§ 706. Taxable years of partner and partnership
(a)
Year in which partnership income is includible
In computing the taxable income of a partner for a taxable year, the inclusions required by section
702 and section
707
(c) with respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner.
(b)
Taxable year
(1)
Partnership’s taxable year
(A)
Partnership treated as taxpayer
The taxable year of a partnership shall be determined as though the partnership were a taxpayer.
(2)
Partner’s taxable year
A partner may not change to a taxable year other than that of a partnership in which he is a principal partner unless he establishes, to the satisfaction of the Secretary, a business purpose therefor.
(3)
Principal partner
For the purpose of this subsection, a principal partner is a partner having an interest of 5 percent or more in partnership profits or capital.
(4)
Majority interest taxable year; limitation on required changes
(A)
Majority interest taxable year defined
For purposes of paragraph (1)(B)(i)—
(B)
Further change not required for 3 years
Except as provided in regulations necessary to prevent the avoidance of this section, if, by reason of paragraph (1)(B)(i), the taxable year of a partnership is changed, such partnership shall not be required to change to another taxable year for either of the 2 taxable years following the year of change.
(5)
Application with other sections
Except as provided in regulations, for purposes of determining the taxable year to which a partnership is required to change by reason of this subsection, changes in taxable years of other persons required by this subsection, section
441
(i), section
584(h),[1] section
644, or section
1378
(a) shall be taken into account.
(c)
Closing of partnership year
(1)
General rule
Except in the case of a termination of a partnership and except as provided in paragraph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner’s interest in the partnership, or the sale or exchange of a partner’s interest in the partnership.
(2)
Treatment of dispositions
(A)
Disposition of entire interest
The taxable year of a partnership shall close with respect to a partner whose entire interest in the partnership terminates (whether by reason of death, liquidation, or otherwise).
(B)
Disposition of less than entire interest
The taxable year of a partnership shall not close (other than at the end of a partnership’s taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift, or otherwise).
(d)
Determination of distributive share when partner’s interest changes
(1)
In general
Except as provided in paragraphs (2) and (3), if during any taxable year of the partnership there is a change in any partner’s interest in the partnership, each partner’s distributive share of any item of income, gain, loss, deduction, or credit of the partnership for such taxable year shall be determined by the use of any method prescribed by the Secretary by regulations which takes into account the varying interests of the partners in the partnership during such taxable year.
(2)
Certain cash basis items prorated over period to which attributable
(A)
In general
If during any taxable year of the partnership there is a change in any partner’s interest in the partnership, then (except to the extent provided in regulations) each partner’s distributive share of any allocable cash basis item shall be determined—
(B)
Allocable cash basis item
For purposes of this paragraph, the term “allocable cash basis item” means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting:
(C)
Items attributable to periods not within taxable year
If any portion of any allocable cash basis item is attributable to—
(D)
Treatment of deductible items attributable to prior periods
If any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of any taxable year—
(i)
such portion shall be allocated among persons who are partners in the partnership during the period to which such portion is attributable in accordance with their varying interests in the partnership during such period, and
(ii)
any amount allocated under clause (i) to a person who is not a partner in the partnership on such first day shall be capitalized by the partnership and treated in the manner provided for in section
755.
(3)
Items attributable to interest in lower tier partnership prorated over entire taxable year
If—
(A)
during any taxable year of the partnership there is a change in any partner’s interest in the partnership (hereinafter in this paragraph referred to as the “upper tier partnership”), and
(B)
such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the “lower tier partnership”),
then (except to the extent provided in regulations) each partner’s distributive share of any item of the upper tier partnership attributable to the lower tier partnership shall be determined by assigning the appropriate portion (determined by applying principles similar to the principles of subparagraphs (C) and (D) of paragraph (2)) of each such item to the appropriate days during which the upper tier partnership is a partner in the lower tier partnership and by allocating the portion assigned to any such day among the partners in proportion to their interests in the upper tier partnership at the close of such day.
[1] See References in Text note below.