26 U.S.C. § 707 — Transactions between partner and partner-

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— Page 1872 TITLE 26—INTERNAL REVENUE CODE § 707 (i) a partner performs services for a part- nership or transfers property to a partner- ship, (ii) there is a related direct or indirect allocation and distribution to such part- ner, and (iii) the performance of such services (or such transfer) and the allocation and dis- tribution, when viewed together, are prop- erly characterized as a transaction occur- ring between the partnership and a partner acting other than in his capacity as a member of the partnership, such allocation and distribution shall be treated as a transaction described in para- graph (1). (B) Treatment of certain property transfers If— (i) there is a direct or indirect transfer of money or other property by a partner to a partnership, (ii) there is a related direct or indirect transfer of money or other property by the partnership to such partner (or another partner), and (iii) the transfers described in clauses (i) and (ii), when viewed together, are prop- erly characterized as a sale or exchange of property, such transfers shall be treated either as a transaction described in paragraph (1) or as a transaction between 2 or more partners acting other than in their capacity as mem- bers of the partnership. (b) Certain sales or exchanges of property with respect to controlled partnerships (1) Losses disallowed No deduction shall be allowed in respect of losses from sales or exchanges of property (other than an interest in the partnership), di- rectly or indirectly, between— (A) a partnership and a person owning, di- rectly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership, or (B) two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests. In the case of a subsequent sale or exchange by a transferee described in this paragraph, sec- tion 267(d) shall be applicable as if the loss were disallowed under section 267(a)(1). For purposes of section 267(a)(2), partnerships de- scribed in subparagraph (B) of this paragraph shall be treated as persons specified in section 267(b). (2) Gains treated as ordinary income In the case of a sale or exchange, directly or indirectly, of property, which in the hands of the transferee, is property other than a capital asset as defined in section 1221— (A) between a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or profits in- terest, in such partnership, or (B) between two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests, any gain recognized shall be considered as or- dinary income. (3) Ownership of a capital or profits interest For purposes of paragraphs (1) and (2) of this subsection, the ownership of a capital or prof- its interest in a partnership shall be deter- mined in accordance with the rules for con- structive ownership of stock provided in sec- tion 267(c) other than paragraph (3) of such section. (c) Guaranteed payments To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, sub- ject to section 263, for purposes of section 162(a) (relating to trade or business expenses). (Aug. 16, 1954, ch. 736, 68A Stat. 243; Pub. L. 94–455, title II, § 213(b)(3), title XIX, § 1901(b)(3)(C), Oct. 4, 1976, 90 Stat. 1547, 1792; Pub. L. 98–369, div. A, title I, § 73(a), July 18, 1984, 98 Stat. 591; Pub. L. 99–514, title VI, § 642(a)(2), title XVIII, §§ 1805(b), 1812(c)(3)(A), (B), Oct. 22, 1986, 100 Stat. 2284, 2810, 2834.) Editorial Notes AMENDMENTS 1986—Subsec. (a)(2)(B)(iii). Pub. L. 99–514, § 1805(b), substituted ‘‘sale or exchange of property’’ for ‘‘sale of property’’. Subsec. (b)(1). Pub. L. 99–514, § 1812(c)(3)(B), inserted at end ‘‘For purposes of section 267(a)(2), partnerships described in subparagraph (B) of this paragraph shall be treated as persons specified in section 267(b).’’ Subsec. (b)(1)(A). Pub. L. 99–514, § 1812(c)(3)(A), sub- stituted ‘‘a person’’ for ‘‘a partner’’. Subsec. (b)(2)(A). Pub. L. 99–514, § 1812(c)(3)(A), sub- stituted ‘‘a person’’ for ‘‘a partner’’. Pub. L. 99–514, § 642(a)(2), substituted ‘‘50 percent’’ for ‘‘80 percent’’. Subsec. (b)(2)(B). Pub. L. 99–514, § 642(a)(2), substituted ‘‘50 percent’’ for ‘‘80 percent’’. 1984—Subsec. (a). Pub. L. 98–369 designated existing provisions as par. (1) and added par. (2). 1976—Subsec. (b)(2). Pub. L. 94–455, § 1901(b)(3)(C), sub- stituted ‘‘as ordinary income’’ for ‘‘as gain from the sale or exchange of property other than a capital asset’’. Subsec. (c). Pub. L. 94–455, § 213(b)(3), substituted ‘‘and, subject to section 263, for purposes of section 162(a)’’ for ‘‘and section 162(a)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 642(a)(2) of Pub. L. 99–514 ap- plicable to sales after Oct. 22, 1986, in taxable years ending after such date, but not applicable to sales made after Aug. 14, 1986, which are made pursuant to a bind- ing contract in effect on Aug. 14, 1986, and at all times thereafter, see section 642(c) of Pub. L. 99–514, set out as a note under section 1239 of this title. Amendment by sections 1805(b) and 1812(c)(3)(B) of Pub. L. 99–514 effective, 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. Page 1873 TITLE 26—INTERNAL REVENUE CODE § 709 Pub. L. 99–514, title XVIII, § 1812(c)(3)(A), Oct. 22, 1986, 100 Stat. 2834, provided that the amendment made by that section is effective with respect to sales or ex- changes after Sept. 27, 1985. EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title I, § 73(b), July 18, 1984, 98 Stat. 592, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(1) IN GENERAL.—The amendment made by sub- section (a) [amending this section] shall apply— ‘‘(A) in the case of arrangements described in sec- tion 707(a)(2)(A) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by subsection (a)), to services performed or property transferred after February 29, 1984, and ‘‘(B) in the case of transfers described in section 707(a)(2)(B) of such Code (as so amended), to property transferred after March 31, 1984. ‘‘(2) BINDING CONTRACT EXCEPTION.—The amendment made by subsection (a) shall not apply to a transfer of property described in section 707(a)(2)(B)(i) if such transfer is pursuant to a binding contract in effect on March 31, 1984, and at all times thereafter before the transfer. ‘‘(3) EXCEPTION FOR CERTAIN TRANSFERS.—The amend- ment made by subsection (a) shall not apply to a trans- fer of property described in section 707(a)(2)(B)(i) that is made before December 31, 1984, if— ‘‘(A) such transfer was proposed in a written private offering memorandum circulated before February 28, 1984; ‘‘(B) the out-of-pocket costs incurred with respect to such offering exceeded $250,000 as of February 28, 1984; ‘‘(C) the encumbrances placed on such property in anticipation of such transfer all constitute obliga- tions for which neither the partnership nor any part- ner is liable; and ‘‘(D) the transferor of such property is the sole gen- eral partner of the partnership.’’ EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 213(b)(3) of Pub. L. 94–455 ap- plicable in the case of partnership taxable years begin- ning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title. Amendment by section 1901(b)(3)(C) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 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. § 708. Continuation of partnership (a) General rule For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated. (b) Termination (1) General rule For purposes of subsection (a), a partnership shall be considered as terminated only if no part of any business, financial operation, or venture of the partnership continues to be car- ried on by any of its partners in a partnership. (2) Special rules (A) Merger or consolidation In the case of the merger or consolidation of two or more partnerships, the resulting partnership shall, for purposes of this sec- tion, be considered the continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the re- sulting partnership. (B) Division of a partnership In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting part- nership the members of which had an inter- est of 50 percent or less in the capital and profits of the prior partnership) shall, for purposes of this section, be considered a con- tinuation of the prior partnership. (Aug. 16, 1954, ch. 736, 68A Stat. 244; Pub. L. 115–97, title I, § 13504(a), Dec. 22, 2017, 131 Stat. 2141.) Editorial Notes AMENDMENTS 2017—Subsec. (b)(1). Pub. L. 115–97 struck out dash after ‘‘only if’’ and subpar. (A) designation before ‘‘no part’’ and struck out subpar. (B) which read as follows: ‘‘within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partner- ship capital and profits’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to partner- ship taxable years beginning after Dec. 31, 2017, see sec- tion 13504(c) of Pub. L. 115–97, set out as a note under section 168 of this title. § 709. Treatment of organization and syndication fees (a) General rule Except as provided in subsection (b), no deduc- tion shall be allowed under this chapter to the partnership or to any partner for any amounts paid or incurred to organize a partnership or to promote the sale of (or to sell) an interest in such partnership. (b) Deduction of organization fees (1) Allowance of deduction If a partnership elects the application of this subsection (in accordance with regulations prescribed by the Secretary) with respect to any organizational expenses— (A) the partnership shall be allowed a de- duction for the taxable year in which the partnership begins business in an amount equal to the lesser of— (i) the amount of organizational ex- penses with respect to the partnership, or (ii) $5,000, reduced (but not below zero) by the amount by which such organiza- tional expenses exceed $50,000, and (B) the remainder of such organizational expenses shall be allowed as a deduction rat- ably over the 180-month period beginning