{"identifier":"/us/usc/t26/s706","title":26,"num":"\u00a7\u202f706.","heading":"Taxable years of partner and partnership","text":"\u00a7\u202f706.\nTaxable years of partner and partnership\n(a)\nYear in which partnership income is includible\nIn 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.\n(b)\nTaxable year\n(1)\nPartnership\u2019s taxable year\n(A)\nPartnership treated as taxpayer\nThe taxable year of a partnership shall be determined as though the partnership were a taxpayer.\n(B)\nTaxable year determined by reference to partners\nExcept as provided in subparagraph (C), a partnership shall not have a taxable year other than\u2014\n(i) the majority interest taxable year (as defined in paragraph (4)),\n(ii) if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or\n(iii) if there is no taxable year described in clause (i) or (ii), the calendar year unless the Secretary by regulations prescribes another period.\n(C)\nBusiness purpose\nA 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.\n(2)\nPartner\u2019s taxable year\nA 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.\n(3)\nPrincipal partner\nFor the purpose of this subsection, a principal partner is a partner having an interest of 5 percent or more in partnership profits or capital.\n(4)\nMajority interest taxable year; limitation on required changes\n(A)\nMajority interest taxable year defined\nFor purposes of paragraph (1)(B)(i)\u2014\n(i)\nIn general\nThe term \u201cmajority interest taxable year\u201d 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.\n(ii)\nTesting days\nThe testing days shall be\u2014\n(I) the 1st day of the partnership taxable year (determined without regard to clause (i)), or\n(II) the days during such representative period as the Secretary may prescribe.\n(B)\nFurther change not required for 3 years\nExcept 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.\n(5)\nApplication with other sections\nExcept 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(i), section 644, or section 1378(a) shall be taken into account.\n(c)\nClosing of partnership year\n(1)\nGeneral rule\nExcept 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\u2019s interest in the partnership, or the sale or exchange of a partner\u2019s interest in the partnership.\n(2)\nTreatment of dispositions\n(A)\nDisposition of entire interest\nThe 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).\n(B)\nDisposition of less than entire interest\nThe taxable year of a partnership shall not close (other than at the end of a partnership\u2019s 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\u2019s interest, gift, or otherwise).\n(d)\nDetermination of distributive share when partner\u2019s interest changes\n(1)\nIn general\nExcept as provided in paragraphs (2) and (3), if during any taxable year of the partnership there is a change in any partner\u2019s interest in the partnership, each partner\u2019s 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.\n(2)\nCertain cash basis items prorated over period to which attributable\n(A)\nIn general\nIf during any taxable year of the partnership there is a change in any partner\u2019s interest in the partnership, then (except to the extent provided in regulations) each partner\u2019s distributive share of any allocable cash basis item shall be determined\u2014\n(i) by assigning the appropriate portion of such item to each day in the period to which it is attributable, and\n(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.\n(B)\nAllocable cash basis item\nFor purposes of this paragraph, the term \u201callocable cash basis item\u201d means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting:\n(i) Interest.\n(ii) Taxes.\n(iii) Payments for services or for the use of property.\n(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.\n(C)\nItems attributable to periods not within taxable year\nIf any portion of any allocable cash basis item is attributable to\u2014\n(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\n(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.\n(D)\nTreatment of deductible items attributable to prior periods\nIf any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of any taxable year\u2014\n(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\n(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.\n(3)\nItems attributable to interest in lower tier partnership prorated over entire taxable year\nIf\u2014\n(A) during any taxable year of the partnership there is a change in any partner\u2019s interest in the partnership (hereinafter in this paragraph referred to as the \u201cupper tier partnership\u201d), and\n(B) such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the \u201clower tier partnership\u201d),\nthen (except to the extent provided in regulations) each partner\u2019s 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.\n(4)\nTaxable year determined without regard to subsection (c)(2)(A)\nFor purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A).","url":"https://projectusc.org/usc/t26/s706.html","content":[{"t":"sec","id":"/us/usc/t26/s706","children":[{"t":"num","text":"\u00a7\u202f706."},{"t":"heading","text":"Taxable years of partner and partnership"},{"t":"subsec","id":"/us/usc/t26/s706/a","children":[{"t":"num","text":"(a)"},{"t":"heading","text":"Year in which partnership income is includible"},{"t":"content","children":[{"t":"p","text":"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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s706/b","children":[{"t":"num","text":"(b)"},{"t":"heading","text":"Taxable year"},{"t":"para","id":"/us/usc/t26/s706/b/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"Partnership\u2019s taxable year"},{"t":"subpara","id":"/us/usc/t26/s706/b/1/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"Partnership treated as taxpayer"},{"t":"content","children":[{"t":"p","text":"The taxable year of a partnership shall be determined as though the partnership were a taxpayer.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/b/1/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Taxable year determined by reference to partners"},{"t":"chapeau","text":"Except as provided in subparagraph (C), a partnership shall not have a taxable year other than\u2014"},{"t":"clause","id":"/us/usc/t26/s706/b/1/B/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" the majority interest taxable year (as defined in paragraph (4)),","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/b/1/B/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/b/1/B/iii","children":[{"t":"num","text":"(iii)"},{"t":"content","text":" if there is no taxable year described in clause (i) or (ii), the calendar year unless the Secretary by regulations prescribes another period.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/b/1/C","children":[{"t":"num","text":"(C)"},{"t":"heading","text":"Business purpose"},{"t":"content","children":[{"t":"p","text":"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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/b/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Partner\u2019s taxable year"},{"t":"content","children":[{"t":"p","text":"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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/b/3","children":[{"t":"num","text":"(3)"},{"t":"heading","text":"Principal partner"},{"t":"content","children":[{"t":"p","text":"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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/b/4","children":[{"t":"num","text":"(4)"},{"t":"heading","text":"Majority interest taxable year; limitation on required changes"},{"t":"subpara","id":"/us/usc/t26/s706/b/4/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"Majority interest taxable year defined"},{"t":"chapeau","text":"For purposes of paragraph (1)(B)(i)\u2014"},{"t":"clause","id":"/us/usc/t26/s706/b/4/A/i","children":[{"t":"num","text":"(i)"},{"t":"heading","text":"In general"},{"t":"content","children":[{"t":"p","text":"The term \u201cmajority interest taxable year\u201d 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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/b/4/A/ii","children":[{"t":"num","text":"(ii)"},{"t":"heading","text":"Testing days"},{"t":"chapeau","text":"The testing days shall be\u2014"},{"t":"subclause","id":"/us/usc/t26/s706/b/4/A/ii/I","children":[{"t":"num","text":"(I)"},{"t":"content","text":" the 1st day of the partnership taxable year (determined without regard to clause (i)), or","tail":"\n"}],"tail":"\n"},{"t":"subclause","id":"/us/usc/t26/s706/b/4/A/ii/II","children":[{"t":"num","text":"(II)"},{"t":"content","text":" the days during such representative period as the Secretary may prescribe.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/b/4/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Further change not required for 3 years"},{"t":"content","children":[{"t":"p","text":"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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/b/5","children":[{"t":"num","text":"(5)"},{"t":"heading","text":"Application with other sections"},{"t":"content","children":[{"t":"p","text":"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(i), section 644, or section 1378(a) shall be taken into account.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s706/c","children":[{"t":"num","text":"(c)"},{"t":"heading","text":"Closing of partnership year"},{"t":"para","id":"/us/usc/t26/s706/c/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"General rule"},{"t":"content","children":[{"t":"p","text":"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\u2019s interest in the partnership, or the sale or exchange of a partner\u2019s interest in the partnership.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/c/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Treatment of dispositions"},{"t":"subpara","id":"/us/usc/t26/s706/c/2/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"Disposition of entire interest"},{"t":"content","children":[{"t":"p","text":"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).","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/c/2/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Disposition of less than entire interest"},{"t":"content","children":[{"t":"p","text":"The taxable year of a partnership shall not close (other than at the end of a partnership\u2019s 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\u2019s interest, gift, or otherwise).","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s706/d","children":[{"t":"num","text":"(d)"},{"t":"heading","text":"Determination of distributive share when partner\u2019s interest changes"},{"t":"para","id":"/us/usc/t26/s706/d/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"In general"},{"t":"content","children":[{"t":"p","text":"Except as provided in paragraphs (2) and (3), if during any taxable year of the partnership there is a change in any partner\u2019s interest in the partnership, each partner\u2019s 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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/d/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Certain cash basis items prorated over period to which attributable"},{"t":"subpara","id":"/us/usc/t26/s706/d/2/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"In general"},{"t":"chapeau","text":"If during any taxable year of the partnership there is a change in any partner\u2019s interest in the partnership, then (except to the extent provided in regulations) each partner\u2019s distributive share of any allocable cash basis item shall be determined\u2014"},{"t":"clause","id":"/us/usc/t26/s706/d/2/A/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" by assigning the appropriate portion of such item to each day in the period to which it is attributable, and","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/d/2/A/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" 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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/d/2/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Allocable cash basis item"},{"t":"chapeau","text":"For purposes of this paragraph, the term \u201callocable cash basis item\u201d means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting:"},{"t":"clause","id":"/us/usc/t26/s706/d/2/B/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" Interest.","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/d/2/B/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" Taxes.","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/d/2/B/iii","children":[{"t":"num","text":"(iii)"},{"t":"content","text":" Payments for services or for the use of property.","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/d/2/B/iv","children":[{"t":"num","text":"(iv)"},{"t":"content","text":" 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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/d/2/C","children":[{"t":"num","text":"(C)"},{"t":"heading","text":"Items attributable to periods not within taxable year"},{"t":"chapeau","text":"If any portion of any allocable cash basis item is attributable to\u2014"},{"t":"clause","id":"/us/usc/t26/s706/d/2/C/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" 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","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/d/2/C/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" 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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/d/2/D","children":[{"t":"num","text":"(D)"},{"t":"heading","text":"Treatment of deductible items attributable to prior periods"},{"t":"chapeau","text":"If any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of any taxable year\u2014"},{"t":"clause","id":"/us/usc/t26/s706/d/2/D/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" 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","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s706/d/2/D/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" 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.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/d/3","children":[{"t":"num","text":"(3)"},{"t":"heading","text":"Items attributable to interest in lower tier partnership prorated over entire taxable year"},{"t":"chapeau","text":"If\u2014"},{"t":"subpara","id":"/us/usc/t26/s706/d/3/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" during any taxable year of the partnership there is a change in any partner\u2019s interest in the partnership (hereinafter in this paragraph referred to as the \u201cupper tier partnership\u201d), and","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s706/d/3/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the \u201clower tier partnership\u201d),","tail":"\n"}],"tail":"\n\n"},{"t":"continuation","text":"then (except to the extent provided in regulations) each partner\u2019s 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.","tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s706/d/4","children":[{"t":"num","text":"(4)"},{"t":"heading","text":"Taxable year determined without regard to subsection (c)(2)(A)"},{"t":"content","children":[{"t":"p","text":"For purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A).","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"text","text":"\n"},{"t":"text","text":"\n"}]}]}