Partner distributive share when change in partner’s interest

Partner distributive share, change in interest

The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9728) as guidance under section 706(d)(1) concerning methods for determining partners’ distributive shares of partnership items in any year in which there is a change in a partner’s interest in the partnership. Also released today are proposed regulations (REG-109370-10) regarding allocable cash basis and tiered partnership items.

Related content

  • The 19-page final regulations [PDF 263 KB] adopt regulations that were proposed in 2009, with certain changes, and generally apply to tax years beginning on or after August 3, 2015 (the publication date in the Federal Register) with certain limited exceptions.
  • The proposed regulations [PDF 226 KB] are effective for tax years beginning on or after the date they are finalized. However, publicly traded partnerships may rely on these proposed rules with respect to the treatment of the new extraordinary item relating to income that is subject to withholding.


The 2009 proposed regulations added provisions clarifying that the following are to be treated as a disposition of the partner’s entire interest in the partnership: (1) a deemed disposition of a partner’s interest for corporate partners that become or cease to be members of a consolidated group; (2) the termination of the subchapter S election of an S corporation partner; and (3) an election to terminate the tax year of an S corporation partner.

The 2009 proposed regulations also revised the rules for determining the tax year of a partnership when a partnership interest is held by a “disregarded foreign partner.”

Final regulations

The preamble to the final regulations explains that the 2009 proposed regulations incorporated several of the “varying interest rules” in current regulations under section 706, and finalize the varying interest rules as contained in the 2009 proposed regulations but with changes.

Because of these changes, Reg. section 1.706-4 is reorganized, with discrete sections addressing the scope of Reg. section 1.706-4; exceptions to Reg. section 1.706-4; partnership conventions; extraordinary items; and procedures for partnership decisions relating to Reg. section 1.706-4.

Also, the regulations now provide a step-by-step process for making allocations under Reg. section 1.706-4.

The final regulations include provisions or rules concerning:

  • Permissible changes among contemporaneous partners
  • Safe harbor for partnerships for which capital is not a material income-producing factor
  • Varying interest rule methods (interim closings and proration)
  • Use of more than one method and convention during the same tax year
  • Optional regular monthly or semi-monthly interim closings
  • Segments and proration periods
  • Determining the items in each segment
  • Determining the items in each proration period
  • Varying interest rule conventions—calendar day, semi-monthly, and monthly
  • Conventions for publicly traded partnerships
  • Use of more than one convention during a tax year
  • Deemed timing of variations
  • Exceptions for admission to and exit from the partnership within a convention period
  • Extraordinary items

Proposed regulations

Today’s proposed regulations provide rules to expand the list of extraordinary items, to include two new items:

  • With respect to any item of income of publicly traded partnerships that is subject to withholding
  • With respect to deductions for transfers of equity in connection with the performance of services

In addition, the proposed rules require certain cash basis items to be prorated over the period to which they are attributable, and items attributable to interests in a lower-tier partnership to be prorated over the period during which the upper-tier partnership owns an interest in the lower-tier partnership.

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