Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 17119 

unescorted access to the utilization 

facility as any individual who has the 

ability to access licensee-designated 

‘‘areas of significance’’ without 

continuous direct supervision or 

monitoring by an authorized individual. 

The NRC Seeks Stakeholders’ Views on 

the Following Questions 

4. Is the proposed definition of 

individuals with unescorted access 

reasonable and sufficient? If not, why? 

For example, should persons granted 

unescorted access to ‘‘areas of 

significance’’ be permitted access to the 

facility at times when no supervision or 

oversight is present (e.g., evenings or 

weekends)? Should the NRC require 

access controls such as maintaining 

records of the time and duration of 

persons accessing an ‘‘area of 

significance’’ without escorts? 

Implementation of the Orders 

To develop the proposed 

requirements for fingerprint-based 

criminal history record checks, the NRC 

would like feedback from stakeholders 

on their experiences in implementing 

the orders that were issued in April 

2007, such as: 

5. What has worked well, what has 

not, and why? 

6. What requirements were found to 

be the most burdensome? Are there less 

burdensome alternatives that would 

accomplish the same level of 

protection? 

7. Are there requirements in the 

orders that appear to contribute little to 

the security of the facility? Could the 

same resources be used more effectively 

in other ways? 

8. Are there other enhancements that 

could be made? 

9. Has the implementation of the 

orders identified any new issues that 

should be addressed through 

rulemaking? 

Others Items of Interest to the NRC 

Because RTRs all have unique sitespecific configurations, the NRC is 

seeking stakeholders’ views on the most 

effective way to formulate regulations 

that continue to provide adequate safety 

to the public without imposing an 

unnecessary burden on any individual 

licensee. During the development and 

implementation of the orders, the NRC 

identified several issues for which it 

planned to provide clarification in the 

rulemaking process. One issue was 

obtaining the fingerprints of a person for 

whom an FBI fingerprint-based criminal 

history record check is unlikely to yield 

reliable results. The FBI criminal history 

record check does not provide 

information on individuals who are 

under eighteen years of age, and will 

only obtain information on an 

individual’s criminal history record 

within the United States. Thus, for 

foreign nationals who have never lived 

in the United States, students who are 

18 years old or younger, or even U.S. 

citizens who have lived abroad for 

much or all of their adult lives, the 

criminal history record check is 

unlikely to provide any useful 

information regarding a person’s 

trustworthiness and reliability. 

However, as noted earlier, Section 149 

of the AEA requires the obtaining of 

fingerprints for all persons granted 

unescorted access, except if these 

persons are relieved by rule. 

In Light of This, the NRC Seeks 

Stakeholders’ Views on the Following 

Questions 

10. Regarding alternatives to 

fingerprinting foreign nationals and/or 

minors regarding a trustworthiness and 

reliability determination: (a) Do foreign 

nationals and/or minors require 

unescorted access to ‘‘areas of 

significance’’? (b) are there alternative 

methods to obtain information upon 

which a licensee could base a 

trustworthiness and reliability 

determination for these individuals? 

11. Is there any additional 

information that the NRC should 

consider in preparing the proposed 

rule? 

Proposed rule language was not 

included in this ANPR. During the 

public comment period for this ANPR, 

the NRC plans to conduct a public 

workshop to discuss this rulemaking 

with stakeholders. Thus, RTR licensees 

and other interested stakeholders will 

have several opportunities to provide 

their comments for the NRC’s 

consideration. 

Dated at Rockville, Maryland, this 8th day 

of April 2009. 

For the Nuclear Regulatory Commission. 

J. Samuel Walker, 

Acting Secretary of the Commission. 

[FR Doc. E9–8461 Filed 4–13–09; 8:45 am] 

BILLING CODE 7590–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–144689–04] 

RIN 1545–BD71 

Determination of Distributive Share 

When a Partner’s Interest Changes 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations regarding the 

determination of partners’ distributive 

shares of partnership items of income, 

gain, loss, deduction and credit when a 

partner’s interests varies during a 

partnership taxable year. Also, the 

proposed regulations modify the 

existing regulations regarding the 

required taxable year of a partnership. 

These proposed regulations affect 

partnerships and their partners. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by July 13, 2009. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–144689–04), Room 

5203, Internal Revenue Service, PO Box 

7604, Ben Franklin Station, Washington 

DC 20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

to CC:PA:LPD:PR (REG–144689–04), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC; or sent 

electronically via the Federal 

eRulemaking Portal at 

www.regulations.gov (IRS REG–144689– 

04). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Laura Fields or Jonathan Cornwell at 

(202) 622–3050, concerning submissions 

of comments and the hearing, Richard 

Hurst at (202) 622–7180 (not toll-free 

numbers) or 

Richard.A.Hurst@irscounsel.treas.gov. 

SUPPLEMENTARY INFORMATION: 

Background 

These proposed regulations contain 

amendments to the Income Tax 

Regulations (26 CFR part 1) under 

section 706 of the Internal Revenue 

Code (Code). These amendments are 

proposed to conform the Income Tax 

Regulations for certain of the provisions 

of section 1246 of the Taxpayer Relief 

Act of 1997, Public Law 105–34 (111 

Stat. 788 (1997)) (the 1997 Act) and 

section 72 of the Deficit Reduction Act 

17120 Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 

of 1984, Public Law 98–369 (98 Stat. 

494 (1984)) (the 1984 Act). 

Also, under section 706(d)(1), the 

Treasury Secretary may provide in 

regulations various methods for 

determining a partner’s distributive 

share of partnership items of income, 

gain, loss, deduction and credit that 

takes into account the varying interests 

of the partners for any taxable year of 

the partnership in which there is a 

change in the interest of a partner. 

Pursuant to that grant of regulatory 

authority, the proposed regulations 

provide methods for determining a 

partner’s distributive share of 

partnership items to take into account 

the varying interests of the partners in 

any year in which there is a change in 

a partner’s interest in the partnership. 

Also, the proposed regulations provide 

that a deemed disposition of a partner’s 

entire interest under other sections of 

the regulations is a deemed disposition 

of a partner’s entire interest for the 

purpose of section 706(d). 

Finally, the proposed regulations 

amend the rules applicable to the 

determination of the taxable year of a 

partnership in those instances in which 

partnership interests are held by 

‘‘disregarded foreign partners’’ (as that 

term is defined in § 1.706–1(b)(6)(i)). 

1. Varying Interest Rule 

a. In General 

Section 702(a) of the Code provides 

that the partner in determining the 

partner’s income tax shall take into 

account separately the partner’s 

distributive share of partnership items 

of income, gain, loss, deduction, or 

credit. 

Section 706(a) provides that, in 

computing the taxable income of a 

partner for a taxable year, the inclusions 

required by sections 702 and 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. 

Section 706(c)(1) provides that, except 

in the case of a termination of a 

partnership and except as provided in 

section 706(c)(2), 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. Under 

section 706(c)(2)(A), the taxable year of 

a partnership shall close with respect to 

a partner whose entire interest 

terminates (whether by reason of death, 

liquidation, or otherwise). Under 

section 706(c)(2)(B), the taxable year of 

a partnership shall not close (other than 

at the end of a partnership’s taxable year 

as determined under section 706(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). 

Section 706(d)(1) provides that, 

except as required by sections 706(d)(2) 

and (d)(3), if there is a change in a 

partner’s interest in the partnership 

during the partnership’s taxable year, 

each partner’s distributive share of any 

partnership item of income, gain, loss, 

deduction or credit for such taxable year 

is 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 

(the varying interests rule). Section 

706(d)(1) was added by the 1984 Act, in 

part, to clarify that the varying interests 

rule applies to the disposition of a 

partner’s entire interest in the 

partnership as well as the disposition of 

less than a partner’s entire interest, and 

to authorize the Secretary to prescribe 

methods for determining a partner’s 

distributive share of partnership items 

when there is a change in the partners’ 

interests during the taxable year of the 

partnership. 

The existing regulations under section 

706 have not been revised to reflect the 

changes made to that section by the 

1984 Act. Section 1.706–1(c)(2)(ii) 

provides that in the case of a disposition 

of a partner’s entire interest in a 

partnership the partner’s distributive 

share of partnership items for the 

taxable year of the partnership in which 

the disposition occurs may be 

determined by a closing of the 

partnership’s books as of the date of 

disposition (interim closing method). 

Alternatively, the partners by agreement 

may determine the departing partner’s 

distributive share by taking his pro rata 

part of the amount of partnership items 

that such partner would have included 

in his taxable income had he remained 

a partner until the end of the 

partnership taxable year (proration 

method). Section 1.706–1(c)(2)(ii). The 

proration may be based on the portion 

of the taxable year that has elapsed prior 

to the disposition or may be determined 

under any other method that is 

reasonable. Moreover, the transferee of 

such departing partner’s interest shall 

include in his taxable income as his 

distributive share of partnership items 

with respect to the acquired interest the 

pro rata part (determined by the method 

used by the transferor partner) of the 

amount of such items that would have 

been included had he been a partner 

from the beginning of the partnership’s 

taxable year. The existing regulations, 

however, do not specifically provide for 

the use of these methods when there has 

been a disposition of less a partner’s 

entire interest in the partnership. 

In Rev. Rul. 77–310 (1977–2 CB 217) 

(see § 601.601(d)(2)(ii)(b)), the IRS 

provided an example of an acceptable 

method for allocating a partnership loss 

for the partnership’s taxable year among 

the partners where their profit and loss 

sharing percentages were changed 

substantially one month before the end 

of the taxable year as a result of capital 

contributions of several existing 

partners. The ruling provided that an 

acceptable method, under the facts of 

the ruling, was to allocate the 

partnership’s loss among the partners 

based on their differing profit and loss 

sharing percentages and the periods 

during the year each partner’s differing 

percentage interests existed. See also 

Rev. Rul. 77–311 (1977–2 CB 218), 

(applying the same method to a 

partnership’s distributive share of a loss 

from a lower-tier partnership). See 

§ 601.601(d)(2)(ii)(b). 

Finally, the existing regulations under 

section 706 have not been revised to 

reflect the change to that section by the 

1997 Act requiring that the taxable year 

of the partnership shall close with 

respect to a partner whose entire 

interest in the partnership terminates by 

reason of death. In that regard, § 1.706– 

1(c)(3) provides that, when a partner 

dies, the partnership taxable year shall 

not close with respect to such partner 

prior to the end of the partnership’s 

taxable year. 

b. Change in Partnership Allocations 

Among Contemporaneous Partners 

Section 761(c) provides that a 

partnership agreement includes any 

modifications of the partnership 

agreement made prior to, or at, the time 

prescribed by law for the filing of the 

partnership return for the taxable year 

(not including extensions). In Lipke v. 

Commissioner, 81 T.C. 689 (1983), the 

Tax Court held that section 706(c)(2)(B) 

(as in effect prior to the 1984 Act) 

prohibited retroactive allocations of 

partnership losses where the allocations 

resulted from additional capital 

contributions made by both new and 

existing partners. However, the Tax 

Court held that the prohibition on 

retroactive allocations under section 

706(c)(2)(B) did not apply to changes in 

the allocations among partners who 

were members of the partnership for the 

entire year (contemporaneous partners) 

Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 17121 

if the changes in the allocations did not 

result from capital contributions. Lipke 

v. Commissioner, supra, at 696 (1983). 

As previously discussed, the 1984 Act 

amended section 706, in part, to clarify 

that the varying interests rule applies to 

any change in a partner’s interest, 

whether in connection with a complete 

disposition of the partner’s interest or 

otherwise. To that end, Congress in the 

1984 Act replaced the varying interests 

rule in section 706(c)(2)(B) with the rule 

that now appears in Section 706(d)(1). 

The legislative history pertaining to this 

amendment reflects Congress’s intention 

that the new rule of section 706(d)(1) be 

comparable to the pre-1984 law without 

overruling the longstanding rule of 

section 761(c). 

The committee wishes to make clear that 

the varying interests rule is not intended to 

override the longstanding rule of section 

761(c) with respect to interest shifts among 

partners who are members of the partnership 

for the entire taxable year, provided such 

shifts are not, in substance, attributable to the 

influx of new capital from such partners. See 

Lipke v. Commissioner, 81 T.C. 689 (1983). 

S. Prt. 98–169, Vol. I, 98th Cong., 2d 

Sess. 218–19 (1984); see also H. Rep. 

No. 432, Pt. 2, 98th Cong., 2d Sess. 

1212–13 (1984) (containing similar 

language). 

c. Conventions 

Section 1.706–1(c)(2)(ii) provides that, 

in determining the distributive share of 

partnership items under section 702(a) 

with respect to a partner whose entire 

interest in the partnership terminates, a 

partnership may use the interim closing 

method or alternatively, the partners 

may by agreement choose to use the 

proration method. Under the proration 

method, the partnership’s income and 

losses may be prorated based on the 

portion of the taxable year that has 

elapsed prior to the date upon which 

the partners’ interests varied, or ‘‘under 

any other method that is reasonable.’’ 

These other reasonable methods have 

become known as conventions. 

Staff of J. Comm. On Taxation, 98th 

Cong., General Explanation of the 

Revenue Provisions of the Deficit 

Reduction Act of 1984, 222 (Comm. 

Print 1984), provides, 

[I]n any case in which there is a 

disposition of less than an entire interest in 

the partnership by a partner (including the 

entry of a new partner), the partners may 

elect to determine the varying interests of the 

partners by using one or more conventions 

that treat any change in any partner’s interest 

in the partnership during a particular month 

as occurring on one or more specified days 

in the month. The actual method for applying 

a convention is to be provided by Treasury 

regulations. The regulations may deny the 

use of any convention when the occurrence 

of significant, discrete events (e.g., a large, 

unusual gain or loss) would mean that use of 

the convention could result in significant tax 

avoidance. 

* * * Congress intended that the regulations 

providing for these conventions will be 

effective on a prospective basis only. Until 

these regulations are proposed, and for a 

reasonable transition period thereafter, it is 

expected that Treasury will permit any 

reasonable convention to be used. This may 

include a method under which any partner 

entering during a month is treated as entering 

on the first day of the month, a method under 

which partners entering during the first 15 

days of a month are treated as entering on the 

first day of the month and partners entering 

after the 15th of the month are treated as 

entering on the 16th day of the month, or any 

other method that is not abusive under the 

relevant facts and circumstances. As a 

general rule, use of a convention is not 

permitted when the occurrence of significant, 

discrete events (e.g., a large, unusual gain or 

loss) would result in significant tax 

avoidance if the convention is used. 

On December 13, 1984, the IRS issued 

a news release (IR–84–129) (http:// 

www.irs.gov/puv/irs-drop/ir-84–129.pdf) 

announcing that partnerships using the 

interim closing method were permitted 

to use a semi-monthly convention. 

Under a semi-monthly convention, 

partners entering during the first 15 

days of the month are treated as entering 

on the first day of the month, and 

partners entering after the 15th day of 

the month (but before the end of the 

month) are treated as entering on the 

16th day of the month (except to the 

extent that section 706(c)(2)(A) applied). 

The news release provided that, until 

regulations were issued, partnerships 

that use the proration method were 

required to use a daily convention. 

d. Deemed Dispositions 

Section 1.1502–76(b)(2)(i) provides 

that the federal income tax returns for 

the years that end and begin with a 

corporation becoming (or ceasing to be) 

a member (as defined in § 1.1502–1(b)) 

of a consolidated group (as defined in 

§ 1.1502–1(h)) are separate tax years for 

all Federal income tax purposes. The 

periods ending and beginning with the 

corporation’s change in status are 

different tax years, and the corporation’s 

items of income, gain, loss, deduction 

and credit must be allocated between 

such separate tax years. Under § 1.1502– 

76(b)(2)(vi), if the corporation is a 

partner in a partnership, the corporation 

is treated for purposes of determining 

the year to which the partnership’s 

items are allocated as selling the 

corporation’s entire interest in the 

partnership immediately before the 

corporation’s change in status. 

Section 1.1362–3(a) provides that, if 

an S election (as defined in section 

1362(a)) terminates under section 

1362(d) on a date other than the first 

day of the taxable year of the S 

corporation (as defined in section 

1361(a)), the portion of the year ending 

as of the close of the day prior to the 

termination is treated as a short taxable 

year for which the corporation is an S 

corporation (S short year) and the 

portion of the S termination year 

beginning on the day of the termination 

is effective is treated as a short taxable 

year for which the corporation is a C 

corporation (as defined in section 

1362(a)(2)) (C short year). Under 

§ 1.1362–3(a), the corporation’s items of 

income, gain, loss, deduction and credit 

must be allocated between the S short 

year and C short year using the pro rata 

allocation approach stated in section 

1362(e)(2) unless an election is made to 

allocate the items using its normal 

accounting method or in certain other 

instances described in sections 

1362(e)(3), 1362(e)(6)(C) or 

1362(e)(6)(D). Under § 1.1362–3(c)(1), 

for purposes of section 706(c) only, the 

termination of the S election of a 

corporation that is a partner in a 

partnership is treated as a sale or 

exchange of the corporation’s entire 

interest in the partnership on the last 

day of the S short year if (i) the pro rata 

allocation rules do not apply and (ii) the 

taxable year of the partnership ends 

with or within the C short year. 

Under section 1377(a)(2), if a 

shareholder terminates the 

shareholder’s entire interest in an S 

corporation and all affected 

shareholders (as defined in section 

1377(a)(2)(B)) and the corporation agree, 

the S corporation may elect under 

section 1377(a)(2) (terminating election) 

to apply the pro rata allocation method 

(as defined in section 1377(a)(1)) as if 

the S corporation’s taxable year 

consisted of two separate taxable years, 

the first of which ends at the close of the 

day on which the shareholder’s entire 

interest in the S corporation is 

terminated. (See § 1.1377–1(b)(1) for 

certain exceptions to the preceding 

rule.) Under § 1.1377(b)(3)(iv), a 

terminating election by an S corporation 

that is a partner in a partnership is 

treated as a sale or exchange of the 

corporation’s entire interest in the 

partnership for purposes of section 

706(c) if the taxable year of the 

partnership ends after the shareholder’s 

interest is terminated and within the 

taxable year of the S corporation. 

2. Taxable Years of Partnerships 

A partnership must determine its 

taxable year under section 706(b)(1)(B) 

17122 Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 

unless the partnership establishes to the 

satisfaction of the Secretary a business 

purpose for a different year. In general, 

the required taxable year of a 

partnership is determined by reference 

to the taxable year of its partners. If 

partners owning a majority interest in a 

partnership have the same taxable year, 

the partnership is required to have the 

same taxable year as the majority 

interest owners (majority interest 

taxable year). If a taxable year for the 

partnership cannot be determined under 

the majority interest taxable year rule, 

the taxable year of the partnership shall 

be the taxable year of all of its principal 

partners (principal partner taxable year). 

Finally, if there is not taxable year 

described under the majority interest 

taxable year rule or principal partner 

taxable year rule, then the partnership is 

required under the regulations to have 

the taxable year that results in the least 

aggregate deferral of income. Section 

1.706–1(b)(2)(C). 

Under § 1.706–1(b)(6)(i), the interest 

held by a disregarded foreign partner is 

not taken into account in determining 

the taxable year of the partnership 

under the foregoing rules. A foreign 

partner is a disregarded foreign partner 

unless such partner is allocated gross 

income that was effectively connected 

with the conduct of a trade or business 

of the partnership within the U.S. and 

taxation of such income is not otherwise 

precluded under any U.S. income tax 

treaty. The interest of a disregarded 

foreign partner is taken into account in 

determining the taxable year of the 

partnership, however, if the partners 

that are not disregarded foreign partners 

(regarded partners) hold a minority 

interest in the partnership (minority 

interest rule). Section 1.706–1(b)(6)(iii). 

Regarded partners hold a minority 

interest for this purpose if each regarded 

partner holds less than a 10-percent 

interest in capital or profits of the 

partnership, and the regarded partners 

in the aggregate hold less than a 20- 

percent interest in the capital or profits 

of the partnership. 

Explanation of Provisions 

1. Varying Interests Rule 

a. In General 

The proposed regulations amend 

§ 1.706–1(c) to reflect the change made 

to section 706(c)(2)(A) in the 1997 Act 

which requires that the taxable year of 

the partnership close with respect to a 

partner who dies. The proposed 

regulations do not change the provisions 

in § 1.706–1(c)(3)(iv) 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 in § 1.706–1(c)(5) that the 

transfer of a partnership interest by gift 

does not close the partnership taxable 

year with respect to the donor. 

Also, the proposed regulations add 

§ 1.706–4 to provide for the application 

of the varying interests rule in all cases 

in which a partner’s interest changes 

during the taxable 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. 

b. Methods and Conventions 

Proposed § 1.706–4(a) provides that, if 

a partner’s interest changes during the 

partnership’s taxable year, the 

partnership shall determine the 

partner’s distributive share using the 

interim closing method. However, the 

partnership by agreement of the partners 

may use the proration method. For each 

partnership taxable 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 § 1.706–4(c) generally 

provides that a partnership shall take 

into account any variation in the 

partners’ interests in the partnership 

during the taxable year by determining 

the distributive share of partnership 

items under section 702(a) for each 

segment of that taxable year 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. Proposed § 1.706–4(c)(1) 

and (2) incorporate the principles of the 

former § 1.706–1(c)(2)(ii) (as finalized in 

TD 6175). 

Proposed § 1.706–4(d) provides that 

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 taxable year. 

Under this method, except for 

extraordinary items (as defined in 

§ 1.706–4(d)(3)), the partnership 

allocates the distributive share of 

partnership items under section 702(a) 

among the partners in accordance with 

their pro rata shares of these same items 

for the entire taxable year. In 

determining a partner’s pro rata share of 

partnership items, the partnership shall 

take into account that partner’s interest 

in such items during each segment of 

the taxable year. Proposed § 1.706– 

4(d)(1) and (2) incorporate the 

principles of the former § 1.706– 

2(c)(2)(ii) (as finalized in TD 6175). 

For purposes of accounting for the 

partners’ varying interests in the 

partnership, proposed § 1.706–4 

requires that for each partner whose 

interest changes in the taxable year the 

partnership shall maintain segments to 

account for such changes. A segment is 

specific portion of a partnership’s 

taxable year. The first segment of a 

taxable year for a partner that incurs a 

change will begin on the partnership’s 

first day of its taxable year and end as 

of the close of business immediately 

preceding the date of the change as 

determined under the applicable 

convention (discussed in this preamble) 

used by the partnership and its partners. 

The next segment will begin on the day 

prescribed by the applicable convention 

and end on the earlier of the close of the 

day immediately preceding the date of 

the subsequent change as determined by 

the applicable convention, or the end of 

the partnership’s taxable year. Proposed 

§ 1.706–4(a)(2) provides that the 

partnership shall determine the items 

for each segment of the taxable year 

created by the variation event for a 

partner in accordance with the 

partnership’s method of accounting 

used for its entire taxable year. Each 

segment is treated as a separate period. 

For purposes of the interim closing 

method in § 1.706–4(c) and the 

proration method in § 1.706–4(d), the 

proposed regulations provide a special 

accounting rule that must be used to 

account for certain items. For example, 

for an interim closing method, the 

partnership may compute a net capital 

loss for a segment even though the 

partnership has net capital gain for the 

complete taxable year. Also, any 

limitation applicable to the partnership 

year as a whole (for example, the 

limitation under section 179) must be 

apportioned among the segments using 

any reasonable method provided that 

the method may not exceed any 

limitation applicable to the partnership 

as a whole. See proposed §§ 1.706– 

4(a)(2)(i) and (ii). 

In addition, proposed § 1.706–4(d)(3) 

requires a partnership using the 

proration method to allocate 

extraordinary items among the partners 

in proportion to their interests at the 

beginning of the day on which they are 

taken into account. For this purpose, an 

extraordinary item is (i) any item from 

the disposition or abandonment (other 

than in the ordinary course of business) 

of a capital asset as defined in section 

1221 (determined without the 

application of any other rules of law); 

(ii) any item from the disposition or 

abandonment of property used in a 

trade or business (other than in the 

ordinary course of business) as defined 

Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 17123 

in section 1231(b) (determined without 

the application of any holding period 

requirement); (iii) any item from the 

disposition or abandonment of an asset 

described in sections 1221(1), (3), (4), or 

(5), if substantially all the assets in the 

same category from the same trade or 

business are disposed of or abandoned 

in one transaction (or series of related 

transactions); (iv) any item from assets 

disposed of in an applicable asset 

acquisition under section 1060(c); (v) 

any section 481(a) adjustment; (vi) any 

item from the discharge or retirement of 

indebtedness (for example, if a debtor 

partnership transfers a capital or profits 

interest in such partnership to a creditor 

in satisfaction of its recourse or 

nonrecourse indebtedness, any 

discharge of indebtedness income 

recognized under section 108(e)(8) must 

be allocated among the persons who 

were partners in the partnership 

immediately before the discharge); (vii) 

any item from the settlement of a tort or 

similar third-party liability; (viii) any 

credit, to the extent it arises from 

activities or items that are not ratably 

allocated (for example, the 

rehabilitation credit under section 47, 

which is based on placement in service); 

and (ix) any item which, in the opinion 

of the Commissioner, would, if ratably 

allocated, result in a substantial 

distortion of income in any consolidated 

return or separate return in which the 

item is included. The IRS and the 

Treasury Department request comments 

concerning whether any items should be 

added to or removed from the definition 

of extraordinary items. 

Under proposed § 1.706–4(e), a 

partnership using the interim closing 

method may use either a calendar day 

convention or a semi-monthly 

convention. A partnership using the 

proration method may use only the 

calendar day convention. The calendar 

day convention requires that, with 

respect to a partner whose interest 

terminates, the partnership’s taxable 

year closes as of the close of the day on 

which the change occurs. Section 

1.706–4(e)(1). The semi-monthly 

convention requires that any variation 

in a partner’s interest occurring during 

the first through 15th day of the 

calendar month is deemed to occur at 

the beginning of the first day of the 

month, and any variation in a partner’s 

interest occurring during the 16th 

through the last day of the month is 

deemed to occur at the beginning of the 

16th day of that month. Section 1.706– 

4(e)(2). 

A partnership must use the same 

method and convention for all 

variations in the partners’ interests 

during the taxable year of the 

partnership. For example, a partnership 

could not use the proration method and 

interim closing method in the same 

taxable year. Additionally, a partnership 

using the interim closing method could 

not use the calendar day convention to 

account for a variation in one partner’s 

interest during the partnership’s taxable 

year while using a monthly convention 

to account for that partner’s, or a 

different partner’s, variation in an 

interest during the partnership’s taxable 

year. Comments are requested with 

regard to the possible expansion of this 

rule to include other conventions or 

other methods. 

The IRS and the Treasury Department 

are aware that some publicly traded 

partnerships (as defined in section 

7704) are using conventions other than 

a monthly or semi-monthly convention 

and are using these conventions with 

the proration method. Thus, the IRS and 

the Treasury Department are requesting 

comments concerning the use of 

conventions other than monthly or 

semi-monthly convention. The 

proposed regulations regarding the use 

of conventions will not apply to existing 

publicly traded partnerships. 

c. Change in Partnership Allocations 

Among Contemporaneous Partners 

Proposed § 1.706–4(b)(1) provides that 

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 taxable year (excluding 

extensions). This exception applies only 

to allocations that are valid under 

section 704(b) and the regulations 

promulgated in association with that 

section. Moreover, consistent with the 

Tax Court’s decision in Lipke, this 

exception to the varying interests rule 

will not apply to any changes in 

interests of the partners attributable to 

contributions of money or other 

property to the partnership. 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. 

d. Safe Harbors for Service Partnerships 

and Publicly Traded Partnerships 

Proposed § 1.706–4(b)(2) provides that 

service partnerships (as defined in that 

section) 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 even though 

such method is not described in 

paragraph (a) of the proposed 

regulations and the partnership does not 

use the methods or conventions 

described in paragraphs (c) and (d), and 

paragraph (e) of the proposed 

regulations, respectively. However, the 

allocations must be valid under section 

704(b). 

Proposed § 1.706–4(b)(3) provides that 

publicly traded partnerships (as defined 

in section 7704(b)) may treat all 

transfers of its publicly traded units (as 

described in § 1.7704–1(b)(1)) 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 semimonthly convention described in 

§ 1.706–4(e)(2). Block transfers of 

publicly traded partnership (PTP) units 

(as described in § 1.7704–1(e)(2)) will 

not qualify for this safe harbor. 

e. Deemed Dispositions 

The proposed regulations amend 

§ 1.706–1(c) to provide that a deemed 

disposition of a partner’s entire interest 

in the partnership pursuant to 

§§ 1.1502–76(b)(2)(vi), 1.1362–3(c)(1), 

and 1.1377–1(b)(3)(iv) shall be treated as 

a disposition of the partner’s entire 

interest for purposes of section 706. The 

IRS and Treasury Department request 

comments concerning the relationship 

of § 1.1502–76(b)(2)(vi)(B) and the 

proposed regulations regarding the 

deemed disposition of partnership 

interests. 

2. Taxable Years of Partnerships 

The proposed regulations amend the 

minority interest rule in § 1.706– 

1(b)(6)(iii) 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 taxable year 

of the partnership only if the regarded 

partners have interests below the stated 

thresholds in partnership capital and 

profits, rather than the current rule 

which requires only an interest below 

the threshold in either capital or profits. 

For example, under the current 

regulations, the taxable year of 

disregarded foreign partners would not 

be ignored in determining the taxable 

year of the partnership if the regarded 

partners had aggregate capital interests 

of less than 20-percent but profits 

interests of more than 20-percent. By 

contrast, under the proposed 

regulations, in that example, the taxable 

year of the disregarded foreign partners 

17124 Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 

would not be applicable in determining 

the taxable year of the partnership. 

Additional Requests for Comments 

The IRS and the Treasury Department 

are also requesting comments relating to 

any other outstanding issues arising 

under section 706(d). Specifically, the 

IRS and the Treasury Department are 

seeking comments with regard to issues 

that arise concerning allocable cash 

basis items and/or tiered partnerships. 

Section 706(d)(2)(A) provides a 

special rule for determining a partner’s 

distributive share of an allocable cash 

basis item. Section 706(d)(2) effectively 

requires a cash method partnership to 

use an economic accrual method solely 

for the purpose of allocating certain 

items. Under the statute, a partner’s 

distributive share of any allocable cash 

basis item is determined by assigning a 

pro rata share of any allocable cash basis 

item to each day within a specified 

period to which it is attributable and 

then allocating each day’s portion in an 

amount equivalent to each partner’s 

interest in the partnership on that day. 

A list of allocable cash basis items is 

found in section 706(d)(2)(B). The IRS 

and the Treasury Department are 

seeking comments as to whether that list 

should be expanded (to include, for 

example, items such as property 

insurance), as well as on any other issue 

with regard to allocating cash basis 

items. 

Section 706(d)(3) provides that if 

during any taxable year of the 

partnership there is a change in any 

partner’s interest in the partnership 

(upper-tier partnership), and such 

partnership is a partner in another 

partnership (lower-tier partnership), 

then (except to the extent provided by 

regulations) each partner’s distributive 

share of any item of the upper-tier 

partnership attributable to the lower-tier 

partnership shall be determined by first 

assigning the appropriate portion of 

each such item to the appropriate days 

during which the upper-tier partnership 

is a partner in the lower-tier 

partnership, and then 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. Thus, the daily 

allocation method, used for cash basis 

items, is applicable to all items of the 

lower-tier partnership if there is a 

change in the partnership interests in 

the upper-tier partnership. The IRS and 

the Treasury Department are seeking 

comments on this and any other issue 

related to tiered partnerships and 

determining a partner’s varying 

interests. 

Proposed Effective Date 

In accord with the legislative history 

to section 706(d), the proposed 

regulations provide a reasonable 

transition period for taxpayers in the 

effective date provisions of this 

proposed regulation. Thus, the proposed 

amendments to §§ 1.706–1 (with the 

exception of the change to § 1.706– 

1(b)(6)(iii)), 1.706–4, and 1.706–5 are 

proposed to apply to partnership taxable 

years that begin after the date the final 

regulations are published in the Federal 

Register, but not before taxable years 

beginning after December 31, 2009. 

The proposed amendment to § 1.706– 

1(b)(6)(iii) generally is applicable to the 

first taxable year of a partnership that 

begins on or after the date final 

regulations are published in the Federal 

Register, subject to two special rules. 

First, under the current regulations, 

partnerships formed prior to September 

23, 2002 (‘‘existing partnerships’’) 

generally are exempt from the rules of 

§ 1.706–1(b)(6) unless they have 

voluntarily elected to apply them or 

unless they have undergone a technical 

termination under section 708(b)(1)(B). 

The proposed regulation retains this 

special rule, such that an existing 

partnership will not be subject to the 

modified minority interest rule in 

proposed § 1.706–1(b)(6)(iii) unless 

there has been such an election or 

technical termination. Second, because 

the proposed regulation would modify 

§ 1.706–1(b)(6)(iii) but otherwise leave 

the rules of § 1.706–1(b)(6) unchanged, 

it is appropriate to exempt other 

partnerships from the modified minority 

interest rule if they are already subject 

to § 1.706–1(b)(6) and the minority 

interest rule of the current regulations 

(‘‘interim period partnerships’’). Thus, 

interim period partnerships will be 

exempt from the modified minority 

interest rule of proposed § 1.706– 

1(b)(6)(iii) unless they voluntarily elect 

to be subject to this rule or undergo a 

technical termination. Accordingly, the 

proposed amendment to § 1.706– 

1(b)(6)(iii) would apply to the first 

taxable year of a partnership that begins 

on or after the date final regulations are 

published in the Federal Register, 

subject to these special rules for existing 

partnerships and interim period 

partnerships. 

The proposed amendments in 

§§ 1.706–4(c)(2) and (d)(2) are proposed 

to apply for the taxable year of a 

partnership other than an existing 

publicly traded partnership that begin 

after the date the final regulations are 

published in the Federal Register, but 

not before taxable years beginning after 

December 31, 2009. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations, and because the 

regulation does not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, this 

regulation has been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Request for a Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written comments (a signed original and 

eight (8) copies) or electronic comments 

that are submitted timely to the IRS. The 

IRS and the Treasury Department 

specifically request comments on the 

clarity of the proposed rules and how 

they can be made easier to understand. 

All comments will be available for 

public inspection and copying. 

A public hearing will be scheduled if 

requested in writing by any person that 

timely submits written comments. If a 

public hearing is scheduled, notice of 

the date, time, and place for the pubic 

hearing will be published in the Federal 

Register. 

Drafting Information 

The principal authors of these 

proposed regulations are Laura Fields 

and Jonathan Cornwell, Office of the 

Associate Chief Counsel (Passthroughs 

and Special Industries). However, other 

personnel from the IRS and the Treasury 

Department participated in their 

development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 is amended by adding a new 

entry in numerical order to read as 

follows: 

Authority: 26 U.S.C. 7805 * * *. 

Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 17125 

Section 1.706–2 also issued under 26 

U.S.C. 706(d). * * * 

Par. 2. Section 1.706–0 is added to 

read as follows: 

§ 1.706–0 Table of contents. 

This section lists the captions 

contained in the regulations under 

section 706. 

§ 1.706–1 Taxable years of partner and 

partnership. 

(a) Year in which partnership income is 

includible. 

(b) Taxable year. 

(1) Partnership treated as taxpayer. 

(2) Partnership’s taxable year. 

(i) Required taxable year. 

(ii) Exceptions. 

(3) Least aggregate deferral. 

(i) Taxable year that results in the least 

aggregate deferral of income. 

(ii) Determination of the taxable year of a 

partner or partnership that uses a 52–53 week 

taxable year. 

(iii) Special de minimis rule. 

(iv) Examples. 

(4) Measurement of partner’s profits and 

capital interest. 

(i) In general. 

(ii) Profits interest. 

(A) In general. 

(B) Percentage share of partnership net 

income. 

(C) Distributive share. 

(iii) Capital interest. 

(5) Taxable year of a partnership with taxexempt partners. 

(i) Certain tax-exempt partners disregarded. 

(ii) Example. 

(iii) Effective date. 

(6) Certain foreign partners disregarded. 

(i) Interests of disregarded foreign partners 

not taken into account. 

(ii) Definition of foreign partner. 

(iii) Minority interest rule. 

(iv) Example. 

(v) Effective date. 

(A) Generally. 

(B) Voluntary change in taxable year. 

(C) Subsequent sale or exchange of 

interests. 

(D) Transition rule. 

(7) Adoption of taxable year. 

(8) Change in taxable year. 

(i) Partnerships. 

(A) Approval required. 

(B) Short period tax return. 

(C) Change in required taxable year. 

(ii) Partners. 

(9) Retention of taxable year. 

(10) Procedures for obtaining approval or 

making a section 444 election. 

(11) Effect on partner elections under 

section 444. 

(i) Election taken into account. 

(ii) Effective date. 

(c) Closing of partnership year. 

(1) General rule. 

(2) Disposition of entire interest 

(i) In general. 

(ii) Example. 

(iii) Deemed dispositions. 

(3) Disposition of less than entire interest. 

(4) Determination of distributive shares. 

(5) Transfer of interest by gift. 

(d) Effective/applicability date. 

§ 1.706–2 Certain cash basis items 

prorated over period to which attributable. 

[Reserved] 

§ 1.706–3 Items attributable to interest in 

lower-tier partnership prorated over entire 

taxable year. [Reserved] 

§ 1.706–4 Determination of distributive 

share when a partner’s interest varies. 

(a) General rule. 

(1) Methods. 

(2) Segments. 

(i) General rule. 

(ii) Other provisions. 

(b) Exceptions. 

(1) Permissible changes among 

contemporaneous partners. 

(2) Safe harbor for certain service 

partnerships. 

(3) Safe harbor for publicly traded units of 

publicly traded partnerships. 

(c) Interim closing method. 

(1) In general. 

(2) Conventions. 

(3) Example. 

(d) Proration method. 

(1) In general. 

(2) Conventions. 

(3) Extraordinary items. 

(4) Example. 

(e) Conventions. 

(1) Calendar day convention. 

(2) Semi-monthly convention. 

(f) Effective/applicability date. 

§ 1.706–5 Taxable year determination. 

(a) General rule. 

(b) Effective/applicability date. 

Par. 3. Section 1.706–1 is amended as 

follows: 

1. The language ‘‘capital or profits’’ in 

the first sentence in paragraph (b)(6)(iii) 

is removed and the language ‘‘capital 

and profits’’ is added in its place. 

2. Paragraph (b)(6)(v)(A) is revised. 

3. The last sentence of paragraph 

(b)(6)(v)(B) is removed and four new 

sentences are added in its place. 

4. Paragraph (b)(6)(v)(C) is revised. 

5. Add a new sentence at the end of 

paragraph (b)(6)(v)(D). 

6. Paragraph (c)(2) is revised. 

7. Paragraph (c)(3) is removed. 

8. Paragraph (c)(4) is redesignated as 

(c)(3) and the last sentence of newly 

designated paragraph (c)(3) is removed. 

9. New paragraph (c)(4) is added. 

10. Paragraph (d) is revised. 

The additions and revisions read as 

follows: 

§ 1.706–1 Taxable years of partner and 

partnership. 

* * * * * 

(b) * * * 

(6) * * * 

(v) * * * (A) Generally. The 

provisions of this paragraph (b)(6) (other 

than paragraph (b)(6)(iii) of this section) 

are applicable for the first taxable year 

of a partnership other than an existing 

partnership that begins on or after July 

23, 2002. The provisions of paragraph 

(b)(6)(iii) of this section are applicable 

for the first taxable year of a partnership 

other than an existing partnership or an 

interim period partnership that begins 

on or after the date these regulations 

become effective. For this purpose, an 

existing partnership is a partnership 

that was formed prior to September 23, 

2002, and an interim period partnership 

is a partnership that was formed on or 

after September 23, 2002, and prior to 

the date these regulations become 

effective. 

(B) * * * An existing partnership that 

makes such a change prior to the date 

these regulations become effective will 

cease to be exempted from the 

requirements of paragraph (b)(6) (other 

than paragraph (b)(6)(iii)) of this section. 

An existing partnership that makes such 

a change on or after the date these 

regulations become effective will cease 

to be exempted from the requirements of 

paragraph (b)(6) of this section. An 

interim period partnership may change 

its taxable year to a year determined in 

accordance with paragraph (b)(6)(iii) of 

this section. An interim period 

partnership that makes such a change 

will cease to be exempted from the 

requirements of paragraph (b)(6)(iii) of 

this section. 

(C) Subsequent sale or exchange of 

interests. If an existing partnership or an 

interim period partnership terminates 

under section 708(b)(1)(B), the resulting 

partnership is not an existing 

partnership or an interim period 

partnership for purposes of paragraph 

(b)(6)(v)(A) of this section. 

(D) * * * If, in the first taxable year 

beginning on or after the date these 

regulations become effective, an interim 

period partnership voluntarily changes 

its taxable year to a year determined in 

accordance with paragraph (b)(6)(iii) of 

this section, then the partners of that 

partnership may apply the provisions of 

§ 1.702–3T to take into account all items 

of income, gain, loss, deduction, and 

credit attributable to the partnership 

year of change ratably over a four-year 

period. 

* * * * * 

(c) * * * 

(2) Disposition of entire interest—(i) 

In general. A partnership taxable year 

shall close with respect to a partner who 

sells or exchanges his entire interest in 

the partnership, with respect to a 

partner whose entire interest in the 

partnership is liquidated and with 

respect to a partner who dies. In the 

case of a death or liquidation, or sale or 

17126 Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 

exchange of a partner’s entire interest in 

the partnership, the partner shall 

include in his taxable income for his 

taxable year within or with which the 

partner’s membership in the partnership 

ends, the partner’s distributive share of 

items described in section 702(a), and 

any guaranteed payments under section 

707(c), for the partner’s partnership 

taxable year ending with the date of 

such termination. If the decedent 

partner’s estate or other successor sells 

or exchanges its entire interest in the 

partnership, or if its entire interest is 

liquidated, the partnership taxable year 

with respect to the estate or other 

successor in interest shall close on the 

date of such sale or exchange, or the 

date of the completion of the 

liquidation. The sale or exchange of a 

partnership interest does not, for the 

purpose of this rule, include any 

transfer of a partnership interest which 

occurs at death as a result of inheritance 

or any testamentary disposition. 

(ii) Example. H is a member of a 

partnership having a taxable year ending 

December 31. Both H and his wife W are on 

a calendar year and file joint returns. H dies 

on March 31, 2010. Administration of the 

estate is completed and the estate, including 

the partnership interest, is distributed to W 

as legatee on November 30, 2010. Such 

distribution by the estate is not a sale or 

exchange of H’s partnership interest. The 

taxable year of the partnership will close 

with respect to H on March 31, 2010, and H 

will include in his final return for his final 

taxable year (January 1 through March 31, 

2010) his distributive share of partnership 

items for that period under the rules of 

§ 1.706–4. W will include in her return for 

the taxable year ending December 31, 2010, 

her distributive share of partnership items for 

the period of April 1 through December 31, 

2010, under the rules of § 1.706–4. 

(iii) Deemed dispositions. A deemed 

disposition of the partner’s interest 

pursuant to §§ 1.1502–76(b)(2)(vi) 

(relating to corporate partners that 

become or cease to be members of a 

consolidated group within the meaning 

of § 1.1502–1(h)), 1.1362–3(c)(1) 

(relating to the termination of the 

subchapter S election of an S 

corporation partner), and 1.1377– 

1(b)(3)(iv) (regarding an election to 

terminate the taxable year of an S 

corporation partner), shall be treated as 

a disposition of the partner’s entire 

interest in the partnership. 

* * * * * 

(4) Determination of distributive 

shares. See § 1.706–4 for rules regarding 

the methods to be used in determining 

the distributive shares of items 

described in section 702(a) for partners 

whose interests in the partnership vary 

as a result of a disposition of a partner’s 

entire interest in a partnership as 

described in paragraph (c)(2) of this 

section or as a result of a disposition of 

less than an entire interest as described 

in paragraph (c)(3) of this section during 

the partnership’s taxable year. 

* * * * * 

(d) Effective/applicability date. The 

rules for paragraphs (a) and (b) of this 

section are applicable for partnership 

taxable years ending on or after May 17, 

2002, except for paragraph (b)(6)(iii) of 

this section which applies to 

partnership taxable years beginning the 

day after final regulations are published 

in the Federal Register. The rules for 

paragraph (c)(1) of this section apply for 

partnership taxable years beginning 

after December 31, 1953. All other 

paragraphs under paragraph (c) of this 

section apply for partnership taxable 

years that begin after the date the final 

regulations are published in the Federal 

Register, but not before taxable years 

beginning after December 31, 2009. 

Par. 4. Section 1.706–2 is added and 

reserved to read as follows: 

§ 1.706–2 Certain cash basis items 

prorated over period to which attributable. 

[Reserved] 

Par. 5. Section 1.706–3 is added and 

reserved to read as follows: 

§ 1.706–3 Items attributable to interest in 

lower-tier partnership prorated over entire 

taxable year. [Reserved] 

Par. 6. Section 1.706–4 is added to 

read as follows: 

§ 1.706–4 Determination of distributive 

share when a partner’s interest varies. 

(a) General rule—(1) Methods. Except 

as provided in paragraph (b) of this 

section, if a partner’s interest in a 

partnership varies during the taxable 

year as a result of a disposition of an 

entire interest in a partnership as 

described in § 1.706–1(c)(2) or as a 

result of the disposition of less than the 

entire interest in a partnership or with 

respect to a partner whose interest in a 

partnership is reduced as described in 

§ 1.706–1(c)(3), the partnership shall 

determine the partner’s distributive 

share of partnership items by using the 

interim closing method (described in 

paragraph (c) of this section). 

Alternatively, a partnership may, by 

agreement of the partners, use the 

proration method (described in 

paragraph (d) of this section). The 

partnership and all of its partners shall 

use the same method (interim closing or 

proration) and, if applicable, the same 

convention (described in paragraph (e) 

of this section) for all variations in the 

partners’ interests occurring within each 

partnership taxable year. 

(2) Segments—(i) General rule. For 

purposes of accounting for a variation in 

a partner’s interest within a taxable year 

of the partnership as a result of 

dispositions or reductions of interests as 

described in § 1.706–1(c)(2) or (c)(3), the 

partnership shall maintain segments, 

which are specific periods of the 

partnership’s taxable year. The first 

segment to account for a change in a 

partner’s interest shall commence with 

the beginning of the taxable year of the 

partnership and end at the close of the 

day specified by the convention used by 

the partnership to account for such 

change. Any additional segment shall 

commence with the day specified by the 

convention used by the partnership to 

account for a previous change in the 

partner’s interest and shall end as a 

result of an additional change in the 

partner’s interest at the close of the day 

specified by the convention used by the 

partnership to account for such change, 

provided, however, that the last segment 

of the taxable year of the partnership 

shall end no later than the close of the 

day of the partnership’s taxable year. 

The partnership shall determine the 

items of income, gain, loss, deduction 

and credit of the partnership for each 

segment in accordance with the method 

of accounting that it uses for the 

partnership’s entire taxable year. In 

general, a partnership using the interim 

closing method shall treat each segment 

as though the segment were a separate 

distributive share period. For example, 

a partnership using the interim closing 

method may compute a net capital loss 

for a segment of a taxable year even 

though the partnership has a net capital 

gain for the entire taxable year. 

(ii) Other provisions. Any limitation 

applicable to the partnership year as a 

whole (for example, the limitation 

under section 179, relating to elections 

to expense certain depreciable business 

assets) must be in connection with the 

interim closing method apportioned 

among the segments by the partnership 

using any reasonable method, provided, 

however, that the amounts apportioned 

among segments shall not exceed the 

limitation applicable to the partnership 

as a whole. 

(b) Exceptions—(1) Permissible 

changes among contemporaneous 

partners. The general rule of paragraph 

(a) of this section, with respect to the 

varying interests of a partner described 

in § 1.706–1(c)(3), will not preclude 

changes in the allocations of the 

distributive share of items described in 

section 702(a) among contemporaneous 

partners for the entire partnership 

taxable year, provided that— 

(i) Any variation in a partner’s interest 

is not attributable to a contribution of 

money or property by a partner to the 

capital of the partnership or a 

Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 17127 

distribution of money or property by the 

partnership to a partner that is a return 

of capital; and 

(ii) The allocations resulting from the 

modification satisfy the provisions of 

section 704(b) and the regulations 

promulgated in association with that 

section. 

(2) Safe harbor for certain service 

partnerships. Notwithstanding 

paragraph (a) of this section, with 

respect to any taxable year in which 

there is a change in any partner’s 

interest in a service partnership (as 

defined below in this subsection), the 

partnership and such partner may 

choose to determine the partner’s 

distributive share of partnership 

income, gain, loss, deduction and credit 

using any reasonable method to account 

for the varying interests of the partners 

in the partnership during the taxable 

year provided that the allocations are 

valid under section 704(b). A service 

partnership is a partnership in which 

substantially all the activities involve 

the performance of services in the fields 

of health, law, engineering, architecture, 

accounting, actuarial science, or 

consulting. 

(3) Safe harbor for publicly traded 

units of publicly traded partnerships. 

Notwithstanding paragraph (a) of this 

section, a publicly traded partnership 

(PTP) (as defined in section 7704(b)) 

using either the interim closing of the 

books method in paragraph (c) of this 

section or the proration method in 

paragraph (d) of this section may treat 

all transfers of its publicly traded units 

(as described in § 1.7704–1(b)(1)) during 

a calendar month as occurring for 

purposes of determining partner status 

on the first day of the following month 

under a consistent method adopted by 

the partnership or may use the semimonthly convention described in 

paragraph (e)(2) of this section. For 

example, PRS, a PTP, uses the proration 

method in paragraph (d) of this section. 

PRS adopts a method treating all 

transfers of its publicly traded units as 

occurring on the first day of the month 

following the transfer. If on May 5, A, 

a partner in PRS, sells a unit in PRS to 

B, and on May 12 B sells that unit to C, 

who holds the interest beyond May 31, 

PRS may allocate all items with respect 

to that unit for the month of May to A, 

and may allocate all partnership items 

with respect to that unit for the month 

of June to C. B will not be considered 

a partner and will receive no allocation 

of partnership items. Block transfers of 

PTP units (as described in § 1.7704– 

1(e)(2)) will not qualify for this safe 

harbor. 

(c) Interim closing method—(1) In 

general. A partnership shall take into 

account any variation in a partner’s 

interest in the partnership as described 

in § 1.706–1(c)(2) or (c)(3) during the 

partnership’s taxable year by 

determining the distributive share of 

partnership items under section 702(a) 

for each segment of that taxable year 

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. 

(2) Conventions. A partnership using 

the interim closing method may use 

either the calendar day convention 

provided in paragraph (e)(1) of this 

section or the semi-monthly convention 

provided in paragraph (e)(2) of this 

section to determine when the segments 

within that taxable year end. 

(3) Example. PRS is a partnership that was 

formed in 2004. It has three partners, P,R, 

and S, who each own a one-third interest in 

the partnership. PRS owns and operates a 

skiing enterprise and under section 

706(b)(1)(C), has adopted a calendar year end 

of June 30th. Each partner is an individual 

who is on the calendar year. On December 

31, 2010, S sold her entire interest in PRS to 

Y. PRS, for its fiscal year ending June 30, 

2011, earned $150,000 of income, and under 

an interim closing of the books on December 

31, 2010, $90,000 of income was earned for 

the period beginning after December 31, 

2010, and $60,000 of income was earned 

before January 1, 2011. The partnership has 

no specific provision in the partnership 

agreement relating to which section 706 

method to use with regard to varying 

interests of the partnership. Thus, pursuant 

to § 1.706–4(a)(1), PRS will be required to use 

the interim closing of the books method to 

account for the varying interests of S and Y 

in the partnership. As a result, S is allocated 

one-third of the income earned prior to 

January 1, 2011, or $20,000. Y is allocated 

$30,000 which is one-third of the income 

earned after December 31, 2010. Since S sold 

her entire interest in PRS, the partnership 

taxable year closes with respect to her 

pursuant to § 1.706–1(c)(2)(i). Thus, she must 

include her share of PRS’s income on her 

2010 federal income tax return. 

(d) Proration method—(1) In general. 

Except as provided in paragraph (d)(3) 

of this section, a partnership may, by 

agreement of the partners, take into 

account any variation in a partner’s 

interest in the partnership described in 

§ 1.706–1(c)(2) or (c)(3) during the 

partnership’s taxable year by allocating 

the distributive share of partnership 

items under section 702(a) among the 

partners according to their pro rata 

shares of such items for the entire 

taxable year. In determining a partner’s 

pro rata share of partnership items, the 

partnership shall take into account that 

partner’s interest in such items during 

each segment. For purposes of this 

paragraph (d), specific items that are 

aggregated by the partnership at the end 

of the year (other than extraordinary 

items as defined in paragraph (d)(3) of 

this section) shall be disregarded, and 

the aggregate of the items shall be 

considered to be the partnership item 

for the year. 

(2) Conventions. A partnership using 

the proration method shall use the 

calendar day convention described in 

paragraph (e)(1) of this section. 

(3) Extraordinary items. A partnership 

must allocate extraordinary items 

among the partners in proportion to 

their interests at the beginning of the 

calendar day of the day on which they 

are taken into account. For purposes of 

this paragraph (d), an extraordinary item 

is— 

(i) Any item from the disposition or 

abandonment of a capital asset (other 

than in the ordinary course of business) 

as defined in section 1221 (determined 

without the application of any other 

rules of law); 

(ii) Any item from the disposition or 

abandonment of property used in a 

trade or business (other than in the 

ordinary course of business) as defined 

in section 1231(b) (determined without 

the application of any holding period 

requirement); 

(iii) Any item from the disposition or 

abandonment of an asset described in 

section 1221(1), (3), (4), or (5), if 

substantially all the assets in the same 

category from the same trade or business 

are disposed of or abandoned in one 

transaction (or series of related 

transactions); 

(iv) Any item from assets disposed of 

in an applicable asset acquisition under 

section 1060(c); 

(v) Any section 481(a) adjustment; 

(vi) Any item from the discharge or 

retirement of indebtedness (for example, 

if a debtor partnership transfers a capital 

or profits interest in such partnership to 

a creditor in satisfaction of its recourse 

or nonrecourse indebtedness, any 

discharge of indebtedness income 

recognized under section 108(e)(8) must 

be allocated among the persons who 

were partners in the partnership 

immediately before the discharge); 

(vii) Any item from the settlement of 

a tort or similar third-party liability or 

payment of a judgment; 

(viii) Any credit, to the extent it arises 

from activities or items that are not 

ratably allocated (for example, the 

rehabilitation credit under section 47, 

which is based on placement in service); 

or 

(ix) Any item which, in the opinion 

of the Commissioner, would, if ratably 

allocated, result in a substantial 

distortion of income in any return in 

which the item is included. 

17128 Federal Register / Vol. 74, No. 70 / Tuesday, April 14, 2009 / Proposed Rules 

(4) Example. PRS is a partnership that was 

formed in 2004. It has three partners, P, R, 

and S, who each own a one-third interest in 

the partnership. PRS owns and operates a 

skiing enterprise, and under section 

706(b)(1)(C), has adopted a calendar year end 

of June 30th. Each partner is an individual 

who is on the calendar year. On December 

31, 2010, S sold her entire interest in PRS to 

Y. PRS, for its fiscal year ending June 30, 

2010, earned $150,000 of income. The 

partnership has a specific provision in the 

partnership agreement agreeing to use the 

proration method when accounting for 

varying interests in the partnership. (See 

§ 1.706–4(a)(1)). Using the proration method, 

$75,000 of income is included in the first 

segment of the year that begins July 1, 2010 

and ends December 31, 2010, and $75,000 is 

included in the second segment of the year 

that begins January 1, 2011 and ends June 30, 

2011. For the first segment, S’s distributive 

share of partnership income is one-third of 

$75,000, or $25,000. For the second segment, 

Y’s distributive share of partnership income 

is one-third of $75,000, or $25,000. Because 

S sold her entire interest in PRS, the 

partnership taxable year closes with respect 

to her pursuant to § 1.706–1(c)(2)(i). Thus, 

she must include her distributive share of 

PRS’s income, or $25,000, on her 2010 

Federal income tax return. 

(e) Conventions—(1) Calendar day 

convention. Under the calendar day 

convention, the first segment of the 

partnership’s taxable year commences 

with the beginning of the partnership’s 

taxable year and ends at the close of any 

day on which the variation occurs in the 

partner’s interest in the partnership. 

Any additional segment shall 

commence with the beginning of the 

day following a prior variation in a 

partner’s interest and end on the earlier 

of the close of the day on which an 

additional variation occurs in the 

partner’s interest or the close of the 

partnership’s taxable year, as applicable. 

(2) Semi-monthly convention. Under 

the semi-monthly convention, the first 

segment of the partnership’s taxable 

year commences with the beginning of 

the partnership’s taxable year, and with 

respect to a partner’s variation in 

interest occurring on the first through 

the 15th day of a calendar month, is 

deemed to close at the end of the last 

day of the immediately preceding 

calendar month, and with respect to any 

variation in interest occurring on the 

16th through the last day of a calendar 

month, is deemed to close at the end of 

the 15th calendar day of that month. 

Any additional segment of the 

partnership taxable year shall 

commence with beginning of the first 

day, or 16th day of the month of the last 

segment, as the case may be, as 

determined for a prior change and shall 

close at the earlier of the close of the 

partnership’s taxable year, or with 

respect to a partner’s variation in 

interest occurring on the first through 

15th day of a calendar month, is deemed 

to close at the end of the last day of the 

immediately preceding calendar month, 

and with respect to any variation in 

interest occurring on the 16th through 

the last day of a calendar month, is 

deemed to close at the end of the 15th 

calendar day of that month. 

(f) Effective/applicability date. Except 

with respect to paragraphs (c)(2) and 

(d)(2) of this section, this section is 

applicable for partnership taxable years 

that begin the day after the date final 

regulations are published in the Federal 

Register, but not before taxable years 

beginning after December 31, 2009. The 

rules of paragraphs (c)(2) and (d)(2) of 

this section are applicable for the 

taxable year of partnerships other than 

existing publicly traded partnerships 

that begin after the date the final 

regulations are published in the Federal 

Register, but not before taxable years 

beginning after December 31, 2009. For 

purposes of the immediately preceding 

sentence, an existing publicly traded 

partnership is a partnership described 

in section 7704(b) of the Internal 

Revenue Code that was formed on a date 

before these proposed regulations are 

published in the Federal Register. 

However, existing publicly traded 

partnerships may rely on the provisions 

of this section. 

Par. 7. Section 1.706–5 is added to 

read as follows: 

§ 1.706–5 Taxable year determination. 

(a) In general. For purposes of 

§ 1.706–4, the taxable year of a 

partnership shall be determined without 

regard to section 706(c)(2)(A) and the 

regulations promulgated under that 

Internal Revenue Code section. 

(b) Effective/applicability date. This 

section is applicable for partnership 

taxable years that begin the day after the 

date final regulations are published in 

the Federal Register, but not before 

taxable years beginning after December 

31, 2009. 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E9–8438 Filed 4–13–09; 8:45 am] 

BILLING CODE 4830–01–P 

POSTAL SERVICE 

39 CFR Part 111 

Express Mail Refunds for Shipments of 

Live Animals 

AGENCY: Postal Service. 

ACTION: Proposed rule. 

SUMMARY: The Postal Service proposes 

to revise its refund guarantees for 

Express Mail® shipments of live animals 

in an effort to maintain the economic 

viability of shipping animals as a 

service. 

DATES: Submit comments on or before 

May 14, 2009. 

ADDRESSES: Mail or deliver written 

comments to the Manager, Mailing 

Standards, U.S. Postal Service, 475 

L’Enfant Plaza, SW., Room 3436, 

Washington, DC 20260–3436. You may 

inspect and photocopy all written 

comments at USPS Headquarters 

Library, 475 L’Enfant Plaza, SW., 11th 

Floor N, Washington, DC between 9 a.m. 

and 4 p.m., Monday through Friday. 

E-mail comments, containing the name 

and address of the commenter, may be 

sent to MailingStandards@usps.gov, 

with a subject line of ‘‘Express Mail 

Refunds for Shipments of Lives 

Comments.’’ Faxed comments will not 

be accepted. 

FOR FURTHER INFORMATION CONTACT: Joel 

Rosen, 202–268–4329 or Monica Grein, 

202–268–8411. 

SUPPLEMENTARY INFORMATION: The Postal 

Service proposes to revise the Mailing 

Standards of the United States Postal 

Service, Domestic Mail Manual (DMM®) 

by changing the refund guarantees for 

Express Mail shipments of live animals 

delivered within 3 days of the date of 

mailing. In some instances, the Postal 

Service must reroute Express Mail 

shipments of live animals to alternative 

flights or routes in order to protect the 

well-being of the live animals. This is 

particularly necessary if other 

shipments on the same flight contain 

dry ice or solid carbon dioxide, which 

will evaporate en route and may 

displace oxygen. If live animals were 

shipped in the same cargo hold, the 

carbon dioxide could cause 

asphyxiation. The use of alternative 

flights and rerouting to protect the wellbeing of the live animals can delay 

shipments. Therefore, even though the 

live animals arrive as promptly as 

possible and in good health, these 

shipments may not meet normal Express 

Mail service guarantees. In those 

instances, some mailers then apply for 

full postage refunds. 

Currently, postage refunds for Express 

Mail shipments of live animals are 

granted based on the next day or second 

day delivery guarantee provided at the 

time of mailing. This current postage 

refund policy does not account for the 

flight changes that may occur to protect 

the well-being of the animals. Therefore, 

the Postal Service is proposing that