US Laws, Codes, Statutes & Cases

From the U.S. Code Online via GPO Access
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[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
  January 24, 2002 and December 19, 2002]
[CITE: 26USC706]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                 Subchapter K--Partners and Partnerships
 
                 PART I--DETERMINATION OF TAX LIABILITY
 
Sec. 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.

        (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 unless the Secretary by 
            regulations prescribes another period.

        (C) Business purpose

            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.

                     (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)--
            (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 having 
            (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 taxable year 
                (determined without regard to clause (i)), or
                    (II) the days during such representative period as 
                the Secretary may prescribe.

        (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.
---------------------------------------------------------------------------
    \1\ See References in Text note below.
---------------------------------------------------------------------------

(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--
                (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 proportion to their interests in the 
            partnership 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 appropriate 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 assigned under subparagraph (A)(i) to 
            the first day of the taxable year, or
                (ii) 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.

        (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.

      (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, 
Sec. 213(c)(1), title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 
1547, 1834; Pub. L. 98-369, div. A, title I, Sec. 72(a), (b), July 18, 
1984, 98 Stat. 589, 591; Pub. L. 99-514, title VIII, Sec. 806(a), title 
XVIII, Sec. 1805(a), Oct. 22, 1986, 100 Stat. 2362, 2810; Pub. L. 100-
647, title I, Sec. 1008(e)(1)-(3), Nov. 10, 1988, 102 Stat. 3439, 3440; 
Pub. L. 105-34, title V, Sec. 507(b)(2), title XII, Sec. 1246(a), (b), 
Aug. 5, 1997, 111 Stat. 857, 1030.)

                       References in Text

    Section 584(h), referred to in subsec. (b)(5), was redesignated 
section 584(i) by Pub. L. 104-188, title I, Sec. 1805(a), 110 Stat. 
1894.


                               Amendments

    1997--Subsec. (b)(5). Pub. L. 105-34, Sec. 507(b)(2), substituted 
``section 644'' for ``section 645''.
    Subsec. (c)(2). Pub. L. 105-34, Sec. 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, Sec. 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 exchanges his 
    entire interest in a partnership, and
        ``(ii) with respect to a partner whose interest is liquidated, 
    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, Sec. 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 
interest in partnership profits and capital of greater than 50 
percent,''.
    Subsec. (b)(1)(B)(iii). Pub. L. 100-647, Sec. 1008(e)(2), 
substituted ``unless the Secretary by regulations prescribes another 
period'' for ``or such other period as the Secretary may prescribe in 
regulations''.
    Subsec. (b)(4). Pub. L. 100-647, Sec. 1008(e)(1)(B), substituted 
``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 
paragraph (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 within 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 period.''
    Subsec. (b)(5). Pub. L. 100-647, Sec. 1008(e)(3), added par. (5).
    1986--Subsec. (b). Pub. L. 99-514, Sec. 806(a)(3), struck out 
``Adoption of'' before ``taxable year'' in heading.
    Subsec. (b)(1). Pub. L. 99-514, Sec. 806(a)(1), amended par. (1) 
generally. Prior to amendment, par. (1) read as follows: ``The taxable 
year of a partnership shall be determined 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, Sec. 806(a)(2), added par. (4).
    Subsec. (d)(2)(A)(i). Pub. L. 99-514, Sec. 1805(a)(1)(A), 
substituted ``such item'' for ``each such item''.
    Subsec. (d)(2)(B). Pub. L. 99-514, Sec. 1805(a)(1)(B), in 
introductory provisions, struck out ``which are described in paragraph 
(1) and'' after ``the following items''.
    Subsec. (d)(2)(C)(i). Pub. L. 99-514, Sec. 1805(a)(2), substituted 
``the first day of the taxable year'' for ``the first day of such 
taxable year''.
    1984--Subsec. (c)(2)(A). Pub. L. 98-369, Sec. 72(b)(1), struck out 
last sentence providing that such partner's distributive share of item 
described in section 702(a) for such year shall be determined, under 
regulations prescribed by the Secretary, for the period ending with such 
sale, exchange, or liquidation.
    Subsec. (c)(2)(B). Pub. L. 98-369, Sec. 72(b)(2), struck out ``, but 
such partner's distributive share of items described 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, Sec. 72(a), added subsec. (d).
    1976--Subsec. (b)(1), (2). Pub. L. 94-455, Sec. 1906(b)(13)(A), 
struck out ``or his delegate'' after ``Secretary''.
    Subsec. (c)(2). Pub. L. 94-455, Secs. 213(c)(1), 1906(b)(13)(A), 
substituted ``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)'' for ``or with respect to a partner whose 
interest is reduced'', in par. (B), and struck out ``or his delegate'' 
after ``Secretary'' in par. (A).


                    Effective Date of 1997 Amendment

    Amendment by section 507(b)(2) of Pub. L. 105-34 applicable to sales 
or exchanges after Aug. 5, 1997, see section 507(c)(2) of Pub. L. 105-
34, set out as a note under section 644 of this title.
    Section 1246(c) of Pub. L. 105-34 provided that: ``The amendments 
made by this section [amending this section] shall apply to partnership 
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 applicable to taxable 
years beginning after Dec. 31, 1986, with special provisions applicable 
to taxpayers who are required to change their accounting periods, see 
section 806(e) of Pub. L. 99-514, set out as a note under section 1378 
of this title.
    Amendment by section 1805(a) 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.


                    Effective Date of 1984 Amendment

    Section 72(c) of Pub. L. 98-369, as amended by Pub. L. 99-514, 
Sec. 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 [formerly 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 applicable in the 
case of partnership taxable years beginning 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 legislative 
history relating thereto to be construed as requiring the Secretary of 
the Treasury or his delegate to permit an automatic change of a taxable 
year, see section 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 [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 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.

                  Section Referred to in Other Sections

    This section is referred to in sections 444, 704, 761, 6110 of this 
title.