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.
Taxable year
Partnership’s taxable year
Partnership treated as taxpayer
The taxable year of a partnership shall be determined as though the partnership were a taxpayer.
Taxable year determined by reference to partners
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.
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.
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.
Majority interest taxable year; limitation on required changes
Majority interest taxable year defined
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.
Testing days
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.
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(i), section 644, or section 1378(a) shall be taken into account.
Closing of partnership year
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.
Treatment of dispositions
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).
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).
Determination of distributive share when partner’s interest changes
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.
Certain cash basis items prorated over period to which attributable
In general
Allocable cash basis item
Items attributable to periods not within taxable year
Treatment of deductible items attributable to prior periods
Items attributable to interest in lower tier partnership prorated over entire taxable year
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. 73668A Stat. 242Pub. L. 94–455, title II, § 213(c)(1)90 Stat. 1547Pub. L. 98–369, div. A, title I, § 72(a)98 Stat. 589Pub. L. 99–514, title VIII, § 806(a)100 Stat. 2362Pub. L. 100–647, title I, § 1008(e)(1)102 Stat. 3439Pub. L. 105–34, title V, § 507(b)(2)111 Stat. 857Pub. L. 115–141, div. U, title IV, § 401(a)(139)132 Stat. 1191(, ; , title XIX, § 1906(b)(13)(A), , , 1834; , (b), , , 591; , title XVIII, § 1805(a), , , 2810; –(3), , , 3440; , title XII, § 1246(a), (b), , , 1030; , , .)
Editorial Notes
Amendments
Pub. L. 115–1412018—Subsec. (b)(5). substituted “section 584(i)” for “section 584(h)”.
Pub. L. 105–34, § 507(b)(2)1997—Subsec. (b)(5). , substituted “section 644” for “section 645”.
Pub. L. 105–34, § 1246(b)Subsec. (c)(2). , substituted “Treatment of dispositions” for “Partner who retires or sells interest in partnership” as heading.
Pub. L. 105–34, § 1246(a)Subsec. (c)(2)(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.”
Pub. L. 100–647, § 1008(e)(1)(A)1988—Subsec. (b)(1)(B)(i). , 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,”.
Pub. L. 100–647, § 1008(e)(2)Subsec. (b)(1)(B)(iii). , substituted “unless the Secretary by regulations prescribes another period” for “or such other period as the Secretary may prescribe in regulations”.
Pub. L. 100–647, § 1008(e)(1)(B)Subsec. (b)(4). , 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.”
Pub. L. 100–647, § 1008(e)(3)Subsec. (b)(5). , added par. (5).
Pub. L. 99–514, § 806(a)(3)1986—Subsec. (b). , struck out “Adoption of” before “taxable year” in heading.
Pub. L. 99–514, § 806(a)(1)Subsec. (b)(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.”
Pub. L. 99–514, § 806(a)(2)Subsec. (b)(4). , added par. (4).
Pub. L. 99–514, § 1805(a)(1)(A)Subsec. (d)(2)(A)(i). , substituted “such item” for “each such item”.
Pub. L. 99–514, § 1805(a)(1)(B)Subsec. (d)(2)(B). , in introductory provisions, struck out “which are described in paragraph (1) and” after “the following items”.
Pub. L. 99–514, § 1805(a)(2)Subsec. (d)(2)(C)(i). , substituted “the first day of the taxable year” for “the first day of such taxable year”.
Pub. L. 98–369, § 72(b)(1)1984—Subsec. (c)(2)(A). , 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.
Pub. L. 98–369, § 72(b)(2)Subsec. (c)(2)(B). , 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)”.
Pub. L. 98–369, § 72(a)Subsec. (d). , added subsec. (d).
Pub. L. 94–455, § 1906(b)(13)(A)1976—Subsec. (b)(1), (2). , struck out “or his delegate” after “Secretary”.
Pub. L. 94–455Subsec. (c)(2). , §§ 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).
Statutory Notes and Related Subsidiaries
Effective Date of 1997 Amendment
section 507(b)(2) of Pub. L. 105–34section 507(c)(2) of Pub. L. 105–34section 644 of this titleAmendment by applicable to sales or exchanges after , see , set out as a note under .
Pub. L. 105–34, title XII, § 1246(c)111 Stat. 1030
Effective Date of 1988 Amendment
Pub. L. 100–647Pub. L. 99–514section 1019(a) of Pub. L. 100–647section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .
Effective Date of 1986 Amendment
section 806(a) of Pub. L. 99–514section 806(e) of Pub. L. 99–514section 1378 of this titleAmendment by applicable to taxable years beginning after , with special provisions applicable to taxpayers who are required to change their accounting periods, see , set out as a note under .
section 1805(a) of Pub. L. 99–514Pub. L. 98–369, div. Asection 1881 of Pub. L. 99–514section 48 of this titleAmendment by effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, , to which such amendment relates, see , set out as a note under .
Effective Date of 1984 Amendment
Pub. L. 98–369, div. A, title I, § 72(c)98 Stat. 591Pub. L. 99–514, § 2100 Stat. 2095
Effective Date of 1976 Amendment
section 213(c)(1) of Pub. L. 94–455section 213(f) of Pub. L. 94–455section 709 of this titleAmendment by applicable in the case of partnership taxable years beginning after , see , set out as an Effective Date note under .
Section 806 of Pub. L. 99–514Construction of
section 806 of Pub. L. 99–514section 1008(e)(9) of Pub. L. 100–647section 1378 of this titleNothing in 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 , set out as a note under .
Plan Amendments Not Required Until January 1, 1989
Pub. L. 99–514section 1140 of Pub. L. 99–514section 401 of this titleFor 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 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 , see , as amended, set out as a note under .