Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations regarding the determination of a partner's distributive shares of partnership items of income, gain, loss, deduction and credit when the partner's interests vary during a partnership tax year.

Varying Interest Rule

  The proposed regulations reflect a change made to
Code Sec. 706(c)(2)(A), which requires that the tax year of the partnership close with respect to a partner who dies. The proposed regulations do not change the current provisions that the sale or exchange of a partnership interest does not include any transfer of a partnership interest which occurs at death as a result of inheritance or any testamentary disposition or that the transfer of a partnership interest by gift does not close the partnership tax year with respect to the donor.

  Also, the proposed regulations provide for the application of the varying interests rule in all cases in which a partner's interest changes during the tax year, whether by reason of a disposition of the partner's entire interest in the partnership or a disposition of less than the partner's entire interest in the partnership.

Methods and Conventions

  If a partner's interest changes during the partnership's tax year, the partnership would determine the partner's distributive share using the interim closing method. However, the partnership may use the proration method. For each partnership tax year in which a partner's interest varies, the proposed regulations provide that the partnership must use the same method to take into account all changes occurring within that year.

 
Proposed Reg. §1.706-4(c) generally provides that a partnership would take into account any variation in the partners' interests in the partnership during the tax year by determining the distributive share of partnership items using an interim closing of the books method and by allocating those items among the partners in accordance with their respective partnership interests during that segment.

  By agreement among the partners, a partnership may use a proration method, rather than the interim closing method, to take into account any variation in a partner's interest in the partnership during the tax year.

  A partnership using the interim closing method may use either a calendar day convention or a semi-monthly convention; however, a partnership using the proration method may use only the calendar day convention.

Allocations

  The varying interests rule will not preclude changes in the allocations among contemporaneous partners resulting from amendments to the partnership agreement made no later than the due date of the partnership return for the tax year (excluding extensions). The proposed regulations further provide that this exception will not apply to changes in the interests of the partners as a result of distributions of capital from the partnership to a partner.

Safe Harbors

  Service partnerships may allocate items relating to the provision of services among the partners whose interests vary during the year using any reasonable method to account for such changes. Publicly traded partnerships (PTPs) may treat all transfers of their PTP units during a calendar month as occurring on the first day of the following month under a consistent method adopted by the partnership or may use the semi-monthly convention. Block transfers of PTP units will not qualify for this safe harbor.

Deemed Dispositions

  The proposed regulations provide that a deemed disposition of a partner's entire interest in the partnership would be treated as a disposition of the partner's entire interest for purposes of Code Sec. 706.

Tax Years

  The proposed regulations amend the minority interest rule to provide that regarded partners have a minority interest only if each regarded partner has less than a 10-percent interest in capital and profits, and the regarded partners collectively have less than a 20-percent interest in partnership capital and profits. This modification means that the interests of foreign partners will be taken into account in determining the tax year of the partnership only if the regarded partners have interests below the stated thresholds in partnership capital and profits.

Request for Comments

  Finally, comments are requested with respect to the proposed regulations, as well as any other outstanding issues arising under Code Sec. 706(d), specifically, with regard to issues that arise concerning allocable cash basis items and/or tiered partnerships.

  Written or electronic comments, and requests for a public hearing, must be received by July 13, 2009.

Proposed Regulations, NPRM REG-144689-04, 2009FED ¶49,418

Other References:

 
Code Sec. 706

  CCH Reference - 2009FED ¶25,160D

  CCH Reference - 2009FED ¶25,162D

  CCH Reference - 2009FED ¶25,163B

  CCH Reference - 2009FED ¶25,163G

  CCH Reference - 2009FED ¶25,163L

  CCH Reference - 2009FED ¶25,163Q

  Tax Research Consultant

  CCH Reference - TRC PART: 6,102