from both partnership and nonpartnership sources), the partner shall separately take into account his distributive share of the deductions of the partnership which are not attributable to a trade or business and combine such amount with his nonbusiness deductions from nonpartnership sources. Such partner shall also separately take into account his distributive share of the gross income of the partnership not derived from a trade or business and combine such amount with his nonbusiness income from nonpartnership sources. See section 172 and the regulations thereunder.
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Treas. Reg. §1.702-3T4-Year spread
(a) Applicability. This section applies to a partner in a partnership if—
(1) The partnership is required by section 806 of the Tax Reform Act of 1986 (the 1986 Act), Pub. L. 99-514, 100 Stat. 2362, to change its taxable year for the first taxable year beginning after December 31, 1986 (partnership's year of change); and
(2) As a result of such change in taxable year, items from more than one taxable year of the partnership would, but for the provisions of this section, be included in the taxable year of the partner with or within which the partnership's year of change ends.
(b) Partner's treatment of items from the partnership's year of change—(1) In general. Except as provided in paragraph (c) of this section, if a partner's share of “income items” exceeds the partner's share of “expense items,” the partner's share of each and every income and expense item shall be taken into account ratably (and retain its character) over the partner's first 4 taxable years beginning with the partner's taxable year with or within which the partnership's year of change ends.
(2) Definitions—(i) Income items. For purposes of this section, the term income items means the sum of—
(A) The partner's distributive share of taxable income (exclusive of separately stated items) from the partnership's year of change,
(B) The partner's distributive share of all separately stated income or gain items from the partnership's year of change, and
(C) Any amount includible in the partner's income under section 707(c) on account of payments during the partnership's year of change.
(ii) Expense items. For purposes of this section, the term expense items means the sum of—
(A) The partner's distributive share of taxable loss (exclusive of separately stated items) from the partnership's year of change, and
(B) The partner's distributive share of all separately stated items of loss or deduction from the partnership's year of change.
(c) Electing out of 4-year spread. A partner may elect out of the rules of paragraph (b) of this section by meeting the requirements of § 301.9100-7T of this chapter (temporary regulations relating to elections under the Tax Reform Act of 1986).
(d) Special rules for a partner that is a partnership or S corporation—(1) In general. Except as provided in paragraph (d)(2) of this section, a partner that is a partnership or S corporation may, if otherwise eligible, use the 4-year spread (with respect to partnership interests owned by the partner) described in this section.
(2) Certain partners prohibited from using 4-year spread—(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, a partner that is a partnership or S corporation may not use the 4-year spread (with respect to partnership interests owned by the partner) if such partner is also changing its taxable year pursuant to section 806 of the 1986 Act.
(ii) Exception. If a partner's year of change does not include any income or expense items with respect to the partnership's year of change, such partner may, if otherwise eligible, use the 4-year spread (with respect to such partnership interest) described in this section even though the partner is a partnership or S corporation. See examples 13 and 14 in paragraph (h) of this section.
(e) Basis of partner's interest. The basis of a partner's interest in a partnership shall be determined as if the partner elected not to spread the partnership items over 4 years, regardless of whether such election was in fact made. Thus, for example, if a partner is eligible for the 4-year spread and does not elect out of the 4-year spread pursuant to paragraph (c) of this section, the partner's basis in the partnership interest will be increased in the first year of the 4-year spread period by an amount equal to the excess of the income items over the expense items. However, the partner's basis will not be increased again, with respect to the unamortized income and expense items, as they are amortized over the 4-year spread period.
(f) Effect on other provisions of the Code. Except as provided in paragraph (e) of this section, determinations with respect to a partner, for purposes of other provisions of the Code, must be made with regard to the manner in which partnership items are taken into account under the rules of this section. Thus, for example, a partner who does not elect out of the 4-year spread must take into account, for purposes of determining net earnings from self-employment under section 1402(a) for a taxable year, only the ratable portion of partnership items for that taxable year.
(g) Treatment of dispositions—(1) In general. If a partnership interest is disposed of before the last taxable year in the 4-year spread period, unamortized income and expense items that are attributable to the interest disposed of and that would be taken into account by the partner for subsequent taxable years in the 4-year spread period shall be taken into account by the partner as determined under paragraph (g)(2) of this section. For purposes of this section, the term disposed of means any transfer, including (but not limited to) transfers by sale, exchange, gift, and by reason of death.
(2) Year unamortized items taken into account—(i) In general. If, at the end of a partner's taxable year, the fraction determined under paragraph (g)(2)(ii) of this section is—
(A) Greater than
2/3, the partner must continue to take the unamortized income and expense items into account ratably over the 4-year spread period;
(B) Greater than
1/3 but less than or equal to
2/3, the partner must, in addition to its ratable amortization, take into account in such year 50 percent of the income and expense items that would otherwise be unamortized at the end of such year (however, this paragraph (g)(2)(i)(B) is only applied once with respect to a partner's interest in a particular partnership); or
(C) Less than or equal to
1/3, the partner must take into account the entire balance of unamortized income and expense items in such year.
(ii) Determination of fraction. For purposes of paragraph (g)(2)(i) of this section, the numerator of the fraction is the partner's proportionate interest in the partnership at the end of the partner's taxable year and the denominator is the partner's proportionate interest in the partnership as of the last day of the partnership's year of change.
(h) Examples. The provisions of this section may be illustrated by the following examples.
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Treas. Reg. §1.702-3T(a)Applicability.
Applicability. This section applies to a partner in a partnership if—
(1) The partnership is required by section 806 of the Tax Reform Act of 1986 (the 1986 Act), Pub. L. 99-514, 100 Stat. 2362, to change its taxable year for the first taxable year beginning after December 31, 1986 (partnership's year of change); and
(2) As a result of such change in taxable year, items from more than one taxable year of the partnership would, but for the provisions of this section, be included in the taxable year of the partner with or within which the partnership's year of change ends.
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Treas. Reg. §1.702-3T(b)Partner's treatment of items from the partnership's year of change—(1) In general.
Partner's treatment of items from the partnership's year of change—(1) In general. Except as provided in paragraph (c) of this section, if a partner's share of “income items” exceeds the partner's share of “expense items,” the partner's share of each and every income and expense item shall be taken into account ratably (and retain its character) over the partner's first 4 taxable years beginning with the partner's taxable year with or within which the partnership's year of change ends.
(2) Definitions—(i) Income items. For purposes of this section, the term income items means the sum of—
(A) The partner's distributive share of taxable income (exclusive of separately stated items) from the partnership's year of change,
(B) The partner's distributive share of all separately stated income or gain items from the partnership's year of change, and
(C) Any amount includible in the partner's income under section 707(c) on account of payments during the partnership's year of change.
(ii) Expense items. For purposes of this section, the term expense items means the sum of—
(A) The partner's distributive share of taxable loss (exclusive of separately stated items) from the partnership's year of change, and
(B) The partner's distributive share of all separately stated items of loss or deduction from the partnership's year of change.
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Treas. Reg. §1.702-3T(c)Electing out of 4-year spread.
Electing out of 4-year spread. A partner may elect out of the rules of paragraph (b) of this section by meeting the requirements of § 301.9100-7T of this chapter (temporary regulations relating to elections under the Tax Reform Act of 1986).
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Treas. Reg. §1.702-3T(d)Special rules for a partner that is a partnership or S corporation—(1) In general.
Special rules for a partner that is a partnership or S corporation—(1) In general. Except as provided in paragraph (d)(2) of this section, a partner that is a partnership or S corporation may, if otherwise eligible, use the 4-year spread (with respect to partnership interests owned by the partner) described in this section.
(2) Certain partners prohibited from using 4-year spread—(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, a partner that is a partnership or S corporation may not use the 4-year spread (with respect to partnership interests owned by the partner) if such partner is also changing its taxable year pursuant to section 806 of the 1986 Act.
(ii) Exception. If a partner's year of change does not include any income or expense items with respect to the partnership's year of change, such partner may, if otherwise eligible, use the 4-year spread (with respect to such partnership interest) described in this section even though the partner is a partnership or S corporation. See examples 13 and 14 in paragraph (h) of this section.
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Treas. Reg. §1.702-3T(e)Basis of partner's interest.
Basis of partner's interest. The basis of a partner's interest in a partnership shall be determined as if the partner elected not to spread the partnership items over 4 years, regardless of whether such election was in fact made. Thus, for example, if a partner is eligible for the 4-year spread and does not elect out of the 4-year spread pursuant to paragraph (c) of this section, the partner's basis in the partnership interest will be increased in the first year of the 4-year spread period by an amount equal to the excess of the income items over the expense items. However, the partner's basis will not be increased again, with respect to the unamortized income and expense items, as they are amortized over the 4-year spread period.
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Treas. Reg. §1.702-3T(f)Effect on other provisions of the Code.
Effect on other provisions of the Code. Except as provided in paragraph (e) of this section, determinations with respect to a partner, for purposes of other provisions of the Code, must be made with regard to the manner in which partnership items are taken into account under the rules of this section. Thus, for example, a partner who does not elect out of the 4-year spread must take into account, for purposes of determining net earnings from self-employment under section 1402(a) for a taxable year, only the ratable portion of partnership items for that taxable year.
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Treas. Reg. §1.702-3T(g)Treatment of dispositions—(1) In general.
Treatment of dispositions—(1) In general. If a partnership interest is disposed of before the last taxable year in the 4-year spread period, unamortized income and expense items that are attributable to the interest disposed of and that would be taken into account by the partner for subsequent taxable years in the 4-year spread period shall be taken into account by the partner as determined under paragraph (g)(2) of this section. For purposes of this section, the term disposed of means any transfer, including (but not limited to) transfers by sale, exchange, gift, and by reason of death.
(2) Year unamortized items taken into account—(i) In general. If, at the end of a partner's taxable year, the fraction determined under paragraph (g)(2)(ii) of this section is—
(A) Greater than
2/3, the partner must continue to take the unamortized income and expense items into account ratably over the 4-year spread period;
(B) Greater than
1/3 but less than or equal to
2/3, the partner must, in addition to its ratable amortization, take into account in such year 50 percent of the income and expense items that would otherwise be unamortized at the end of such year (however, this paragraph (g)(2)(i)(B) is only applied once with respect to a partner's interest in a particular partnership); or
(C) Less than or equal to
1/3, the partner must take into account the entire balance of unamortized income and expense items in such year.
(ii) Determination of fraction. For purposes of paragraph (g)(2)(i) of this section, the numerator of the fraction is the partner's proportionate interest in the partnership at the end of the partner's taxable year and the denominator is the partner's proportionate interest in the partnership as of the last day of the partnership's year of change.
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Treas. Reg. §1.702-3T(h)Examples.
Examples. The provisions of this section may be illustrated by the following examples.
136 Citing Cases
101 Codified as amended at 5 U.S.C. sec. 706 (2018). 102 Codified as amended at 5 U.S.C. sec. 706(2). 103 Codified as amended at 5 U.S.C. sec. 706(2)(A). 104 Codified as amended at 5 U.S.C. sec. 706(2)(C). 110 V. The lifting of the wartime suspension of the Federal Register Act requirement that regulations be codified every five y
ts, 461 U.S. 300, 307, 312-313 (1983). 14While partnerships usually do not pay income tax, sec. 701, the partnership’s taxable income is generally computed at the partnership level, sec. 703, and then reported as distributive shares by its partners, sec. 702. 15See Policy Holders Agency, Inc. v. Commissioner, 41 T.C. 44, 47 (1963). 16Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). 17Cozzi v. Commissioner, 88 T.C. at 445 (citing United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927)); s
ts, 461 U.S. 300, 307, 312-313 (1983). 14While partnerships usually do not pay income tax, sec. 701, the partnership’s taxable income is generally computed at the partnership level, sec. 703, and then reported as distributive shares by its partners, sec. 702. 15See Policy Holders Agency, Inc. v. Commissioner, 41 T.C. 44, 47 (1963). 16Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). 17Cozzi v. Commissioner, 88 T.C. at 445 (citing United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927)); s
Each partner is taxed on its distributive share ofpartnership income without regard to whether the income is actually distributed. Sec. 1.702-1(a), Income Tax Regs. Under these rules the upper tier CFC partners must include in their gross income their distributive shares ofEW LLC's income. Under section 951(a) EW LLC's income includes sub
From the date ofits incorporation Hopper Cyprus has been a CFC within the meaning of section 957(a).
- 7 - [*7] In computing the taxable income ofa partner for a taxable year, the inclusions required by section 702 * * * with respect to a partnership shall be based on the income, gain, loss, deduction, or credit ofthe partnershipfor any taxableyear ofthepartnership ending within or with the taxableyear ofthepartner.
as having directly contributed the property, section 702(b) - 18 - provides that "[t]he character ofany item ofincome, gain, loss, deduction, or credit included in a partner's distributive share under paragraphs (1) through (7) of subsection (a) [ofsec. 702] shall be determined as ifsuch item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership." Browning Creek was not in the business offarming; it was in the
as having directly contributed the property, section 702(b) - 18 - provides that "[t]he character ofany item ofincome, gain, loss, deduction, or credit included in a partner's distributive share under paragraphs (1) through (7) of subsection (a) [ofsec. 702] shall be determined as ifsuch item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership." Browning Creek was not in the business offarming; it was in the
702 ("Nothing herein * * * affects * * * the power or duty ofthe court to * * * deny reliefon any other appropriate legal or equitable ground". Thus, nothing in the APA affects the power ofthe Tax Court to deny a taxpayer in a deficiency case reliefon "other appropriate legal * * * ground[s]", including those outside the NOD that are raised pu
(Section 702 and its accompanying regulations provide rules to determine the income-tax liability ofa partner for his distributive share ofa partnership's income.) That regulation states that ifa husband and wife in a community-propertystate file separate returns, and only one spouse is a member 2° We are left with the vexing question ofwhatto do wi
(Section 702 and its accompanying regulations provide rules to determine the income-tax liability ofa partner for his distributive share ofa partnership's income.) That regulation states that ifa husband and wife in a community-propertystate file separate returns, and only one spouse is a member 2° We are left with the vexing question ofwhatto do wi
nd methods". Fed. R. Evid. 702(c). Expert witness testimony can be "reliable even though the expert's methodology is not generally accepted in her field." 3 Stephen A. Saltzburg, Michael M. Martin & Daniel J. Capra, Federal Rules ofEvidence Manual, sec. 702.02[5], at 702-19 (10th ed. 2011). Nevertheless, we need not rely on the unsupported opinion ofan expertwitness. Holman v. Commissioner, 130 T.C. 170, 213 (2008), aff'd, 601 F.3d 763 (8th Cir. 2010). Mr. Hanlon's deconstruction ofthe 15% Primo
ties for not properly reporting his income, so he reported the Schedule K-1 items on his 2007 Federal income tax return. The income allocated to petitioner for the taxable years 2006 and 2007 was calculated to represent his distributive shares under section 702. As a result,_ petitioner had to pay the tax associated with the income allocations out ofhis own pocket. Petitioner was unhappy with these substantial out-of-pocket expenses and spoke with the management ofDuke Ventures and the board ofC
706(a)("In computing the taxable income.ofa partner for a taxable year, the inclusions required by section 702 [for the partner's distributive shares] and section 707(c)[for the partner's guaranteed payments] with respect to a partnership shall be based on the income, gain, loss, deduction, or credit ofthe partnership for any taxable year ofthé partnership ending within or with the taxable year ofthe partner." (Emphasis supplied.)).7 7The emphas
Section 706(a) requires that, in computing the taxable income ofa partner for a taxable year ofthe partner, the inclusions required by section 702 (income and credits ofa partner) and section 707(c) (guaranteed payments) with respect to a partnership are to be based on the income, gain, loss, deduction, or credit ofthe partnership for any taxable year ofthe partnership that ends within or with the taxable year ofthe partner.
706(a) (“In computing the taxable income of a partner for a taxable year, the inclusions required by section 702 [for the partner’s distributive shares] and section 707(c) [for the partner’s guaranteed payments] 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.” (Emphasis supplied.)).
3Notwithstanding, we hold that the depreciation expense claimed on line 13 of Schedule C for 2006 and the charitable contribution expense claimed on line 27 of Schedules C for 2005 and 2006 are allowed because they are flow-through partnership items under.
In the notice of deficiency for 2001 respondent determined that petitioners -realized long-term capital gain from the sale of the 1312 Flint Street'property by QES .` Section 702 subjects a partner to tax on the partner's distributive share of partnership income when realized by the partnership regardless of whether that income is actually distributed to the partner .
. 8, sec. 155.1 (2001). 7 As professors Saltzburg, Martin, and Capra state: Expert witness testimony can be "reliable even though the expert's methodology is not generally accepted in her field." 3 Saltzburg et al., Federal Rules of Evidence Manual, sec. 702.02[5], at 702- 718 (9th ed. 2006). - 25 - EPCO, Inc. v. Commissioner, T.C. Memo. 1999-103 (report of expert not familiar with USPAP received into evidence but of little use to Court); Cheatle v. Katz, 2004 WL 906249 (E.D. Pa. 2004) (report o
4150. - 4 - approximately 1995 petitioner conducted her medical practice through various corporations including Letantia Bussell MD Inc. Mr. Bussell was a licensed physician specializing in anesthesiology until he became disabled in September 1992. I. Assessments for 1983, 1984, 1986, and 1987 The Bussells filed joint Forms 104
702 (2000) (“Nothing herein * * * confers authority to grant relief if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.”). - 35 - within the meaning of APA section 559.3 See, e.g., Phillips v. Commissioner, 283 U.S. 589, 598, 600 (1931) (stating that in deficiency proceedings before the
702 (2000) (“Nothing herein * * * confers authority to grant relief if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.”). When the APA was enacted, this Court had jurisdiction not only to redetermine deficiencies, but also to determine certain overpayments, to redetermine excessive profi
ss” language of section 62(a)(1) that applies to business owners, partners in firms, and independent contractors. The scope of section 62(a)(2)(A) is further restricted by section 62(c), as enacted by the Family Support Act of 1988, Pub. L. 100-485, sec. 702, 102 Stat. 2426, effective for tax years beginning after December 31, 1988. Under section 62(c)(1) and (2), an employee business expense will be treated as covered by a “reimbursement or other expense allowance arrangement” only if the emplo
e partners requires a determination of each partner's share of such items. In general, such shares will be determined in accordance with the partnership agreement as under existing practice. The report goes on to state as follows, id. at A221, A222: Section 702. Income and credits of partner This provision represents no change in current law and practice. It incorporates provisions of sections 182 183(c), 184, 186, and 189 of present law. * * * * * .* * ) - 23 - Subsection (c) makes clear that,
In pertinent part, APA section 702 provides: “A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action - 17 - within the meaning of a relevant statute, is entitled to judicial review thereof.” In full, APA section 703 provides: The form of proceeding for judicial review is the special stat
1.702-1(a), Income Tax Regs. Or to put it another way, a partner is taxable on his or her distributive or proportionate shares of partnership income, irrespective of whether that income is actually distributed to him or her. United States v. Basye, 410 U.S. 441, 447-8, 454 (1973); Cipparone v. Commissioner, T.C. Memo. 1985-234. In th
the pa'rtners require a determination of each partner's share of such items. n general, such shares will be determined in accordance ith the partnership agreement as under existing practice. The report goes on to state as follows, id ät A221, A222: Section 702. Income and credits of partner This provision represents no change in current law and practice. It incorporates provisions of sections 182, 183(c), 184, 186, and 189 of present law. * * * * * * * - 23 - Subsection (c) makes clear that, wh
e partners requires a determination of each partner’s share of such items. In general, such shares will be determined in accordance with the partnership agreement as under existing practice. The report goes on to state as follows, id. at A221, A222: Section 702. Income and credits of partner This provision represents no change in current law and practice. It incorporates provisions of sections 182, 183(c), 184, 186, and 189 of present law. * * * * * * Subsection (c) makes clear that, whenever th
erests are owned by each of the partners. Subchapter K of the Internal Revenue Code (Partners and Partnerships) blends both approaches. In certain areas, the aggregate approach predominates. See sec. 701 (Partners, Not Partnership, Subject to Tax), sec. 702 (Income and Credits of Partner). In other areas, the entity approach predominates. See sec. 742 (Basis of Transferee Partner’s Interest), sec. 743 (Optional Adjustment to Basis of Partnership Property). Outside of subchapter K, whether the ag
ests are owned by each of the partners. Subchapter K of the Internal Revenue Code (Partners and Partnerships) blends both approaches. In certain areas, the aggregate approach predominates. See sec. 701 (Partners, Not Partnership, Subject to Tax) and sec. 702 (Income and Credits of Partner). In other areas, the entity approach predominates. See sec. 742 (Basis of Transferee Partner’s Interest) and sec. 743 (Optional Adjustment to Basis of Partnership Property). Outside of subchapter K, whether th
Each partner is taxed on his distributive share of partnership income without regard to whether the income is actually distributed to him. Sec. 1.702-1(a), Income Tax Regs. Section 722 provides that the basis of a partnership interest acquired by contribution of money or other property to a partnership is the amount of such money, and the
Each partner is taxed on his distributive share of partnership income without regard to whether the income is actually distributed to him. Sec. 1.702-1(a), Income Tax Regs. Section 722 provides that the basis of a partnership interest acquired by contribution of money or other property to a partnership is the amount of such money, and the
- 10 - partners under section 702 in accordance with his or her interest in the partnership and is reflected in each partner's adjusted basis in the partnership pursuant to section 705(a).
Each partner is taxed on his distributive share of partnership income without regard to whether the income is actually distributed to him. Sec. 1.702-1(a), Income Tax Regs. Section 722 provides that the basis of a partnership interest acquired by contribution of money or other property to a partnership is the amount of such money, and the
Each partner is taxed on his distributive share of partnership income without regard to whether the income is actually distributed to him. Sec. 1.702-1(a), Income Tax Regs. Section 722 provides that the basis of a partnership interest acquired by contribution of money or other property to a partnership is the amount of such money, and the
Each partner is taxed on his distributive share of partnership income without regard to whether the income is actually distributed to him. Sec. 1.702- 1(a), Income Tax Regs. Section 704(a) provides the framework for the determination of a partner's distributive share of partnership income, gain, loss, deductions, or credits of the partner
Although section 212(3) applies only to individuals, under section 702 each partner, in determining his income tax, is required to take into account separately his distributive share of certain partnership items.
Section 706(a) provides: (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 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.
y following fiscal years ending June 30 and Sept. 30, 1988, respectively. This is because Pertinax is on a calendar year, consistently with the limitations of sec. 706(b), and its partners include within their income for a taxable year of theirs any sec. 702 distributive share taxable income with respect to a partnership for any taxable year of the partnership ending within or with the taxable year of the partner. Sec. 706(a). However, the fact that the corporate petitioners would not be taxed o
y following fiscal years ending June 30 and Sept. 30, 1988, respectively. This is because Pertinax is on a calendar year, consistently with the limitations of sec. 706(b), and its partners include within their income for a taxable year of theirs any sec. 702 distributive share taxable income with respect to a partnership for any taxable year of the partnership ending within or with the taxable year of the partner. Sec. 706(a). However, the fact that the corporate petitioners would not be taxed o
In contrast, petitioners argue that the cashier's checks remained partnership property, belonging equally to petitioner and Carlton, and therefore, pursuant to section 702, only one-half of the funds is attributable to petitioners.