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