26 U.S.C. § 706 — Taxable years of partner and partnership

Page 1869 TITLE 26—INTERNAL REVENUE CODE § 706 Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title VII, § 722(e)(3)(A), July 18, 1984, 98 Stat. 974, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall take ef- fect on January 1, 1975.’’ EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 2115(c)(3) of Pub. L. 94–455 ef- fective on Jan. 1, 1975, and applicable to taxable years ending after Dec. 31, 1974, see section 2115(f) of Pub. L. 94–455, set out as a note under section 613A of this title. § 706. Taxable years of partner and partnership (a) Year in which partnership income is includ- ible 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 with- in 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. (B) Taxable year determined by reference to partners Except as provided in subparagraph (C), a partnership shall not have a taxable year other than— (i) the majority interest taxable year (as defined in paragraph (4)), (ii) if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or (iii) if there is no taxable year described in clause (i) or (ii), the calendar year un- less the Secretary by regulations pre- scribes another period. (C) Business purpose A partnership may have a taxable year not described in subparagraph (B) if it estab- lishes, 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. (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 prin- cipal 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)— (i) In general The term ‘‘majority interest taxable year’’ means the taxable year (if any) which, on each testing day, constituted the taxable year of 1 or more partners hav- ing (on such day) an aggregate interest in partnership profits and capital of more than 50 percent. (ii) Testing days The testing days shall be— (I) the 1st day of the partnership tax- able year (determined without regard to clause (i)), or (II) the days during such representa- tive period as the Secretary may pre- scribe. (B) Further change not required for 3 years Except as provided in regulations nec- essary to prevent the avoidance of this sec- tion, 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 pur- poses 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, sec- tion 441(i), section 584(i), section 644, or sec- tion 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 para- graph (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 part- ner, 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 partner- ship’s taxable year as determined under sub- section (b)(1)) with respect to a partner who sells or exchanges less than his entire inter- est in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquida- tion of a partner’s interest, gift, or other- wise). (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 Page 1870 TITLE 26—INTERNAL REVENUE CODE § 706 there is a change in any partner’s interest in the partnership, each partner’s distributive share of any item of income, gain, loss, deduc- tion, or credit of the partnership for such tax- able 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 part- nership during such taxable year. (2) Certain cash basis items prorated over pe- riod to which attributable (A) In general If during any taxable year of the partner- ship there is a change in any partner’s inter- est in the partnership, then (except to the extent provided in regulations) each part- ner’s distributive share of any allocable cash basis item shall be determined— (i) by assigning the appropriate portion of such item to each day in the period to which it is attributable, and (ii) by allocating the portion assigned to any such day among the partners in pro- portion to their interests in the partner- ship at the close of such day. (B) Allocable cash basis item For purposes of this paragraph, the term ‘‘allocable cash basis item’’ means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting: (i) Interest. (ii) Taxes. (iii) Payments for services or for the use of property. (iv) Any other item of a kind specified in regulations prescribed by the Secretary as being an item with respect to which the application of this paragraph is appro- priate to avoid significant misstatements of the income of the partners. (C) Items attributable to periods not within taxable year If any portion of any allocable cash basis item is attributable to— (i) any period before the beginning of the taxable year, such portion shall be as- signed under subparagraph (A)(i) to the first day of the taxable year, or (ii) any period after the close of the tax- able year, such portion shall be assigned under subparagraph (A)(i) to the last day of the taxable year. (D) Treatment of deductible items attrib- utable 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 partner- ship during the period to which such por- tion 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 cap- italized 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 partner- ship there is a change in any partner’s inter- est in the partnership (hereinafter in this paragraph referred to as the ‘‘upper tier partnership’’), and (B) such partnership is a partner in an- other partnership (hereinafter in this para- graph referred to as the ‘‘lower tier partner- ship’’), then (except to the extent provided in regula- tions) each partner’s distributive share of any item of the upper tier partnership attributable to the lower tier partnership shall be deter- mined 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 appro- priate days during which the upper tier part- nership is a partner in the lower tier partner- ship and by allocating the portion assigned to any such day among the partners in propor- tion to their interests in the upper tier part- nership at the close of such day. (4) Taxable year determined without regard to subsection (c)(2)(A) For purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A). (Aug. 16, 1954, ch. 736, 68A Stat. 242; Pub. L. 94–455, title II, § 213(c)(1), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1547, 1834; Pub. L. 98–369, div. A, title I, § 72(a), (b), July 18, 1984, 98 Stat. 589, 591; Pub. L. 99–514, title VIII, § 806(a), title XVIII, § 1805(a), Oct. 22, 1986, 100 Stat. 2362, 2810; Pub. L. 100–647, title I, § 1008(e)(1)–(3), Nov. 10, 1988, 102 Stat. 3439, 3440; Pub. L. 105–34, title V, § 507(b)(2), title XII, § 1246(a), (b), Aug. 5, 1997, 111 Stat. 857, 1030; Pub. L. 115–141, div. U, title IV, § 401(a)(139), Mar. 23, 2018, 132 Stat. 1191.) Editorial Notes AMENDMENTS 2018—Subsec. (b)(5). Pub. L. 115–141 substituted ‘‘sec- tion 584(i)’’ for ‘‘section 584(h)’’. 1997—Subsec. (b)(5). Pub. L. 105–34, § 507(b)(2), sub- stituted ‘‘section 644’’ for ‘‘section 645’’. Subsec. (c)(2). Pub. L. 105–34, § 1246(b), substituted ‘‘Treatment of dispositions’’ for ‘‘Partner who retires or sells interest in partnership’’ as heading. Subsec. (c)(2)(A). Pub. L. 105–34, § 1246(a), amended heading and text of subpar. (A) generally. Prior to amendment, text read as follows: ‘‘The taxable year of a partnership shall close— ‘‘(i) with respect to a partner who sells or ex- changes his entire interest in a partnership, and ‘‘(ii) with respect to a partner whose interest is liq- uidated, except that the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership’s taxable year.’’ 1988—Subsec. (b)(1)(B)(i). Pub. L. 100–647, § 1008(e)(1)(A), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: ‘‘the taxable year of 1 or more of its partners who have an aggregate inter- est in partnership profits and capital of greater than 50 percent,’’. Subsec. (b)(1)(B)(iii). Pub. L. 100–647, § 1008(e)(2), sub- stituted ‘‘unless the Secretary by regulations pre- Page 1871 TITLE 26—INTERNAL REVENUE CODE § 707 scribes another period’’ for ‘‘or such other period as the Secretary may prescribe in regulations’’. Subsec. (b)(4). Pub. L. 100–647, § 1008(e)(1)(B), sub- stituted ‘‘Majority interest taxable year; limitation on required changes’’ for ‘‘Application of majority interest rule’’ in heading and amended text generally. Prior to amendment, text read as follows: ‘‘Clause (i) of para- graph (1)(B) shall not apply to any taxable year of a partnership unless the period which constitutes the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent has been the same for— ‘‘(A) the 3-taxable year period of such partner or partners ending on or before the beginning of such taxable year of the partnership, or ‘‘(B) if the partnership has not been in existence during all of such 3-taxable year period, the taxable years of such partner or partners ending with or with- in the period of existence. This paragraph shall apply without regard to whether the same partners or interests are taken into account in determining the 50 percent interest during any pe- riod.’’ Subsec. (b)(5). Pub. L. 100–647, § 1008(e)(3), added par. (5). 1986—Subsec. (b). Pub. L. 99–514, § 806(a)(3), struck out ‘‘Adoption of’’ before ‘‘taxable year’’ in heading. Subsec. (b)(1). Pub. L. 99–514, § 806(a)(1), amended par. (1) generally. Prior to amendment, par. (1) read as fol- lows: ‘‘The taxable year of a partnership shall be deter- mined as though the partnership were a taxpayer. A partnership may not change to, or adopt, a taxable year other than that of all its principal partners unless it establishes, to the satisfaction of the Secretary, a business purpose therefor.’’ Subsec. (b)(4). Pub. L. 99–514, § 806(a)(2), added par. (4). Subsec. (d)(2)(A)(i). Pub. L. 99–514, § 1805(a)(1)(A), sub- stituted ‘‘such item’’ for ‘‘each such item’’. Subsec. (d)(2)(B). Pub. L. 99–514, § 1805(a)(1)(B), in in- troductory provisions, struck out ‘‘which are described in paragraph (1) and’’ after ‘‘the following items’’. Subsec. (d)(2)(C)(i). Pub. L. 99–514, § 1805(a)(2), sub- stituted ‘‘the first day of the taxable year’’ for ‘‘the first day of such taxable year’’. 1984—Subsec. (c)(2)(A). Pub. L. 98–369, § 72(b)(1), struck out last sentence providing that such partner’s dis- tributive share of item described in section 702(a) for such year shall be determined, under regulations pre- scribed by the Secretary, for the period ending with such sale, exchange, or liquidation. Subsec. (c)(2)(B). Pub. L. 98–369, § 72(b)(2), struck out ‘‘, but such partner’s distributive share of items de- scribed in section 702(a) shall be determined by taking into account his varying interests in the partnership during the taxable year’’ after ‘‘otherwise)’’. Subsec. (d). Pub. L. 98–369, § 72(a), added subsec. (d). 1976—Subsec. (b)(1), (2). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Subsec. (c)(2). Pub. L. 94–455, §§ 213(c)(1), 1906(b)(13)(A), substituted ‘‘or with respect to a partner whose inter- est is reduced (whether by entry of a new partner, par- tial liquidation of a partner’s interest, gift, or other- wise)’’ for ‘‘or with respect to a partner whose interest is reduced’’, in par. (B), and struck out ‘‘or his dele- gate’’ after ‘‘Secretary’’ in par. (A). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1997 AMENDMENT Amendment by section 507(b)(2) of Pub. L. 105–34 ap- plicable to sales or exchanges after Aug. 5, 1997, see sec- tion 507(c)(2) of Pub. L. 105–34, set out as a note under section 644 of this title. Pub. L. 105–34, title XII, § 1246(c), Aug. 5, 1997, 111 Stat. 1030, provided that: ‘‘The amendments made by this section [amending this section] shall apply to part- nership taxable years beginning after December 31, 1997.’’ EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 806(a) of Pub. L. 99–514 appli- cable to taxable years beginning after Dec. 31, 1986, with special provisions applicable to taxpayers who are required to change their accounting periods, see sec- tion 806(e) of Pub. L. 99–514, set out as a note under sec- tion 1378 of this title. Amendment by section 1805(a) of Pub. L. 99–514 effec- tive, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title I, § 72(c), July 18, 1984, 98 Stat. 591, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendments made by this section [amending this section] shall apply— ‘‘(1) in the case of items described in section 706(d)(2) of the Internal Revenue Code of 1986 [for- merly I.R.C. 1954] (as added by subsection (a)), to amounts attributable to periods after March 31, 1984, and ‘‘(2) in the case of items described in section 706(d)(3) of such Code (as added by subsection (a)), to amounts paid or accrued by the other partnership after March 31, 1984.’’ EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 213(c)(1) of Pub. L. 94–455 ap- plicable in the case of partnership taxable years begin- ning after Dec. 31, 1975, see section 213(f) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title. CONSTRUCTION OF SECTION 806 OF PUB. L. 99–514 Nothing in section 806 of Pub. L. 99–514 or in any leg- islative history relating thereto to be construed as re- quiring the Secretary of the Treasury or his delegate to permit an automatic change of a taxable year, see sec- tion 1008(e)(9) of Pub. L. 100–647, set out as a note under section 1378 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. § 707. Transactions between partner and partner- ship (a) Partner not acting in capacity as partner (1) In general If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this sec- tion, be considered as occurring between the partnership and one who is not a partner. (2) Treatment of payments to partners for property or services Under regulations prescribed by the Sec- retary— (A) Treatment of certain services and trans- fers of property If—