In T.D. 9728 the IRS finalized the 2009 proposed § 706(d) regulations relating to how partnerships should allocate tax items to take into account a variance in a partner’s interest during a year. A typical example is when a partner makes a disproportionate contribution or received a disproportionate distribution during the year. The IRS also issued new proposed regulations to address the special interaction with tiered partnerships and so-called “allocable cash basis items” such as interest, taxes and service payments that are required to be prorated among the days to which they relate. In general these rules effect the legislative requirement that one cannot generally make a large capital contribution to a partnership at the very end of the year and receive a disproportionate loss allocation that relates to losses incurred earlier in the year.
The final regulations are quite lengthy and show the great attention to detail by the IRS as they tried to incorporate many practical taxpayer comments to make the process of allocating items among the partners more administrable. Helpful changes made in the final regulations include (1) expanding the exception for service partnerships to no longer be limited to specific types of services but instead include any partnership where capital is not a material income producing factor; (2) allowing a partnership to use different methods for different ownership changes, such as closing the books for one change and pro-rations for another change, provided that the overall combination of methods is reasonable based on the overall facts and circumstances; (3) permitting partnerships to perform regular monthly or semi-monthly interim closings, and to prorate items within each month or semi-month, as applicable, and (4) expanding the list of extraordinary items that may not be prorated to allow a partnership to add additional non-enumerated items for a taxable year if, for that taxable year, there is an agreement of the partners to consistently treat such items as extraordinary items and no substantial distortion of income results.
