§706 — Taxable years of partner and partnership
160 citing cases
Statute Text — 26 U.S.C. §706
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.
The taxable year of a partnership shall be determined as though the partnership were a taxpayer.
Except as provided in subparagraph (C), a partnership shall not have a taxable year other than—
the majority interest taxable year (as defined in paragraph (4)),
if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or
if there is no taxable year described in clause (i) or (ii), the calendar year unless the Secretary by regulations prescribes another period.
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.
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.
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.
For purposes of paragraph (1)(B)(i)—
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.
The testing days shall be—
the 1st day of the partnership taxable year (determined without regard to clause (i)), or
the days during such representative period as the Secretary may prescribe.
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.
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.
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.
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).
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).
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.
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—
by assigning the appropriate portion of such item to each day in the period to which it is attributable, and
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.
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:
Interest.
Taxes.
Payments for services or for the use of property.
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.
If any portion of any allocable cash basis item is attributable to—
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
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.
If any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of any taxable year—
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
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.
If—
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
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.
For purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A).
Treasury Regulations
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Treas. Reg. §1.706-0Table of contents
This section lists the captions contained in the regulations under section 706.
(a) Year in which partnership income is includible.
(b) Taxable year.
(1) Partnership treated as taxpayer.
(2) Partnership's taxable year.
(i) Required taxable year.
(ii) Exceptions.
(3) Least aggregate deferral.
(i) Taxable year that results in the least aggregate deferral of income.
(ii) Determination of the taxable year of a partner or partnership that uses a 52-53 week taxable year.
(iii) Special de minimis rule.
(iv) Examples.
(4) Measurement of partner's profits and capital interest.
(i) In general.
(ii) Profits interest.
(A) In general.
(B) Percentage share of partnership net income.
(C) Distributive share.
(iii) Capital interest.
(5) Taxable year of a partnership with tax-exempt partners.
(i) Certain tax-exempt partners disregarded.
(ii) Example.
(iii) Effective date.
(6) Certain foreign partners disregarded.
(i) Interests of disregarded foreign partners not taken into account.
(ii) Definition of foreign partner.
(iii) Minority interest rule.
(iv) Example.
(v) Effective date.
(A) Generally.
(B) Voluntary change in taxable year.
(C) Subsequent sale or exchange of interests.
(D) Transition rule.
(7) Adoption of taxable year.
(8) Change in taxable year.
(i) Partnerships.
(A) Approval required.
(B) Short period tax return.
(C) Change in required taxable year.
(ii) Partners.
(9) Retention of taxable year.
(10) Procedures for obtaining approval or making a section 444 election.
(11) Effect on partner elections under section 444.
(i) Election taken into account.
(ii) Effective date.
(c) Closing of partnership year.
(1) General rule.
(2) Disposition of entire interest.
(i) In general.
(ii) Example.
(iii) Deemed dispositions.
(3) Disposition of less than entire interest.
(4) Determination of distributive shares.
(5) Transfer of interest by gift.
(6) Foreign taxes.
(d) Effective/applicability date.
(a) through (c) [Reserved]
(d) Conservation contributions.
(e) Applicability date.
(a) General rule.
(1) Variations subject to this section.
(2) Coordination with section 706(d)(2) and (3) and other Code sections.
(3) Allocation of items subject to this section.
(4) Example.
(b) Exceptions.
(1) Permissible changes among contemporaneous partners.
(2) Safe harbor for partnerships for which capital is not a material income-producing factor.
(3) Special rules for publicly traded partnerships.
(c) Conventions.
(1) In general.
(i) Calendar day convention.
(ii) Semi-monthly convention.
(iii) Monthly convention.
(2) Exceptions.
(3) Permissible conventions for each variation.
(i) Rules applicable to all partnerships.
(ii) Publicly treated partnerships.
(4) Examples.
(d)(1) Optional regular monthly or semimonthly interim closings.
(2) Example.
(e) Extraordinary items.
(1) General principles.
(2) Definition.
(3) Small item exception.
(4) Examples.
(f) Agreement of the partners.
(g) Effective/applicability date.
(a) In general.
(b) Effective/applicability date.
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Treas. Reg. §1.706-0(a)In general.
In general.
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Treas. Reg. §1.706-0(b)Effective/applicability date.
Effective/applicability date.
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Treas. Reg. §1.706-0(c)Conventions.
Conventions.
(1) In general.
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Treas. Reg. §1.706-0(d)§1.706-0(d)
(1) Optional regular monthly or semimonthly interim closings.
(2) Example.
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Treas. Reg. §1.706-0(e)Extraordinary items.
Extraordinary items.
(1) General principles.
(2) Definition.
(3) Small item exception.
(4) Examples.
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Treas. Reg. §1.706-0(f)Agreement of the partners.
Agreement of the partners.
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Treas. Reg. §1.706-0(g)Effective/applicability date.
Effective/applicability date.
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Treas. Reg. §1.706-0(i)Rules applicable to all partnerships.
Rules applicable to all partnerships.
(ii) Publicly treated partnerships.
(4) Examples.
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Treas. Reg. §1.706-0(v)Effective date.
Effective date.
(A) Generally.
(B) Voluntary change in taxable year.
(C) Subsequent sale or exchange of interests.
(D) Transition rule.
(7) Adoption of taxable year.
(8) Change in taxable year.
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Treas. Reg. §1.706-1Taxable years of partner and partnership
(a) Year in which partnership income is includible. (1) In computing taxable income for a taxable year, a partner is required to include the partner's distributive share of partnership items set forth in section 702 and the regulations thereunder for any partnership taxable year ending within or with the partner's taxable year. A partner must also include in taxable income for a taxable year guaranteed payments under section 707(c) that are deductible by the partnership under its method of accounting in the partnership taxable year ending within or with the partner's taxable year.
(2) The rules of paragraph (a)(1) of this section may be illustrated by the following example:
(3) If a partner receives distributions under section 731 or sells or exchanges all or part of a partnership interest, any gain or loss arising therefrom does not constitute partnership income.
(b) Taxable year—(1) Partnership treated as a taxpayer. The taxable year of a partnership must be determined as though the partnership were a taxpayer.
(2) Partnership's taxable year—(i) Required taxable year. Except as provided in paragraph (b)(2)(ii) of this section, the taxable year of a partnership must be—
(A) The majority interest taxable year, as defined in section 706(b)(4);
(B) If there is no majority interest taxable year, the taxable year of all of the principal partners of the partnership, as defined in 706(b)(3) (the principal partners' taxable year); or
(C) If there is no majority interest taxable year or principal partners' taxable year, the taxable year that produces the least aggregate deferral of income as determined under paragraph (b)(3) of this section.
(ii) Exceptions. A partnership may have a taxable year other than its required taxable year if it makes an election under section 444, elects to use a 52-53-week taxable year that ends with reference to its required taxable year or a taxable year elected under section 444, or establishes a business purpose for such taxable year and obtains approval of the Commissioner under section 442.
(3) Least aggregate deferral—(i) Taxable year that results in the least aggregate deferral of income. The taxable year that results in the least aggregate deferral of income will be the taxable year of one or more of the partners in the partnership which will result in the least aggregate deferral of income to the partners. The aggregate deferral for a particular year is equal to the sum of the products determined by multiplying the month(s) of deferral for each partner that would be generated by that year and each partner's interest in partnership profits for that year. The partner's taxable year that produces the lowest sum when compared to the other partner's taxable years is the taxable year that results in the least aggregate deferral of income to the partners. If the calculation results in more than one taxable year qualifying as the taxable year with the least aggregate deferral, the partnership may select any one of those taxable years as its taxable year. However, if one of the qualifying taxable years is also the partnership's existing taxable year, the partnership must maintain its existing taxable year. The determination of the taxable year that results in the least aggregate deferral of income generally must be made as of the beginning of the partnership's current taxable year. The director, however, may determine that the first day of the current taxable year is not the appropriate testing day and require the use of some other day or period that will more accurately reflect the ownership of the partnership and thereby the actual aggregate deferral to the partners where the partners engage in a transaction that has as its principal purpose the avoidance of the principles of this section. Thus, for example the preceding sentence would apply where there is a transfer of an interest in the partnership that results in a temporary transfer of that interest principally for purposes of qualifying for a specific taxable year under the principles of this section. For purposes of this section, deferral to each partner is measured in terms of months from the end of the partnership's taxable year forward to the end of the partner's taxable year.
(ii) Determination of the taxable year of a partner or partnership that uses a 52-53-week taxable year. For purposes of the calculation described in paragraph (b)(3)(i) of this section, the taxable year of a partner or partnership that uses a 52-53-week taxable year must be the same year determined under the rules of section 441(f) and the regulations thereunder with respect to the inclusion of income by the partner or partnership.
(iii) Special de minimis rule. If the taxable year that results in the least aggregate deferral produces an aggregate deferral that is less than .5 when compared to the aggregate deferral of the current taxable year, the partnership's current taxable year will be treated as the taxable year with the least aggregate deferral. Thus, the partnership will not be permitted to change its taxable year.
(iv) Examples. The principles of this section may be illustrated by the following examples:
(4) Measurement of partner's profits and capital interest—
(i) In general. The rules of this paragraph (b)(4) apply in determining the majority interest taxable year, the principal partners' taxable year, and the least aggregate deferral taxable year.
(ii) Profits interest—(A) In general. For purposes of section 706(b), a partner's interest in partnership profits is generally the partner's percentage share of partnership profits for the current partnership taxable year. If the partnership does not expect to have net income for the current partnership taxable year, then a partner's interest in partnership profits instead must be the partner's percentage share of partnership net income for the first taxable year in which the partnership expects to have net income.
(B) Percentage share of partnership net income. The partner's percentage share of partnership net income for a partnership taxable year is the ratio of: the partner's distributive share of partnership net income for the taxable year, to the partnership's net income for the year. If a partner's percentage share of partnership net income for the taxable year depends on the amount or nature of partnership income for that year (due to, for example, preferred returns or special allocations of specific partnership items), then the partnership must make a reasonable estimate of the amount and nature of its income for the taxable year. This estimate must be based on all facts and circumstances known to the partnership as of the first day of the current partnership taxable year. The partnership must then use this estimate in determining the partners' interests in partnership profits for the taxable year.
(C) Distributive share. For purposes of this paragraph (b)(4)(ii), a partner's distributive share of partnership net income is determined by taking into account all rules and regulations affecting that determination, including, without limitation, sections 704(b), (c), and (e), 736, and 743.
(iii) Capital interest. Generally, a partner's interest in partnership capital is determined by reference to the assets of the partnership that the partner would be entitled to upon withdrawal from the partnership or upon liquidation of the partnership. If the partnership maintains capital accounts in accordance with § 1.704-1(b)(2)(iv), then for purposes of section 706(b), the partnership may assume that a partner's interest in partnership capital is the ratio of the partner's capital account to all partners' capital accounts as of the first day of the partnership taxable year.
(5) Taxable year of a partnership with tax-exempt partners—(i) Certain tax-exempt partners disregarded. In determining the taxable year (the current year) of a partnership under section 706(b) and the regulations thereunder, a partner that is tax-exempt under section 501(a) shall be disregarded if such partner was not subject to tax, under chapter 1 of the Internal Revenue Code, on any income attributable to its investment in the partnership during the partnership's taxable year immediately preceding the current year. However, if a partner that is tax-exempt under section 501(a) was not a partner during the partnership's immediately preceding taxable year, such partner will be disregarded for the current year if the partnership reasonably believes that the partner will not be subject to tax, under chapter 1 of the Internal Revenue Code, on any income attributable to such partner's investment in the partnership during the current year.
(ii) Example. The provisions of paragraph (b)(5)(i) of this section may be illustrated by the following example:
(iii) Effective date. The provisions of this paragraph (b)(5) are applicable for taxable years beginning on or after July 23, 2002. For taxable years beginning before July 23, 2002, see § 1.706-3T as contained in 26 CFR part 1 revised April 1, 2002.
(6) Certain foreign partners disregarded—(i) Interests of disregarded foreign partners not taken into account. In determining the taxable year (the current taxable year) of a partnership under section 706(b) and the regulations thereunder, any interest held by a disregarded foreign partner is not taken into account. A foreign partner is a disregarded foreign partner unless such partner is allocated any gross income of the partnership that was effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States during the partnership's taxable year immediately preceding the current taxable year (or, if such partner was not a partner during the partnership's immediately preceding taxable year, the partnership reasonably believes that the partner will be allocated any such income during the current taxable year) and taxation of that income is not otherwise precluded under any U.S. income tax treaty.
(ii) Definition of foreign partner. For purposes of this paragraph (b)(6), a foreign partner is any partner that is not a United States person (as defined in section 7701(a)(30)), except that a partner that is a controlled foreign corporation (within the meaning of section 957(a)) in which a United States shareholder (as defined in section 951(b)) owns (within the meaning of section 958(a)) stock is not treated as a foreign partner.
(iii) Minority interest rule. If each partner that is not a disregarded foreign partner under paragraph (b)(6)(i) of this section (regarded partner) holds less than a 10-percent interest, and the regarded partners, in the aggregate, hold less than a 20-percent interest in the capital and profits of the partnership, then paragraph (b)(6)(i) of this section does not apply. In determining ownership in a partnership for purposes of this paragraph (b)(6)(iii), each regarded partner is treated as owning any interest in the partnership owned by a related partner. For this purpose, partners are treated as related if they are related within the meaning of sections 267(b) or 707(b) (using the language “10 percent” instead of “50 percent” each place it appears). However, for purposes of determining if partners hold less than a 20-percent interest in the aggregate, the same interests will not be considered as being owned by more than one regarded partner.
(iv) Example. The provisions of paragraph (b)(6) of this section may be illustrated by the following example:
(v) Applicability dates—(A) Generally. The provisions of this paragraph (b)(6) (other than paragraph (b)(6)(iii) of this section and paragraph (b)(6)(ii) of this section to the extent described in the next sentence) apply to partnership taxable years, other than those of an existing partnership, that begin on or after July 23, 2002. The provisions in paragraph (b)(6)(ii) of this section relating to controlled foreign corporations apply to taxable years of foreign corporations ending on or after October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and to taxable years of United States shareholders in which or with which such taxable years of the foreign corporation end, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, where the taxpayer does not apply the provisions of paragraph (b)(6)(ii) of this section relating to controlled foreign corporations, see paragraph (b)(6)(ii) of this section as in effect and contained in 26 CFR part 1, as revised April 1, 2020. The provisions of paragraph (b)(6)(iii) of this section apply to partnership taxable years, other than those of an existing partnership or an interim period partnership, that begin on or after August 3, 2015. For partnership taxable years beginning on or after July 23, 2002, and before August 3, 2015, see the provisions of § 1.706-1(b)(6)(iii) as contained in the 26 CFR part 1 on July 31, 2015. For purposes of paragraph (b)(6) of this section, an existing partnership is a partnership that was formed prior to September 23, 2002, and an interim period partnership is a partnership that was formed on or after September 23, 2002, and prior to August 3, 2015.
(B) Voluntary change in taxable year. An existing partnership may change its taxable year to a year determined in accordance with this section. An existing partnership that makes such a change prior to August 3, 2015 will generally cease to be exempted from the requirements of this paragraph (b)(6) of this section, and thus will be subject to the requirements of paragraph (b)(6) of this section, except for paragraph (b)(6)(iii) of this section—instead, such partnership will be subject to the provisions of § 1.706-1(b)(6)(iii) as contained in the 26 CFR part 1 on July 31, 2015. An existing partnership that makes such a change on or after August 3, 2015 will cease to be exempted from the requirements of this paragraph (b)(6). An interim period partnership may change its taxable year to a year determined in accordance with paragraph (b)(6)(iii) of this section. An interim period partnership that makes such a change will cease to be exempted from the requirements of paragraph (b)(6)(iii) of this section.
(C) Subsequent sale or exchange of interests. If an existing partnership or an interim period partnership terminates under section 708(b)(1)(B), the resulting partnership is not an existing partnership or an interim period partnership for purposes of paragraph (b)(6)(v) of this section.
(D) Transition rule. If, in the first taxable year beginning on or after July 23, 2002, an existing partnership voluntarily changes its taxable year to a year determined in accordance with this paragraph (b)(6), then the partners of that partnership may apply the provisions of § 1.702-3T to take into account all items of income, gain, loss, deduction, and credit attributable to the partnership year of change ratably over a four-year period. If, in a partnership taxable year beginning on or after August 3, 2015, an interim period partnership voluntarily changes its taxable year to a year determined in accordance with paragraph (b)(6)(iii) of this section, then the partners of that partnership may apply the provisions of § 1.702-3T to take into account all items of income, gain, loss, deduction, and credit attributable to the partnership year of change ratably over a four-year period.
(7) Adoption of taxable year. A newly-formed partnership may adopt, in accordance with § 1.441-1(c), its required taxable year, a taxable year elected under section 444, or a 52-53-week taxable year ending with reference to its required taxable year or a taxable year elected under section 444 without securing the approval of the Commissioner. If a newly-formed partnership wants to adopt any other taxable year, it must establish a business purpose and secure the approval of the Commissioner under section 442.
(8) Change in taxable year—(i) Partnerships—(A) Approval required. An existing partnership may change its taxable year only by securing the approval of the Commissioner under section 442 or making an election under section 444. However, a partnership may obtain automatic approval for certain changes, including a change to its required taxable year, pursuant to administrative procedures published by the Commissioner.
(B) Short period tax return. A partnership that changes its taxable year must make its return for a short period in accordance with section 443, but must not annualize the partnership taxable income.
(C) Change in required taxable year. If a partnership is required to change to its majority interest taxable year, then no further change in the partnership's required taxable year is required for either of the two years following the year of the change. This limitation against a second change within a three-year period applies only if the first change was to the majority interest taxable year and does not apply following a change in the partnership's taxable year to the principal partners' taxable year or the least aggregate deferral taxable year.
(ii) Partners. Except as otherwise provided in the Internal Revenue Code or the regulations thereunder (e.g., section 859 regarding real estate investment trusts or § 1.442-2(c) regarding a subsidiary changing to its consolidated parent's taxable year), a partner may not change its taxable year without securing the approval of the Commissioner under section 442. However, certain partners may be eligible to obtain automatic approval to change their taxable years pursuant to the regulations or administrative procedures published by the Commissioner. A partner that changes its taxable year must make its return for a short period in accordance with section 443.
(9) Retention of taxable year. In certain cases, a partnership will be required to change its taxable year unless it obtains the approval of the Commissioner under section 442, or makes an election under section 444, to retain its current taxable year. For example, a partnership using a taxable year that corresponds to its required taxable year must obtain the approval of the Commissioner to retain such taxable year if its required taxable year changes as a result of a change in ownership, unless the partnership previously obtained approval for its current taxable year or, if appropriate, makes an election under section 444.
(10) Procedures for obtaining approval or making a section 444 election. See § 1.442-1(b) for procedures to obtain the approval of the Commissioner (automatically or otherwise) to adopt, change, or retain a taxable year. See §§ 1.444-1T and 1.444-2T for qualifications, and § 1.444-3T for procedures, for making an election under section 444.
(11) Effect of partner elections under section 444—(i) Election taken into account. For purposes of section 706(b)(1)(B), any section 444 election by a partner in a partnership shall be taken into account in determining the taxable year of the partnership. See § 1.7519-1T(d), Example (4).
(ii) Effective date. The provisions of this paragraph (b)(11) are applicable for taxable years beginning on or after July 23, 2002. For taxable years beginning before July 23, 2002, see § 1.706-3T as contained in 26 CFR part 1 revised April 1, 2002.
(c) Closing of partnership year—(1) General rule. Section 706(c) and this paragraph provide rules governing the closing of partnership years. The closing of a partnership taxable year or a termination of a partnership for Federal income tax purposes is not necessarily governed by the “dissolution”, “liquidation”, etc., of a partnership under State or local law. 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 entire interest in the partnership (as defined in section 761(d)), or the sale or exchange of a partner's interest in the partnership, except in the case of a termination of a partnership and except as provided in subparagraph (2) of this paragraph. In the case of termination, the partnership taxable year closes for all partners as of the date of termination. See section 708(b) and paragraph (b) of § 1.708-1.
(2) Disposition of entire interest—(i) In general. A partnership taxable year shall close with respect to a partner who sells or exchanges his entire interest in the partnership, with respect to a partner whose entire interest in the partnership is liquidated, and with respect to a partner who dies. In the case of a death, liquidation, or sale or exchange of a partner's entire interest in the partnership, the partner shall include in his taxable income for his taxable year within or with which the partner's interest in the partnership ends the partner's distributive share of items described in section 702(a) and any guaranteed payments under section 707(c) for the partnership taxable year ending with the date of such termination. If the decedent partner's estate or other successor sells or exchanges its entire interest in the partnership, or if its entire interest is liquidated, the partnership taxable year with respect to the estate or other successor in interest shall close on the date of such sale or exchange, or the date of the completion of the liquidation. The sale or exchange of a partnership interest does not, for the purpose of this rule, include any transfer of a partnership interest which occurs at death as a result of inheritance or any testamentary disposition.
(ii) Example. H is a partner of a partnership having a taxable year ending December 31. Both H and his wife W are on a calendar year and file joint returns. H dies on March 31, 2016. Administration of the estate is completed and the estate, including the partnership interest, is distributed to W as legatee on November 30, 2016. Such distribution by the estate is not a sale or exchange of H's partnership interest. The taxable year of the partnership will close with respect to H on March 31, 2016, and H will include in his final return for his final taxable year (January 1, 2016, through March 31, 2016) his distributive share of partnership items for that period under the rules of sections 706(d)(2), 706(d)(3), and § 1.706-4. W will include in her return for the taxable year ending December 31, 2016, her distributive share of partnership items for the period of April 1, 2016, through December 31, 2016, under the rules of sections 706(d)(2), 706(d)(3), and § 1.706-4.
(iii) Deemed dispositions. A deemed disposition of the partner's interest pursuant to § 1.1502-76(b)(2)(vi) (relating to corporate partners that become or cease to be members of a consolidated group within the meaning of §§ 1.1502-1(h)), 1.1362-3(c)(1) (relating to the termination of the subchapter S election of an S corporation partner), or 1.1377-1(b)(3)(iv) (regarding an election to terminate the taxable year of an S corporation partner), shall be treated as a disposition of the partner's entire interest in the partnership solely for purposes of section 706.
(3) Disposition of less than entire interest. If a partner sells or exchanges a part of his interest in a partnership, or if the interest of a partner is reduced, the partnership taxable year shall continue to its normal end.
(4) Determination of distributive shares. See section 706(d)(2), 706(d)(3), and § 1.706-4 for rules regarding the methods to be used in determining the distributive shares of items described in section 702(a) for partners whose interests in the partnership vary during the partnership's taxable year as a result of a disposition of a partner's entire interest in a partnership as described in paragraph (c)(2) of this section or as a result of a disposition of less than a partner's entire interest as described in paragraph (c)(3) of this section.
(5) Transfer of interest by gift. The transfer of a partnership interest by gift does not close the partnership taxable year with respect to the donor. However, the income up to the date of gift attributable to the donor's interest shall be allocated to him under section 704(e)(2).
(6) Foreign taxes. For rules relating to the treatment of foreign taxes paid or accrued by a partnership, see § 1.901-2(f)(4)(i) and (f)(4)(ii).
(d) Effective/applicability date. (1) The rules for paragraphs (a) and (b) of this section apply for partnership taxable years ending on or after May 17, 2002, except for paragraphs (b)(5) and (6) of this section, which generally apply to partnership taxable years beginning on or after July 23, 2002 (however, see paragraphs (b)(5)(iii) and (b)(6)(v) of this section for certain exceptions to and transition relief from the applicability dates of paragraphs (b)(5) and (6) of this section).
(2) The rules for paragraph (c)(1) of this section apply for partnership taxable years beginning after December 31, 1953. All other paragraphs under paragraph (c) of this section apply for partnership taxable years that begin on or after August 3, 2015.
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Treas. Reg. §1.706-1(a)Year in which partnership income is includible.
Year in which partnership income is includible. (1) In computing taxable income for a taxable year, a partner is required to include the partner's distributive share of partnership items set forth in section 702 and the regulations thereunder for any partnership taxable year ending within or with the partner's taxable year. A partner must also include in taxable income for a taxable year guaranteed payments under section 707(c) that are deductible by the partnership under its method of accounting in the partnership taxable year ending within or with the partner's taxable year.
(2) The rules of paragraph (a)(1) of this section may be illustrated by the following example:
(3) If a partner receives distributions under section 731 or sells or exchanges all or part of a partnership interest, any gain or loss arising therefrom does not constitute partnership income.
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Treas. Reg. §1.706-1(b)Taxable year—(1) Partnership treated as a taxpayer.
Taxable year—(1) Partnership treated as a taxpayer. The taxable year of a partnership must be determined as though the partnership were a taxpayer.
(2) Partnership's taxable year—(i) Required taxable year. Except as provided in paragraph (b)(2)(ii) of this section, the taxable year of a partnership must be—
(A) The majority interest taxable year, as defined in section 706(b)(4);
(B) If there is no majority interest taxable year, the taxable year of all of the principal partners of the partnership, as defined in 706(b)(3) (the principal partners' taxable year); or
(C) If there is no majority interest taxable year or principal partners' taxable year, the taxable year that produces the least aggregate deferral of income as determined under paragraph (b)(3) of this section.
(ii) Exceptions. A partnership may have a taxable year other than its required taxable year if it makes an election under section 444, elects to use a 52-53-week taxable year that ends with reference to its required taxable year or a taxable year elected under section 444, or establishes a business purpose for such taxable year and obtains approval of the Commissioner under section 442.
(3) Least aggregate deferral—(i) Taxable year that results in the least aggregate deferral of income. The taxable year that results in the least aggregate deferral of income will be the taxable year of one or more of the partners in the partnership which will result in the least aggregate deferral of income to the partners. The aggregate deferral for a particular year is equal to the sum of the products determined by multiplying the month(s) of deferral for each partner that would be generated by that year and each partner's interest in partnership profits for that year. The partner's taxable year that produces the lowest sum when compared to the other partner's taxable years is the taxable year that results in the least aggregate deferral of income to the partners. If the calculation results in more than one taxable year qualifying as the taxable year with the least aggregate deferral, the partnership may select any one of those taxable years as its taxable year. However, if one of the qualifying taxable years is also the partnership's existing taxable year, the partnership must maintain its existing taxable year. The determination of the taxable year that results in the least aggregate deferral of income generally must be made as of the beginning of the partnership's current taxable year. The director, however, may determine that the first day of the current taxable year is not the appropriate testing day and require the use of some other day or period that will more accurately reflect the ownership of the partnership and thereby the actual aggregate deferral to the partners where the partners engage in a transaction that has as its principal purpose the avoidance of the principles of this section. Thus, for example the preceding sentence would apply where there is a transfer of an interest in the partnership that results in a temporary transfer of that interest principally for purposes of qualifying for a specific taxable year under the principles of this section. For purposes of this section, deferral to each partner is measured in terms of months from the end of the partnership's taxable year forward to the end of the partner's taxable year.
(ii) Determination of the taxable year of a partner or partnership that uses a 52-53-week taxable year. For purposes of the calculation described in paragraph (b)(3)(i) of this section, the taxable year of a partner or partnership that uses a 52-53-week taxable year must be the same year determined under the rules of section 441(f) and the regulations thereunder with respect to the inclusion of income by the partner or partnership.
(iii) Special de minimis rule. If the taxable year that results in the least aggregate deferral produces an aggregate deferral that is less than .5 when compared to the aggregate deferral of the current taxable year, the partnership's current taxable year will be treated as the taxable year with the least aggregate deferral. Thus, the partnership will not be permitted to change its taxable year.
(iv) Examples. The principles of this section may be illustrated by the following examples:
(4) Measurement of partner's profits and capital interest—
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Treas. Reg. §1.706-1(c)Closing of partnership year—(1) General rule.
Closing of partnership year—(1) General rule. Section 706(c) and this paragraph provide rules governing the closing of partnership years. The closing of a partnership taxable year or a termination of a partnership for Federal income tax purposes is not necessarily governed by the “dissolution”, “liquidation”, etc., of a partnership under State or local law. 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 entire interest in the partnership (as defined in section 761(d)), or the sale or exchange of a partner's interest in the partnership, except in the case of a termination of a partnership and except as provided in subparagraph (2) of this paragraph. In the case of termination, the partnership taxable year closes for all partners as of the date of termination. See section 708(b) and paragraph (b) of § 1.708-1.
(2) Disposition of entire interest—(i) In general. A partnership taxable year shall close with respect to a partner who sells or exchanges his entire interest in the partnership, with respect to a partner whose entire interest in the partnership is liquidated, and with respect to a partner who dies. In the case of a death, liquidation, or sale or exchange of a partner's entire interest in the partnership, the partner shall include in his taxable income for his taxable year within or with which the partner's interest in the partnership ends the partner's distributive share of items described in section 702(a) and any guaranteed payments under section 707(c) for the partnership taxable year ending with the date of such termination. If the decedent partner's estate or other successor sells or exchanges its entire interest in the partnership, or if its entire interest is liquidated, the partnership taxable year with respect to the estate or other successor in interest shall close on the date of such sale or exchange, or the date of the completion of the liquidation. The sale or exchange of a partnership interest does not, for the purpose of this rule, include any transfer of a partnership interest which occurs at death as a result of inheritance or any testamentary disposition.
(ii) Example. H is a partner of a partnership having a taxable year ending December 31. Both H and his wife W are on a calendar year and file joint returns. H dies on March 31, 2016. Administration of the estate is completed and the estate, including the partnership interest, is distributed to W as legatee on November 30, 2016. Such distribution by the estate is not a sale or exchange of H's partnership interest. The taxable year of the partnership will close with respect to H on March 31, 2016, and H will include in his final return for his final taxable year (January 1, 2016, through March 31, 2016) his distributive share of partnership items for that period under the rules of sections 706(d)(2), 706(d)(3), and § 1.706-4. W will include in her return for the taxable year ending December 31, 2016, her distributive share of partnership items for the period of April 1, 2016, through December 31, 2016, under the rules of sections 706(d)(2), 706(d)(3), and § 1.706-4.
(iii) Deemed dispositions. A deemed disposition of the partner's interest pursuant to § 1.1502-76(b)(2)(vi) (relating to corporate partners that become or cease to be members of a consolidated group within the meaning of §§ 1.1502-1(h)), 1.1362-3(c)(1) (relating to the termination of the subchapter S election of an S corporation partner), or 1.1377-1(b)(3)(iv) (regarding an election to terminate the taxable year of an S corporation partner), shall be treated as a disposition of the partner's entire interest in the partnership solely for purposes of section 706.
(3) Disposition of less than entire interest. If a partner sells or exchanges a part of his interest in a partnership, or if the interest of a partner is reduced, the partnership taxable year shall continue to its normal end.
(4) Determination of distributive shares. See section 706(d)(2), 706(d)(3), and § 1.706-4 for rules regarding the methods to be used in determining the distributive shares of items described in section 702(a) for partners whose interests in the partnership vary during the partnership's taxable year as a result of a disposition of a partner's entire interest in a partnership as described in paragraph (c)(2) of this section or as a result of a disposition of less than a partner's entire interest as described in paragraph (c)(3) of this section.
(5) Transfer of interest by gift. The transfer of a partnership interest by gift does not close the partnership taxable year with respect to the donor. However, the income up to the date of gift attributable to the donor's interest shall be allocated to him under section 704(e)(2).
(6) Foreign taxes. For rules relating to the treatment of foreign taxes paid or accrued by a partnership, see § 1.901-2(f)(4)(i) and (f)(4)(ii).
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Treas. Reg. §1.706-1(d)Effective/applicability date.
Effective/applicability date. (1) The rules for paragraphs (a) and (b) of this section apply for partnership taxable years ending on or after May 17, 2002, except for paragraphs (b)(5) and (6) of this section, which generally apply to partnership taxable years beginning on or after July 23, 2002 (however, see paragraphs (b)(5)(iii) and (b)(6)(v) of this section for certain exceptions to and transition relief from the applicability dates of paragraphs (b)(5) and (6) of this section).
(2) The rules for paragraph (c)(1) of this section apply for partnership taxable years beginning after December 31, 1953. All other paragraphs under paragraph (c) of this section apply for partnership taxable years that begin on or after August 3, 2015.
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Treas. Reg. §1.706-1(i)In general.
In general. The rules of this paragraph (b)(4) apply in determining the majority interest taxable year, the principal partners' taxable year, and the least aggregate deferral taxable year.
(ii) Profits interest—(A) In general. For purposes of section 706(b), a partner's interest in partnership profits is generally the partner's percentage share of partnership profits for the current partnership taxable year. If the partnership does not expect to have net income for the current partnership taxable year, then a partner's interest in partnership profits instead must be the partner's percentage share of partnership net income for the first taxable year in which the partnership expects to have net income.
(B) Percentage share of partnership net income. The partner's percentage share of partnership net income for a partnership taxable year is the ratio of: the partner's distributive share of partnership net income for the taxable year, to the partnership's net income for the year. If a partner's percentage share of partnership net income for the taxable year depends on the amount or nature of partnership income for that year (due to, for example, preferred returns or special allocations of specific partnership items), then the partnership must make a reasonable estimate of the amount and nature of its income for the taxable year. This estimate must be based on all facts and circumstances known to the partnership as of the first day of the current partnership taxable year. The partnership must then use this estimate in determining the partners' interests in partnership profits for the taxable year.
(C) Distributive share. For purposes of this paragraph (b)(4)(ii), a partner's distributive share of partnership net income is determined by taking into account all rules and regulations affecting that determination, including, without limitation, sections 704(b), (c), and (e), 736, and 743.
(iii) Capital interest. Generally, a partner's interest in partnership capital is determined by reference to the assets of the partnership that the partner would be entitled to upon withdrawal from the partnership or upon liquidation of the partnership. If the partnership maintains capital accounts in accordance with § 1.704-1(b)(2)(iv), then for purposes of section 706(b), the partnership may assume that a partner's interest in partnership capital is the ratio of the partner's capital account to all partners' capital accounts as of the first day of the partnership taxable year.
(5) Taxable year of a partnership with tax-exempt partners—(i) Certain tax-exempt partners disregarded. In determining the taxable year (the current year) of a partnership under section 706(b) and the regulations thereunder, a partner that is tax-exempt under section 501(a) shall be disregarded if such partner was not subject to tax, under chapter 1 of the Internal Revenue Code, on any income attributable to its investment in the partnership during the partnership's taxable year immediately preceding the current year. However, if a partner that is tax-exempt under section 501(a) was not a partner during the partnership's immediately preceding taxable year, such partner will be disregarded for the current year if the partnership reasonably believes that the partner will not be subject to tax, under chapter 1 of the Internal Revenue Code, on any income attributable to such partner's investment in the partnership during the current year.
(ii) Example. The provisions of paragraph (b)(5)(i) of this section may be illustrated by the following example:
(iii) Effective date. The provisions of this paragraph (b)(5) are applicable for taxable years beginning on or after July 23, 2002. For taxable years beginning before July 23, 2002, see § 1.706-3T as contained in 26 CFR part 1 revised April 1, 2002.
(6) Certain foreign partners disregarded—(i) Interests of disregarded foreign partners not taken into account. In determining the taxable year (the current taxable year) of a partnership under section 706(b) and the regulations thereunder, any interest held by a disregarded foreign partner is not taken into account. A foreign partner is a disregarded foreign partner unless such partner is allocated any gross income of the partnership that was effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States during the partnership's taxable year immediately preceding the current taxable year (or, if such partner was not a partner during the partnership's immediately preceding taxable year, the partnership reasonably believes that the partner will be allocated any such income during the current taxable year) and taxation of that income is not otherwise precluded under any U.S. income tax treaty.
(ii) Definition of foreign partner. For purposes of this paragraph (b)(6), a foreign partner is any partner that is not a United States person (as defined in section 7701(a)(30)), except that a partner that is a controlled foreign corporation (within the meaning of section 957(a)) in which a United States shareholder (as defined in section 951(b)) owns (within the meaning of section 958(a)) stock is not treated as a foreign partner.
(iii) Minority interest rule. If each partner that is not a disregarded foreign partner under paragraph (b)(6)(i) of this section (regarded partner) holds less than a 10-percent interest, and the regarded partners, in the aggregate, hold less than a 20-percent interest in the capital and profits of the partnership, then paragraph (b)(6)(i) of this section does not apply. In determining ownership in a partnership for purposes of this paragraph (b)(6)(iii), each regarded partner is treated as owning any interest in the partnership owned by a related partner. For this purpose, partners are treated as related if they are related within the meaning of sections 267(b) or 707(b) (using the language “10 percent” instead of “50 percent” each place it appears). However, for purposes of determining if partners hold less than a 20-percent interest in the aggregate, the same interests will not be considered as being owned by more than one regarded partner.
(iv) Example. The provisions of paragraph (b)(6) of this section may be illustrated by the following example:
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Treas. Reg. §1.706-1(v)Applicability dates—(A) Generally.
Applicability dates—(A) Generally. The provisions of this paragraph (b)(6) (other than paragraph (b)(6)(iii) of this section and paragraph (b)(6)(ii) of this section to the extent described in the next sentence) apply to partnership taxable years, other than those of an existing partnership, that begin on or after July 23, 2002. The provisions in paragraph (b)(6)(ii) of this section relating to controlled foreign corporations apply to taxable years of foreign corporations ending on or after October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and to taxable years of United States shareholders in which or with which such taxable years of the foreign corporation end, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, where the taxpayer does not apply the provisions of paragraph (b)(6)(ii) of this section relating to controlled foreign corporations, see paragraph (b)(6)(ii) of this section as in effect and contained in 26 CFR part 1, as revised April 1, 2020. The provisions of paragraph (b)(6)(iii) of this section apply to partnership taxable years, other than those of an existing partnership or an interim period partnership, that begin on or after August 3, 2015. For partnership taxable years beginning on or after July 23, 2002, and before August 3, 2015, see the provisions of § 1.706-1(b)(6)(iii) as contained in the 26 CFR part 1 on July 31, 2015. For purposes of paragraph (b)(6) of this section, an existing partnership is a partnership that was formed prior to September 23, 2002, and an interim period partnership is a partnership that was formed on or after September 23, 2002, and prior to August 3, 2015.
(B) Voluntary change in taxable year. An existing partnership may change its taxable year to a year determined in accordance with this section. An existing partnership that makes such a change prior to August 3, 2015 will generally cease to be exempted from the requirements of this paragraph (b)(6) of this section, and thus will be subject to the requirements of paragraph (b)(6) of this section, except for paragraph (b)(6)(iii) of this section—instead, such partnership will be subject to the provisions of § 1.706-1(b)(6)(iii) as contained in the 26 CFR part 1 on July 31, 2015. An existing partnership that makes such a change on or after August 3, 2015 will cease to be exempted from the requirements of this paragraph (b)(6). An interim period partnership may change its taxable year to a year determined in accordance with paragraph (b)(6)(iii) of this section. An interim period partnership that makes such a change will cease to be exempted from the requirements of paragraph (b)(6)(iii) of this section.
(C) Subsequent sale or exchange of interests. If an existing partnership or an interim period partnership terminates under section 708(b)(1)(B), the resulting partnership is not an existing partnership or an interim period partnership for purposes of paragraph (b)(6)(v) of this section.
(D) Transition rule. If, in the first taxable year beginning on or after July 23, 2002, an existing partnership voluntarily changes its taxable year to a year determined in accordance with this paragraph (b)(6), then the partners of that partnership may apply the provisions of § 1.702-3T to take into account all items of income, gain, loss, deduction, and credit attributable to the partnership year of change ratably over a four-year period. If, in a partnership taxable year beginning on or after August 3, 2015, an interim period partnership voluntarily changes its taxable year to a year determined in accordance with paragraph (b)(6)(iii) of this section, then the partners of that partnership may apply the provisions of § 1.702-3T to take into account all items of income, gain, loss, deduction, and credit attributable to the partnership year of change ratably over a four-year period.
(7) Adoption of taxable year. A newly-formed partnership may adopt, in accordance with § 1.441-1(c), its required taxable year, a taxable year elected under section 444, or a 52-53-week taxable year ending with reference to its required taxable year or a taxable year elected under section 444 without securing the approval of the Commissioner. If a newly-formed partnership wants to adopt any other taxable year, it must establish a business purpose and secure the approval of the Commissioner under section 442.
(8) Change in taxable year—(i) Partnerships—(A) Approval required. An existing partnership may change its taxable year only by securing the approval of the Commissioner under section 442 or making an election under section 444. However, a partnership may obtain automatic approval for certain changes, including a change to its required taxable year, pursuant to administrative procedures published by the Commissioner.
(B) Short period tax return. A partnership that changes its taxable year must make its return for a short period in accordance with section 443, but must not annualize the partnership taxable income.
(C) Change in required taxable year. If a partnership is required to change to its majority interest taxable year, then no further change in the partnership's required taxable year is required for either of the two years following the year of the change. This limitation against a second change within a three-year period applies only if the first change was to the majority interest taxable year and does not apply following a change in the partnership's taxable year to the principal partners' taxable year or the least aggregate deferral taxable year.
(ii) Partners. Except as otherwise provided in the Internal Revenue Code or the regulations thereunder (e.g., section 859 regarding real estate investment trusts or § 1.442-2(c) regarding a subsidiary changing to its consolidated parent's taxable year), a partner may not change its taxable year without securing the approval of the Commissioner under section 442. However, certain partners may be eligible to obtain automatic approval to change their taxable years pursuant to the regulations or administrative procedures published by the Commissioner. A partner that changes its taxable year must make its return for a short period in accordance with section 443.
(9) Retention of taxable year. In certain cases, a partnership will be required to change its taxable year unless it obtains the approval of the Commissioner under section 442, or makes an election under section 444, to retain its current taxable year. For example, a partnership using a taxable year that corresponds to its required taxable year must obtain the approval of the Commissioner to retain such taxable year if its required taxable year changes as a result of a change in ownership, unless the partnership previously obtained approval for its current taxable year or, if appropriate, makes an election under section 444.
(10) Procedures for obtaining approval or making a section 444 election. See § 1.442-1(b) for procedures to obtain the approval of the Commissioner (automatically or otherwise) to adopt, change, or retain a taxable year. See §§ 1.444-1T and 1.444-2T for qualifications, and § 1.444-3T for procedures, for making an election under section 444.
(11) Effect of partner elections under section 444—(i) Election taken into account. For purposes of section 706(b)(1)(B), any section 444 election by a partner in a partnership shall be taken into account in determining the taxable year of the partnership. See § 1.7519-1T(d), Example (4).
(ii) Effective date. The provisions of this paragraph (b)(11) are applicable for taxable years beginning on or after July 23, 2002. For taxable years beginning before July 23, 2002, see § 1.706-3T as contained in 26 CFR part 1 revised April 1, 2002.
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Treas. Reg. §1.706-2TTemporary regulations; question and answer under the Tax Reform Act of 1984
Question 1: For purposes of section 706(d), how is an otherwise deductible amount that is deferred under section 267(a)(2) treated?
Answer 1: In the year the deduction is allowed, the deduction will constitute an allocable cash basis item under section 706(d)(2)(B)(iv).
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Treas. Reg. §1.706-3Items attributable to interest in lower-tier partnership
(a) through (c) [Reserved]
(d) Conservation contributions. For purposes of section 706(d)(3), in the case of a qualified conservation contribution (as defined in section 170(h)(1) and § 1.170A-14(a) without regard to whether such contribution is a disallowed qualified conservation contribution within the meaning of § 1.170A-14(j)(3)(vii)) by a partnership that is allocated to an upper-tier partnership, the upper-tier partnership must allocate the contribution among its partners in accordance with their interests in the qualified conservation contribution at the time of day at which the qualified conservation contribution was made, regardless of the general rule of section 706(d)(3). Pursuant to § 1.706-4(a)(2), the rules of § 1.706-4 do not apply to allocations subject to this section.
(e) Applicability date. Paragraph (d) of this section applies to qualified conservation contributions made after December 29, 2022, and in partnership taxable years ending after December 29, 2022.
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Treas. Reg. §1.706-3(a)§1.706-3(a)
through (c) [Reserved]
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Treas. Reg. §1.706-3(d)Conservation contributions.
Conservation contributions. For purposes of section 706(d)(3), in the case of a qualified conservation contribution (as defined in section 170(h)(1) and § 1.170A-14(a) without regard to whether such contribution is a disallowed qualified conservation contribution within the meaning of § 1.170A-14(j)(3)(vii)) by a partnership that is allocated to an upper-tier partnership, the upper-tier partnership must allocate the contribution among its partners in accordance with their interests in the qualified conservation contribution at the time of day at which the qualified conservation contribution was made, regardless of the general rule of section 706(d)(3). Pursuant to § 1.706-4(a)(2), the rules of § 1.706-4 do not apply to allocations subject to this section.
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Treas. Reg. §1.706-3(e)Applicability date.
Applicability date. Paragraph (d) of this section applies to qualified conservation contributions made after December 29, 2022, and in partnership taxable years ending after December 29, 2022.
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Treas. Reg. §1.706-4Determination of distributive share when a partner's interest varies
(a) General rule—(1) Variations subject to this section. Except as provided in paragraph (a)(2) of this section, this section provides rules for determining the partners' distributive shares of partnership items when a partner's interest in a partnership varies during the taxable year as a result of the disposition of a partial or entire interest in a partnership as described in § 1.706-1(c)(2) and (3), or with respect to a partner whose interest in a partnership is reduced as described in § 1.706-1(c)(3), including by the entry of a new partner (collectively, a “variation”).
(2) Coordination with sections 706(d)(2) and 706(d)(3) and other Code sections. Items subject to allocation under other rules, including sections 108(e)(8) and 108(i) (which provide special allocation rules for certain items from the discharge or retirement of indebtedness section), section 704(c) (relating to allocations with respect to certain contributed property), § 1.704-3(a)(6) (relating to allocations with respect to revalued property), section 706(d)(2) (relating to the determination of partners' distributive shares of allocable cash basis items), and section 706(d)(3) (relating the determination of partners' distributive share of any item of an upper tier partnership attributable to a lower tier partnership), are not subject to the rules of this section. In addition, the rules of this section do not apply in making allocation of book items pursuant to § 1.704-1(b)(2)(iv)(e), (f), or (s). In all cases, all partnership items for each taxable year must be allocated among the partners, and no partnership items may be duplicated, regardless of the particular provision of section 706 (or other Code section) which applies, and regardless of the method or convention adopted by the partnership.
(3) Allocation of items subject to this section. In determining the distributive share under section 702(a) of partnership items subject to this section, the partnership shall follow the steps described in this paragraph (a)(3)(i) through (x).
(i) First, determine whether either of the exceptions in paragraph (b) of this section (regarding certain changes among contemporaneous partners and partnerships for which capital is not a material income-producing factor) applies.
(ii) Second, determine which of its items are subject to allocation under the special rules for extraordinary items in paragraph (e) of this section, and allocate those items accordingly.
(iii) Third, determine with respect to each variation whether it will apply the interim closing method or the proration method. Absent an agreement of the partners (within the meaning of paragraph (f) of this section) to use the proration method, the partnership shall use the interim closing method. The partnership may use different methods (interim closing or proration) for different variations within each partnership taxable year; however, the Commissioner may place restrictions on the ability of partnerships to use different methods during the same taxable year in guidance published in the Internal Revenue Bulletin.
(iv) Fourth, determine when each variation is deemed to have occurred under the partnership's selected convention (as described in paragraph (c) of this section).
(v) Fifth, determine whether there is an agreement of the partners (within the meaning of paragraph (f) of this section) to perform regular monthly or semi-monthly interim closings (as described in paragraph (d) of this section). If so, then the partnership will perform an interim closing of its books at the end of each month (in the case of an agreement to perform monthly closings) or at the end and middle of each month (in the case of an agreement to perform semi-monthly closings), regardless of whether any variation occurs. Absent an agreement of the partners to perform regular monthly or semi-monthly interim closings, the only interim closings during the partnership's taxable year will be at the deemed time of the occurrence of variations for which the partnership uses the interim closing method.
(vi) Sixth, determine the partnership's segments, which are specific periods of the partnership's taxable year created by interim closings of the partnership's books. The first segment shall commence with the beginning of the taxable year of the partnership and shall end at the time of the first interim closing. Any additional segment shall commence immediately after the closing of the prior segment and shall end at the time of the next interim closing. However, the last segment of the partnership's taxable year shall end no later than the close of the last day of the partnership's taxable year. If there are no interim closings, the partnership has one segment, which corresponds to its entire taxable year.
(vii) Seventh, apportion the partnership's items for the year among its segments. The partnership shall determine the items of income, gain, loss, deduction, and credit of the partnership for each segment. In general, a partnership shall treat each segment as though the segment were a separate distributive share period. For example, a partnership may compute a capital loss for a segment of a taxable year even though the partnership has a net capital gain for the entire taxable year. For purposes of determining allocations to segments, any special limitation or requirement relating to the timing or amount of income, gain, loss, deduction, or credit applicable to the entire partnership taxable year will be applied based upon the partnership's satisfaction of the limitation or requirement as of the end of the partnership's taxable year. For example, the expenses related to the election to expense a section 179 asset must first be calculated (and limited if applicable) based on the partnership's full taxable year, and then the effect of any limitation must be apportioned among the segments in accordance with the interim closing method or the proration method using any reasonable method.
(viii) Eighth, determine the partnership's proration periods, which are specific portions of a segment created by a variation for which the partnership chooses to apply the proration method. The first proration period in each segment begins at the beginning of the segment, and ends at the first time of the first variation within the segment for which the partnership selects the proration method. The next proration period begins immediately after the close of the prior proration period and ends at the time of the next variation for which the partnership selects the proration method. However, each proration period shall end no later than the close of the segment.
(ix) Ninth, prorate the items of income, gain, loss, deduction, and credit in each segment among the proration periods within the segment.
(x) Tenth, determine the partners' distributive shares of partnership items under section 702(a) by taking into account the partners' interests in such items during each segment and proration period.
(4) Example.
At the beginning of 2017, PRS, a calendar year partnership, has three equal partners, A, B, and C. On April 16, 2017, A sells 50% of its interest in PRS to new partner D. On August 6, 2017, B sells 50% of its interest in PRS to new partner E. During 2015, PRS earned $75,000 of ordinary income, incurred $33,000 of ordinary deductions, earned $12,000 of capital gain in the ordinary course of its business, and sustained $9,000 of capital loss in the ordinary course of its business. Within that year, PRS earned $60,000 of ordinary income, incurred $24,000 of ordinary deductions, earned $12,000 of capital gain, and sustained $6,000 of capital loss between January 1, 2017, and July 31, 2017, and PRS earned $15,000 of gross ordinary income, incurred $9,000 of gross ordinary deductions, and sustained $3,000 of capital loss between August 1, 2017, and December 31, 2017. None of PRS's items are extraordinary items within the meaning of paragraph (e)(2) of this section. Capital is a material income-producing factor for PRS. For 2017, PRS determines the distributive shares of A, B, C, D, and E as follows:
(i) First, PRS determines that none of the exceptions in paragraph (b) of this section apply because capital is a material-income producing factor and no variation is the result of a change in allocations among contemporaneous partners.
(ii) Second, PRS determines that none of its items are extraordinary items subject to allocation under paragraph (e) of this section.
(iii) Third, the partners of PRS agree (within the meaning of paragraph (f) of this section) to apply the proration method to the April 16, 2017, variation, and PRS accepts the default application of the interim closing method to the August 6, 2017, variation.
(iv) Fourth, PRS determines the deemed date of the variations for purposes of this section based upon PRS's selected convention. Because PRS applied the proration method to the April 16, 2017, variation, PRS must use the calendar day convention with respect to the April 16, 2017, variation pursuant to paragraph (c) of this section. Therefore, the variation that resulted from A's sale to D on April 16, 2017, is deemed to occur for purposes of this section at the end of the day on April 16, 2017. Further, the partners of PRS agree (within the meaning of paragraph (f) of this section) to apply the semi-monthly convention to the August 6, 2017, variation. Therefore, the August 6, 2017, variation is deemed to occur at the end of the day on July 31, 2017.
(v) Fifth, the partners of PRS do not agree to perform regular semi-monthly or monthly closings as described in paragraph (d) of this section. Therefore, PRS will have only one interim closing for 2017, occurring at the end of the day on July 31.
(vi) Sixth, PRS determines that it has two segments for 2017. The first segment commences January 1, 2017, and ends at the close of the day on July 31, 2017. The second segment commences at the beginning of the day on August 1, 2017, and ends at the close of the day on December 31, 2017.
(vii) Seventh, PRS determines that during the first segment of its taxable year (beginning January 1, 2017, and ending July 31, 2017), it had $60,000 of ordinary income, $24,000 of ordinary deductions, $12,000 of capital gain, and $6,000 of capital loss. PRS determines that during the second segment of its taxable year (beginning August 1, 2017, and ending December 31, 2017), it had $15,000 of gross ordinary income, $9,000 of gross ordinary deductions, and $3,000 of capital loss.
(viii) Eighth, PRS determines that it has two proration periods. The first proration period begins January 1, 2017, and ends at the close of the day on April 16, 2017; the second proration period begins April 17, 2017, and ends at the close of the day on July 31, 2017.
(ix) Ninth, PRS prorates its income from the first segment of its taxable year among the two proration periods. Because each proration period has 106 days, PRS allocates 50% of its items from the first segment to each proration period. Thus, each proration period contains $30,000 gross ordinary income, $12,000 gross ordinary deductions, $6,000 capital gain, and $3,000 capital loss.
(x) Tenth, PRS calculates each partner's distributive share. Because A, B, and C were equal partners during the first proration period, each is allocated one-third of the partnership's items attributable to that proration period. Thus, A, B, and C are each allocated $10,000 gross ordinary income, $4,000 gross ordinary deductions, $2,000 capital gain, and $1,000 capital loss for the first proration period. For the second proration period, A and D each had a one-sixth interest in PRS and B and C each had a one-third interest in PRS. Thus, A and D are each allocated $5,000 gross ordinary income, $2,000 gross ordinary deductions, $1,000 capital gain, and $500 capital loss, and B and C are each allocated $10,000 gross ordinary income, $4,000 gross ordinary deductions, $2,000 capital gain, and $1,000 capital loss for the second proration period. For the second segment of PRS's taxable year, A, B, D, and E each had a one-sixth interest in PRS and C had a one-third interest in PRS. Thus, A, B, D, and E are each allocated $2,500 gross ordinary income, $1,500 gross ordinary deductions, and $500 capital loss, and C is allocated $5,000 gross ordinary income, $3,000 gross ordinary deductions, and $1,000 capital loss for the second segment.
(b) Exceptions—(1) Permissible changes among contemporaneous partners. The general rule of paragraph (a)(3) of this section, with respect to the varying interests of a partner described in § 1.706-1(c)(3), will not preclude changes in the allocations of the distributive share of items described in section 702(a) among contemporaneous partners for the entire partnership taxable year (or among contemporaneous partners for a segment if the item is entirely attributable to a segment), provided that—
(i) Any variation in a partner's interest is not attributable to a contribution of money or property by a partner to the partnership or a distribution of money or property by the partnership to a partner; and
(ii) The allocations resulting from the modification satisfy the provisions of section 704(b) and the regulations promulgated thereunder.
(2) Safe harbor for partnerships for which capital is not a material income-producing factor. Notwithstanding paragraph (a)(3) of this section, with respect to any taxable year in which there is a change in any partner's interest in a partnership for which capital is not a material income-producing factor, the partnership and such partner may choose to determine the partner's distributive share of partnership income, gain, loss, deduction, and credit using any reasonable method to account for the varying interests of the partners in the partnership during the taxable year provided that the allocations satisfy the provisions of section 704(b).
(c) Conventions—(1) In general. Conventions are rules of administrative convenience that determine when each variation is deemed to occur for purposes of this section. Because the timing of each variation is necessary to determine the partnership's segments and proration periods, which are used to determine the partners' distributive shares, the convention used by the partnership with respect to a variation will generally affect the allocation of partnership items. However, see paragraph (e) of this section for special rules regarding extraordinary items, which generally must be allocated without regard to the partnership's convention. Subject to the limitations set forth in paragraphs (c)(2) and (3) of this section, partnerships may generally choose from the following three conventions:
(i) Calendar day convention. Under the calendar day convention, each variation is deemed to occur for purposes of this section at the end of the day on which the variation occurs.
(ii) Semi-monthly convention. Under the semi-monthly convention, each variation is deemed to occur for purposes of this section either:
(A) In the case of a variation occurring on the 1st through the 15th day of a calendar month, at the end of the last day of the immediately preceding calendar month; or
(B) In the case of a variation occurring on the 16th through the last day of a calendar month, at the end of the 15th calendar day of that month.
(iii) Monthly convention. Under the monthly convention, each variation is deemed to occur for purposes of this section either:
(A) In the case of a variation occurring on the 1st through the 15th day of a calendar month, at the end of the last day of the immediately preceding calendar month; or
(B) In the case of a variation occurring on the 16th through the last day of a calendar month, at the end of the last day of that calendar month.
(2) Exceptions. (i) Notwithstanding paragraph (c)(1) of this section, all variations within a taxable year shall be deemed to occur no earlier than the first day of the partnership's taxable year, and no later than the close of the final day of the partnership's taxable year. Thus, in the case of a calendar year partnership applying either the semi-monthly or monthly convention to a variation occurring on January 1st through January 15th, the variation will be deemed to occur for purposes of this section at the beginning of the day on January 1st.
(ii) In the case of a partner who becomes a partner during the partnership's taxable year as a result of a variation, and ceases to be a partner as a result of another variation, if both such variations would be deemed to occur at the same time under the rules of paragraph (c)(1) of this section, then the variations with respect to that partner's interest will instead be treated as occurring on the dates each variation actually occurred. Thus, the partnership must treat such a partner as a partner for the entire portion of its taxable year during which the partner actually owned an interest. See Example 2 of paragraph (c)(4) of this section. However, this paragraph (c)(2)(ii) does not apply to publicly traded partnerships (as defined in section 7704(b)) that are treated as partnerships with respect to holders of publicly traded units (as described in § 1.7704-1(b) or 1.7704-1(c)(1)).
(iii) Notwithstanding paragraph (c)(1)(iii) of this section, a publicly traded partnership (as defined in section 7704(b)) that is treated as a partnership may consistently treat all variations occurring during each month as occurring at the end of the last day of that calendar month if the publicly traded partnership uses the monthly convention for those variations.
(3) Permissible conventions for each variation—(i) Rules applicable to all partnerships. A partnership generally shall use the calendar day convention for each variation; however, for all variations during a taxable year for which the partnership uses the interim closing method, the partnership may instead use the semi-monthly or monthly convention by agreement of the partners (within the meaning of paragraph (f) of this section). The partnership must use the same convention for all variations for which the partnership uses the interim closing method.
(ii) Publicly traded partnerships. A publicly traded partnership (as defined in section 7704(b)) that is treated as a partnership may, by agreement of the partners (within the meaning of paragraph (f) of this section) use any of the calendar day, the semi-monthly, or the monthly conventions with respect to all variations during the taxable year relating to its publicly-traded units (as described in § 1.7704-1(b) or (c)(1)), regardless of whether the publicly traded partnership uses the proration method with respect to those variations. A publicly traded partnership must use the same convention for all variations during the taxable year relating to its publicly traded units. A publicly traded partnership must use the calendar day convention with respect to all variations relating to its non-publicly traded units for which the publicly traded partnership uses the proration method.
(4) Examples. The following examples illustrate the principles in this paragraph (c).
(d)(1) Optional regular monthly or semi-monthly interim closings. Under the rules of this section, a partnership is not required to perform an interim closing of its books except at the time of any variation for which the partnership uses the interim closing method (taking into account the applicable convention). However, a partnership may, by agreement of the partners (within the meaning of paragraph (f) of this section) perform regular monthly or semi-monthly interim closings of its books, regardless of whether any variation occurs. Regardless of whether the partners agree to perform these regular interim closings, the partnership must continue to apply the interim closing or proration method to its variations according to the rules of this section.
(2) Example. The following example illustrates the principles in this paragraph (d).
(e) Extraordinary items—(1) General principles. Extraordinary items may not be prorated. The partnership must allocate extraordinary items among the partners in proportion to their interests in the partnership item at the time of day on which the extraordinary item occurred, regardless of the method (interim closing or proration method) and convention (daily, semi-monthly, or monthly) otherwise used by the partnership. These rules require the allocation of extraordinary items as an exception to the proration method, which would otherwise ratably allocate the extraordinary items across the segment, and the conventions, which could otherwise inappropriately shift extraordinary items between a transferor and transferee. However, publicly traded partnerships (as defined in section 7704(b)) that are treated as partnerships may, but are not required to, apply their selected convention in determining who held publicly traded units (as described in § 1.7704-1(b) or (c)(1)) at the time of the occurrence of an extraordinary item. Extraordinary items continue to be subject to any special limitation or requirement relating to the timing or amount of income, gain, loss, deduction, or credit applicable to the entire partnership taxable year (for example, the limitation for section 179 expenses).
(2) Definition. Except as provided in paragraph (e)(3) of this section, an extraordinary item is:
(i) Any item from the disposition or abandonment (other than in the ordinary course of business) of a capital asset as defined in section 1221 (determined without the application of any other rules of law);
(ii) Any item from the disposition or abandonment (other than in the ordinary course of business) of property used in a trade or business as defined in section 1231(b) (determined without the application of any holding period requirement);
(iii) Any item from the disposition or abandonment of an asset described in section 1221(a)(1), (a)(3), (a)(4), or (a)(5) if substantially all the assets in the same category from the same trade or business are disposed of or abandoned in one transaction (or series of related transactions);
(iv) Any item from assets disposed of in an applicable asset acquisition under section 1060(c);
(v) Any item resulting from any change in accounting method initiated by the filing of the appropriate form after a variation occurs;
(vi) Any item from the discharge or retirement of indebtedness (except items subject to section 108(e)(8) or 108(i), which are subject to special allocation rules provided in section 108(e)(8) and 108(i));
(vii) Any item from the settlement of a tort or similar third-party liability or payment of a judgment;
(viii) Any credit, to the extent it arises from activities or items that are not ratably allocated (for example, the rehabilitation credit under section 47, which is based on placement in service);
(ix) Any specified credit portion transferred pursuant to section 6418 and §§ 1.6418-1 through 1.6418-5;
(x) For all partnerships, any additional item if, the partners agree (within the meaning of paragraph (f) of this section) to consistently treat such item as an extraordinary item for that taxable year; however, this rule does not apply if treating that additional item as an extraordinary item would result in a substantial distortion of income in any partner's return; any additional extraordinary items continue to be subject to any special limitation or requirement relating to the timing or amount of income, gain, loss, deduction, or credit applicable to the entire partnership taxable year (for example, the limitation for section 179 expenses);
(xi) Any item which, in the opinion of the Commissioner, would, if ratably allocated, result in a substantial distortion of income in any return in which the item is included;
(xii) Any item identified as an additional class of extraordinary item in guidance published in the Internal Revenue Bulletin.
(xiii) Applicable for partnership taxable years ending after December 29, 2022, any qualified conservation contribution (as defined in section 170(h)(1) and § 1.170A-14(a) without regard to whether such contribution is a disallowed qualified conservation contribution within the meaning of § 1.170A-14(j)(3)(vii)) made after December 29, 2022.
(3) Small item exception—(i) In general. A partnership may treat an item described in paragraph (e)(2) of this section (except for an item described in paragraph (e)(2)(xiii) of this section) as other than an extraordinary item for purposes of this paragraph (e) if, for the partnership's taxable year the total of all items in the particular class of extraordinary items (as enumerated in paragraphs (e)(2)(i) through (xii) of this section, for example, all tort or similar liabilities, but in no event counting an extraordinary 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 the extraordinary items from all classes of extraordinary 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 extraordinary items as positive amounts.
(ii) Applicability date. This paragraph (e)(3) applies to partnership taxable years ending after December 29, 2022. For partnership taxable years ending before December 30, 2022, see paragraph (e)(3) of this section contained in 26 CFR part 1, as revised April 1, 2024.
(4) Examples. The following examples illustrate the provisions of this paragraph (e).
(f) Agreement of the partners. For purposes of paragraphs (a)(3)(iii) (relating to selection of the proration method), (c)(3) (relating to selection of the semi-monthly or monthly convention), (d) (relating to performance of regular monthly or semi-monthly interim closings), and (e)(2)(ix) (relating to selection of additional extraordinary items) of this section, the term agreement of the partners means either an agreement of all the partners to select the method, convention, or extraordinary item in a dated, written statement maintained with the partnership's books and records, including, for example, a selection that is included in the partnership agreement, or a selection of the method, convention, or extraordinary item made by a person authorized to make that selection, including under a grant of general authority provided for by either state law or in the partnership agreement, if that person's selection is in a dated, written statement maintained with the partnership's books and records. In either case, the dated written agreement must be maintained with the partnership's books and records by the due date, including extension, of the partnership's tax return.
(g) Applicability date. (1) Except with respect to paragraph (c)(3) of this section, this section applies for partnership taxable years that begin on or after August 3, 2015. The rules of paragraph (c)(3) of this section apply for taxable years of partnerships other than existing publicly traded partnerships that begin on or after August 3, 2015. For purposes of the immediately preceding sentence, an existing publicly traded partnership is a partnership described in section 7704(b) that was formed prior to April 14, 2009. For purposes of this effective date provision, the termination of a publicly traded partnership under section 708(b)(1)(B) due to the sale or exchange of 50 percent or more of the total interests in partnership capital and profits is disregarded in determining whether the publicly traded partnership is an existing publicly traded partnership.
(2) Paragraph (e)(2)(ix) of this section applies to taxable years ending on or after April 30, 2024.
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Treas. Reg. §1.706-4(a)General rule—(1) Variations subject to this section.
General rule—(1) Variations subject to this section. Except as provided in paragraph (a)(2) of this section, this section provides rules for determining the partners' distributive shares of partnership items when a partner's interest in a partnership varies during the taxable year as a result of the disposition of a partial or entire interest in a partnership as described in § 1.706-1(c)(2) and (3), or with respect to a partner whose interest in a partnership is reduced as described in § 1.706-1(c)(3), including by the entry of a new partner (collectively, a “variation”).
(2) Coordination with sections 706(d)(2) and 706(d)(3) and other Code sections. Items subject to allocation under other rules, including sections 108(e)(8) and 108(i) (which provide special allocation rules for certain items from the discharge or retirement of indebtedness section), section 704(c) (relating to allocations with respect to certain contributed property), § 1.704-3(a)(6) (relating to allocations with respect to revalued property), section 706(d)(2) (relating to the determination of partners' distributive shares of allocable cash basis items), and section 706(d)(3) (relating the determination of partners' distributive share of any item of an upper tier partnership attributable to a lower tier partnership), are not subject to the rules of this section. In addition, the rules of this section do not apply in making allocation of book items pursuant to § 1.704-1(b)(2)(iv)(e), (f), or (s). In all cases, all partnership items for each taxable year must be allocated among the partners, and no partnership items may be duplicated, regardless of the particular provision of section 706 (or other Code section) which applies, and regardless of the method or convention adopted by the partnership.
(3) Allocation of items subject to this section. In determining the distributive share under section 702(a) of partnership items subject to this section, the partnership shall follow the steps described in this paragraph (a)(3)(i) through (x).
-
Treas. Reg. §1.706-4(b)Exceptions—(1) Permissible changes among contemporaneous partners.
Exceptions—(1) Permissible changes among contemporaneous partners. The general rule of paragraph (a)(3) of this section, with respect to the varying interests of a partner described in § 1.706-1(c)(3), will not preclude changes in the allocations of the distributive share of items described in section 702(a) among contemporaneous partners for the entire partnership taxable year (or among contemporaneous partners for a segment if the item is entirely attributable to a segment), provided that—
160 Citing Cases
The courts have 12 accordingly held that supervisory approval must be meaningful from a temporal standpoint—i.e., that it not come so late as to be a vain act. No court has ever held that section 6751(b)(1) requires a supervisor to supply—in addition to timely written approval—any particular level of substantive review. See Thompson v. Commissioner, 155 T.C. 87, 93 (2020) (rejecting argument that penalty should not apply because an acting supervisor was supposedly incapable of engaging in “mean
“[A]n irrational departure from that policy (as opposed to an avowed alteration of it) could constitute action that must be overturned as ‘arbitrary, capricious, [or] an abuse of discretion’ within the meaning of the Administrative Procedure Act, 5 U.S.C.
Section 706 and the accompanying regulations provide rules for determining a partnership’s taxable year. See Treas. Reg. § 1.441- 1(b)(2)(i)(G) (stating that partnerships must use the required partnership year determined under section 706 and the accompanying regulations). A partnership’s taxable year is determined as though the partnership is a ta
Our review standard is “narrow,” and we will not substitute our judgment for that of the agency. Zzyym v. Pompeo, 958 F.3d 1014, 1022 (10th Cir. 2020) (quoting Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). However, in employing this deferential standard of review, we must determine whethe
In other words, we hold that we do have jurisdiction to review the Commissioner’s denial of a waiver under section 408(d)(3)(I) and that we review such a denial for abuse of discretion.
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 years On November 12, 1947, the Administrative Committ
§ 706(2) (2018), petitioner asks us to “set aside” the denial as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” or “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right,” because the OVDI claim “must be evaluated based on the law applicable as of the date of responden
Our scope of review of WBO determinations is generally confined to the administrative record (the so-called record rule).
A court asked to decide if an agency has abused its discretion must usually review how the agency 39 [*39] exercised its discretion on the basis of the administrative record compiled by the agency. We review only the rationale that the agency uses, and don’t come up with one of our own or let the Commissioner’s attorneys come up with one of
706(2)(E). The Court of Appeals for the D.C. Circuit, to which appeal of whistleblower cases lies, see sec. 7482(b)(1), has opined that “the substantial evidence test and the arbitrary or capricious test are one and the same”, Ass’n of Data Processing Serv. Orgs., Inc., 745 F.2d at 683. The substantial evidence test, in that court’s view, “is only a specific application” of the more general arbitrary and capricious standard. Id. In cases to which 5 U.S.C. sec. 706(2)(E) does not apply--that is,
There is not even "a minimal level ofanalysis," as the Supreme Court,just a couple years ago, insisted an agency must show ifit hopes to avoid its regulation's being held procedurally invalid. Encino Motorcars, 579 U.S. at , 136 S. Ct. at 2120. Nova Scotia also shows what should happen when an agency doesn't consider significant comments.¹7 There, the court found no concise general ¹6 The majority misreads Dominion Resources to apply only to regulations that are inconsistent with statutory text.
§ 706, however, the standard set forth in Rule 56(c) does not apply because ofthe limited role ofa court in reviewing the administrative record.
706 (2018), a provision ofthe Administrative Procedure Act that generally provides that, when a court reviews an agency action, "due account shall be taken ofthe rule ofprejudicial error." h Ala. Hosp. Ass'n, 702 F.2d at 958. It has been said that the rule ofharmless error means the following: Ifan agency's mistake that does not affect the out
706(2)(F) (2018) (recognizing an exception to the ordinary remand rule where "the facts are subject to trial de novo by the reviewing court"). Like section 6015, section 7623(b) contains no analog to section 6330(d)(2) expressly reservingjurisdiction to the IRS. We do not believe, however, that this consideration is determinative with regard t
150 (1999), to mean that APA section 706 "functions as a defaultjudicial review standard"); Dickson v.
However, the facts surrounding the agency action in State Farm are inapposite, - 26 - and the concerns that led the Court in that case to review more stringentlythe agency's process are not presented here.
706 ("reviewing court shall decide all relevant questions oflaw, interpret constitutional and statutory provisions, and determine the meaning or applicability ofthe terms ofan agency action"). B. This should also be a situation where we apply Chenery. But instead of examining the SO's reasoning--or, more precisely, lack ofreasoning--we create
See Motor Vehicle Mfrs. Assn. v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 43-44 (1983). The Tax Court's exclusivelyjudicial role distinguishes it from other non-Article III tribunals that perform multiple functions and provides the limit on the diffusion ofappointment power that the Constitution demands. * * * [Freytag v. Comm
706 is inapplicable because it is not clear that Treasury would have adopted the final rule ifit had been determined to be inconsistent with the arm's-length standard.
706 is inapplicable because it is not clear that Treasury would have adopted the final rule ifit had been determined to be inconsistent with the arm's-length standard.
"A federal court may not substitute itsjudgment for that of the agency." Id. It concluded - 70 - [*70] that the district court properly granted * * * summaryjudgment. McFarland has no valid claim to an easement. To the extent he has a right to access his property across federal land, that right is subject to the reasonable regulat
706(2)(A) (2006). Petitioner argues that respondent's stated reason for denying the claim was inconsistent with his procedures. The Commissionerwill not process an award claim ifthe information provided did not identify a Federal tax issue upon which the Commissionertook action, result in the detection ofan underpayment oftax or result in the
would make the modifier "partnership's" before "taxable year" superfluous-- section 6231(a)(3) already requires the item be related to or "with respect to a partnership." The phrase is no accident--"partnership's taxable year" is a defined term, see sec. 706, and "partnership's taxable year" or "partnership taxable year(s)" appears in twenty or so Code sections.5 The Code makes sure that a partnership 5 See secs. 465, 706, 775, 1402, 1446,.6031, 6223, 6224, 6226, 6227,6228, (continued...) - 192
ould make the modifier “partnership’s” before “taxable year” superfluous — section 6231(a)(3) already requires the item be related to or “with respect to a partnership.” The phrase is no accident — “partnership’s taxable year” is a defined term, see sec. 706, and “partnership’s taxable year” or “partnership taxable year(s)” appears in twenty or so Code sections. The Code makes sure that a partnership has its own tax year as if it were a taxpayer apart from its partners. See sec. 706(b)(1). And t
706.02 (West 2001), to convey such an,interest. We disagree. Under Wis. Statt. Ann. sec. 706.04, a conveyance that does not satisfy every requirement of the statute of frauds may nonetheless be enforced- where there has been detrimental reliance. See also Clay v. Bradley, 246 N.W.2d 142 (Wis. 1976). The VFD demolished the lake house in relianc
Print 1945), reprinted in Administrative Procedure Act Legislativ e History, 1944-1946, at 22 (1946) .2 As a corollary to these APA provisio s regarding agency adjudications, APA section 706 expressly ontemplates that certain types of agency actions will be subjec t e novo judicial (F) provides that the set aside agency e * * * unwarranted by the facts to the extent that the facts ar subject to trial de novo by the reviewing court ." Although t e statute does not otherwise specify the types of c
As a corollary to these APA provisions regarding agency adjudications, apa section 706 expressly contemplates that certain types of agency actions will be subject to de novo judicial review.
The premise of respondent’s motion is that the Court’s review of the notice of determination is governed by the judicial review provisions of the Administrative Procedure Act, particularly section 706, 5 U.S.C.
(E) relates to “formal” agency action (i.e., action that is statutorily required (continued...) - 47 - the record rule in cases where APA section 706(2)(A) provides the appropriate standard of review. See Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 743-744 (1985); Camp v. Pitts, 411 U.S. 138, 142 (1973); see also Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156, 162 (D.C. Cir. 2003); Beno v. Shalala, 30 F.3d 1057, 1073-1074 (9th Cir. 1994). Conversely, in cases that fall into th
Raymond Smith were effective on June 30, 1990, rather than on January 13, 1989, and the correct distributive shares of - 2 - partnership income, loss, deductions, and credits were determined based on their ownership percentages in accordance with section 706.1 After concessions, the sole issue for decision is whether petitioner was divested of his ownership interest in Life Care Communities of America, Ltd., on January 12, 1989, or June 30, 1990.
The taxpayer in O’Dwyer sought to compel the IRS to produce its entire administrative file, based in part on language in APA section 706 directing the reviewing court to “review the whole record”.
711, 717 (1990), section 706 of the Administrative Procedure Act (the APA), 5 U.S.C.
706(2)(A)-(D) (2000) should apply. Office of Chief Counsel Notice CC-2003-016, at 29 (May 29, 2003). We have not ourselves taken a position on the merits of that assertion, but that type of review would likely be easier if a uniform procedure were in place, whenever the Commissioner moves for summary judgment, to put before a reviewing court t
706, which, in pertinent part, provides: Scope of review To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and - 19 - statutory provisions, and determine the meaning or applicability of the terms of an agency action. The reviewing court shall-- (1)
Katz’ bankruptcy estate succeeded to the partnership interests on July 5, 1990, and held beneficial ownership of such interests on December 31, 1990, all the 1990 calendar year distributive shares (which include the prepetition partnership losses) belonged to and were reportable by Mr. Katz’ bankruptcy estate under section 1398(e)(1). Respondent’s analysis is consistent with the treatment of the issue in 15 Sheinfeld et al., Collier on Bankruptcy, par.
It must be read in the larger context of section 706, particularly section 706(c).
In pertinent part, APA section 706 provides: The reviewing court shall –- * * * * * * * (2) hold unlawful and set aside agency action, findings, and conclusions found to be –- (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law; * * * * * * * (D) without observance of procedure required by law; * *
It must be read in the larger context of section 706, particularly section 706(c).
The correct distributive shares of partnership income, loss, deductions, and credits have been determined based on their ownership percentages in accordance with section 706 of the Internal Revenue Code.
706 (1988), which is the applicable standard of review in the instant case. In Georgia Fed. Bank v. Commissioner, 98 T.C. 105 (1992), on appeal (11th Cir., Nov. 3, 1992), we set forth the standards generally applied in reviewing an agency’s change of position. We recognized that “An agency has the flexibility to modify its regulations in the l