Partnership varying interest regulations now effective
TAX BLOG |
In the summer of 2015, the IRS issued final varying interest regulations under section 706, amending proposed regulations originally issued in 2009. The regulations are effective for tax years beginning on or after Aug. 3, 2015.
Among other provisions, the regulations adopt a new 10-step process for determining how to allocate distributive share items among partners when there is a change in a partner's interest during the tax year. Such a change may arise from a sale or disposition of all or part of an interest in the partnership (including certain deemed distributions) or from a reduction in a partner's interest due to the admission of new partners.
In general, the regulations adopt the 'interim closing of the books' method for allocating tax items. They also allow an annualized or proration method for items other than extraordinary items.
Perhaps most importantly, taxpayers and their advisors should be aware that the operation of some of the new rules and options depends on the existence of an agreement of the partners. Generally, this means either an actual agreement of all of the partners or certain actions of certain authorized persons, evidenced by timely, dated, written statements maintained with the partnership's books and records.
Business leaders should be familiar with the new rules when they are negotiating the terms of a transfer of a partnership interest or engaging in a general review of a partnership agreement. The choice among allowable allocation methods may have a significant effect on the tax consequences to the parties to a transfer and, in certain circumstances, to other partners.