Prop. regs. on determining partners' distributive shares.

• Author: Nevius, Alistair M.

The IRS has issued proposed regulations on determining partners' distributive shares of partnership items of income, gain, loss, deduction, and credit when a partner's interest varies during a partnership tax year (REG-144689-04). The proposed regulations also modify the existing regulations regarding a partnership's required tax year.

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. They also 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 Sec. 706(d). Finally, the proposed regulations amend the rules applicable to the determination of the partnership's tax year in those instances in which partnership interests are held by disregarded foreign partners (as defined in Regs. Sec. 1.706-1(b)(6)(i)).

Sec. 706(d)(1) provides that, except as required by Secs. 706(d)(2) and (d)(3), if there is a change in a partner's interest in the partnership during the partnership's tax year, each partner's distributive share of any partnership item is determined by the use of any method prescribed by the regulations that takes into account the varying interests of the partners in the partnership during the tax year (the varying interests rule). Sec. 706(d)(1) was added by the Deficit Reduction Act of 1984, P.L. 98-369 (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 a disposition of less than a partner's entire interest, and to authorize the IR8 to prescribe methods for determining a partner's distributive share of partnership items when there is a change in the partners' interests during the partnership's tax year.

The existing regulations under Sec. 706 have never been revised to reflect the changes made to Sec. 706(d)(1) by the 1984 act. The Sec. 706 regulations have also not been revised to reflect a change made to Sec. 706(c)(2)(A) by...