Internal Revenue Bulletin 2015-33 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2015-33
August 17, 2015

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## INCOME TAX

### REG-109370-10, page 198.

Proposed regulations regarding the determination of a part-
ner's distributive share of certain allocable cash basis items
and items attributable to an interest in a lower-tier partnership
during a partnership taxable year in which a partner's interest
changes. These proposed regulations affect partnerships and
their partners.

### Rev. Proc. 2015-39, page 195.

This revenue procedure provides a safe harbor for accrual
method taxpayers to treat economic performance as occurring
ratably for certain service contracts. This revenue procedure
also provides procedures for obtaining automatic consent to
change to the safe harbor method of accounting.

### T.D. 9728, page 169.

Final regulations regarding the determination of a partner's
distributive share of partnership items of income, gain, loss,
deduction, and credit when a partner's interest varies during a
partnership taxable year. The final regulations also modify the
existing regulations regarding the required taxable year of a
partnership. These final regulations affect partnerships and
their partners.

## EMPLOYEE PLANS

Notice 2015-53, page 190.

This notice provides updated static mortality tables to be used
for defined benefit pension plans for purposes of calculating
the funding target and other items for valuation dates occurring
during calendar year 2016. This notice also includes a modi-
fied unisex version of the mortality tables for use in determining
minimum present value under § 417(e)(3) for distributions with
annuity starting dates that occur during stability periods begin-
ning in the 2016 calendar year.

## ADMINISTRATIVE

### Announcement 2015-18, page 198.

Announcement 2015-18 amends Revenue Procedure
2015-35 to: . Amend the penalties amounts for failure to file
correct information returns under section 6721 of the Code, .
Include regulation section 1.6047-2, and . Delete "Form
1042-S Foreign Person's U.S. Source Income Subject to With-
holding" from bullet list contained in the What's New section.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

26 CFR 1.706-4: Determination of distributive
share when a partner's interest varies.

### T.D. 9728

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602

### Determination of Distributive Share When Partner's Interest Changes

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations regarding the determina-
tion of a partner's distributive share of
partnership items of income, gain, loss,
deduction, and credit when a partner's
interest varies during a partnership taxable
year. The final regulations also modify the
existing regulations regarding the required
taxable year of a partnership. These final
regulations affect partnerships and their
partners.

DATES: Effective date: These regulations
are effective on August 3, 2015.

Applicability date: For dates of appli-
cability, see §§ 1.706-1(b)(6)(v), 1.706-
1(d), 1.706-4(g), and 1.706-5(b).

#### FOR FURTHER INFORMATION

CONTACT: Benjamin H. Weaver of the
Office of Associate Chief Counsel (Pass-
throughs and Special Industries) at (202)
317-6850 (not a toll-free number).

### SUPPLEMENTARY INFORMATION: Paperwork Reduction Act

The collection of information con-
tained in this Treasury decision has been
submitted to the OMB for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection of information
should be sent to the Office of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of

Information and Regulatory Affairs,
Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Re-
ports Clearance Officer, SE:W:CAR:MP:
T:T:SP, Washington, DC 20224. Com-
ments on the collection of information
should be received by October 2, 2015.
Comments are specifically requested con-
cerning:

Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;

The accuracy of the estimated burden
associated with the proposed collection of
information; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.

The collections of information in the
final regulations are in § 1.706-4(f),
which requires partnerships adopting the
proration method, adopting the semi-
monthly or monthly convention, choosing
to perform semi-monthly or monthly in-
terim closings, or selecting an additional
class of extraordinary items, to maintain a
statement with their books and records.
This information will be available to the
IRS upon examination to document the
partnership's selection of the method,
convention, optional interim closings, or
additional class of extraordinary items.
The collections of information are re-
quired to obtain a benefit. The likely re-
spondents are partnerships. The collec-
tions will be reported and collected
through the OMB approval number for
Form 1065, U.S. Return of Partnership
Income, under control number 1545-
0123; please see the instructions for Form
1065 for estimates of the burden associ-
ated with the collection of information.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the OMB.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-

rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

### Background

These final regulations contain amend-
ments to the Income Tax Regulations (26
CFR Part 1) under section 706 of the
Internal Revenue Code (Code). On April
14, 2009, the Treasury Department and
the IRS published a notice of proposed
rulemaking (REG-144689-04) (the 2009
proposed regulations) in the Federal Reg-
ister to provide guidance under section
706(d)(1) and to conform the Income Tax
Regulations for certain provisions of sec-
tion 1246 of the Taxpayer Relief Act of
1997, Public Law 105-34 (111 Stat. 788
(1997)), and section 72 of the Deficit Re-
duction Act of 1984, Public Law 98-369
(98 Stat. 494 (1984)). The Treasury De-
partment and the IRS did not hold a public
hearing because there were no requests to
speak at a hearing. However, the Treasury
Department and the IRS received com-
ments in response to the 2009 proposed
regulations. The comments are discussed
in this preamble.

The 2009 proposed regulations pro-
vided 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,
whether by reason of a disposition of the
partner's entire interest or less than the
partner's entire interest, or by reason of a
reduction of a partner's interest due to the
entry of a new partner or partners. The
2009 proposed regulations also added pro-
posed § 1.706-1(c)(2)(iii) to provide that
a deemed disposition of a partner's inter-
est pursuant to §§ 1.1502-76(b)(2)(vi) (re-
lating to corporate partners that become or
cease to be members of a consolidated
group within the meaning of § 1.1502-
1(h)), 1.1362-3(c)(1) (relating to the ter-
mination of the subchapter S election of
an S corporation partner), or 1.1377-
1(b)(3)(iv) (regarding an election to ter-
minate the taxable year of an S corpora-
tion partner) shall be treated as a
disposition of the partner's entire interest

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in the partnership. Finally, the 2009 pro-
posed regulations amended the rules ap-
plicable to the determination of the tax-
able year of a partnership when a
partnership interest is held by a "disre-
garded foreign partner" (as defined in
§ 1.706-1(b)(6)(i)).

After consideration of the comments,
the 2009 proposed regulations are adopted
as modified by this Treasury decision.

### Explanation of Provisions and Summary of Comments

#### 1. Varying Interests Rule

The 2009 proposed regulations under
§ 1.706-4 provided guidance under sec-
tion 706(d)(1), which provides that, ex-
cept as required by section 706(d)(2) and
(d)(3), if there is a change in a partner's
interest in the partnership during the part-
nership's taxable year, each partner's dis-
tributive share of any partnership item of
income, gain, loss, deduction, or credit for
such taxable year is determined by the use
of any method prescribed by the Secretary
by regulations which takes into account
the varying interests of the partners in the
partnership during such taxable year. The
2009 proposed regulations incorporated
several of the existing varying interest
rules in the regulations under section 706.
These final regulations finalize the vary-
ing interest rules contained in the 2009
proposed regulations with the modifica-
tions described in this Part 1 of the pre-
amble. The Treasury Department and the
IRS have decided that these modifications
necessitate reorganizing § 1.706-4 for
clarity. As finalized by these regulations,
§ 1.706-4(a)(3) now contains a step-by-
step process for making allocations under
§ 1.706-4. In addition, the remainder of
§ 1.706-4 has been reorganized into dis-
crete sections addressing the scope of
§ 1.706-4, exceptions to § 1.706-4, part-
nership conventions, extraordinary items,
and procedures for partnership decisions re-
lating to § 1.706-4. Where possible, this
preamble tracks the organization of
§ 1.706-4 as finalized by these regulations.

#### A. Scope of § 1.706-4

Section 1.706-4 of the final regula-
tions provides rules for determining the
partners' distributive shares of partnership

items when a partner's interest in a part-
nership varies during the taxable year as a
result of the disposition of a partial or
entire interest in a partnership as de-
scribed in § 1.706-1(c)(2) and (c)(3), or
with respect to a partner whose interest in
a partnership is reduced as described in
§ 1.706-1(c)(3), including by the entry of
a new partner (collectively, a "variation").
The final regulations further provide that,
in all cases, all partnership items for each
taxable year must be allocated among the
partners, and no items may be duplicated,
regardless of the particular provision of
section 706 which applies, and regardless
of the method or convention adopted by
the partnership.

The 2009 proposed regulations con-
tained two exceptions for allocations that
would otherwise be subject to the rules of
§ 1.706-4: one exception applies to cer-
tain partnerships with contemporaneous
partners, and the other exception applies
to certain service partnerships. As de-
scribed below, the final regulations adopt
these exceptions with certain modifica-
tions.

The 2009 proposed regulations did not
address the interaction of the allocable
cash basis item rules of section 706(d)(2)
and the tiered partnership rules of section
706(d)(3) with the rules in § 1.706-4 for
determining a partner's distributive share
when a partner's interest varies. However,
the 2009 proposed regulations did request
comments on issues that arise with regard
to allocable cash basis items and tiered
partnerships. In response to comments re-
ceived, §§ 1.706-2 and 1.706-3 are pro-
posed to be amended as described in a
notice of proposed rulemaking issued con-
temporaneously with these final regula-
tions to address the treatment of allocable
cash basis items and tiered partnerships,
respectively. The final regulations clarify
that § 1.706-4 does not apply to items
subject to allocation under other rules,
including section 706(d)(2) and section
706(d)(3).

#### i. Permissible changes among contemporaneous partners

The 2009 proposed regulations con-
tained a "contemporaneous partner excep-
tion" based on the Tax Court's opinion in
Lipke v. Commissioner, 81 T.C. 689

(1983), and the legislative history of sec-
tion 706. Section 761(c) provides that a
partnership agreement includes any mod-
ifications of the partnership agreement
made prior to, or at, the time prescribed by
law for the filing of the partnership return
for the taxable year (not including exten-
sions). In Lipke, the Tax Court held that
section 706(c)(2)(B) (as in effect prior to
1984) prohibited retroactive allocations of
partnership losses when the allocations re-
sulted from additional capital contribu-
tions made by both new and existing part-
ners. However, the Tax Court held that the
prohibition on retroactive allocations un-
der section 706(c)(2)(B) did not apply to
changes in the allocations among partners
that were members of the partnership for
the entire year (contemporaneous part-
ners) if the changes in the allocations did
not result from capital contributions. Con-
gress amended section 706 in 1984, in part
to clarify that the varying interests rule
applies to any change in a partner's inter-
est, whether in connection with a com-
plete disposition of the partner's interest
or otherwise. To that end, Congress re-
placed the varying interests rule in section
706(c)(2)(B) with the rule that now ap-
pears in section 706(d)(1). The legislative
history pertaining to this amendment re-
flects Congress's intention that the new
rule of section 706(d)(1) be comparable to
the pre-1984 law without overruling the
longstanding rule of section 761(c):

The committee wishes to make clear
that the varying interests rule is not
intended to override the longstand-
ing rule of section 761(c) with re-
spect to interest shifts among part-
ners who are members of the
partnership for the entire taxable
year, provided such shifts are not, in
substance, attributable to the influx
of new capital from such partners.
See Lipke v. Commissioner, 81 T.C.
689 (1983).

S. Prt. 98-169, Vol. I, 98th Cong., 2d
Sess. 218-19 (1984); see also H. Rep. No.
432, Pt. 2, 98th Cong., 2d Sess. 1212-13
(1984) (containing similar language).

Consistent with this authority, pro-
posed § 1.706-4(b)(1) provided an ex-
ception to the rule in proposed § 1.706-
4(a)(1) for dispositions of less than a
partner's entire interest in the partnership
described in § 1.706-1(c)(3), provided
that the variation in the partner's interest

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is not attributable to a capital contribution
or a partnership distribution to a partner
that is a return of capital, and the alloca-
tions resulting from the modification oth-
erwise comply with section 704(b) and the
regulations promulgated thereunder.

Commenters requested guidance on
determining when changes in the alloca-
tions among partners are attributable to
capital contributions to, and distributions
from, the partnership, and which require-
ments of section 704(b) must be met. The
final regulations do not address the deter-
mination of whether an amended alloca-
tion is attributable to a contribution or a
distribution to a partner or whether such
allocations otherwise satisfy section
704(b) because these comments raise is-
sues beyond the scope of this project and
require further consideration. However,
the Treasury Department and the IRS may
address these issues in future guidance.

Commenters also requested that the fi-
nal regulations expand the scope of the
contemporaneous partner exception to in-
clude allocations of items attributable
solely to a particular segment of a part-
nership's year (see § 1.706-4(a)) among
partners who are partners of the partner-
ship for that entire segment. The final
regulations adopt this recommendation
and finalize the contemporaneous partner
exception.

##### ii. Safe harbor for partnerships for which capital is not a material income- producing factor

Proposed § 1.706-4(b)(2) provided
that a service partnership (a partnership in
which substantially all the activities in-
volve the performance of services in the
fields of health, law, engineering, archi-
tecture, accounting, actuarial science, or
consulting) may choose to determine the
partners' distributive shares of partnership
income, gain, loss, deduction, and credit
using any reasonable method, provided
that the allocations were valid under sec-
tion 704(b). Commenters recommended
the final regulations extend the safe harbor
to non-service partnerships that satisfy
specific revenue and allocation thresholds
(for example, gross receipts of $100 mil-
lion or less and no partner receives an
allocation of an item listed under section
702(a) in excess of $10 million). Another

commenter requested that the final regu-
lations provide that the list of service part-
nerships could be expanded by other pub-
lished guidance.

The Treasury Department and the IRS
intend the safe harbor for service partner-
ships to be limited to partnerships that
derive their income from the provision of
services and not from capital because, in
general, allocations among individual
partners in partnerships for which capital
is not a material income-producing factor
do not raise concerns that may be present
in allocations among partners in capital-
intensive partnerships. Therefore the final
regulations do not provide an exception
based upon revenue and allocation thresh-
olds. However, the Treasury Department
and the IRS agree that the definition of a
service partnership in the proposed regu-
lations was overly narrow. Accordingly,
the final regulations apply the service
partnership safe harbor to any partnership
for which capital is not a material income-
producing factor.

#### B. Varying Interest Rule Methods: Interim Closing and Proration

The 2009 proposed regulations gener-
ally provided that a partnership shall take
into account any variation in the partners'
interests in the partnership during the tax-
able year in determining the distributive
share of partnership items under section
702(a) by using either the interim closing
method or the proration method. Unless
the partners agree to use the proration
method, the partnership was required to
use the interim closing method and allo-
cate its items among the partners in accor-
dance with their respective partnership in-
terests during each segment of the taxable
year. Under the 2009 proposed regula-
tions, if the partners agreed to use the
proration method, the partnership was re-
quired to allocate the distributive share of
partnership items among the partners in
accordance with their pro rata shares of
the items for the entire taxable year. The
2009 proposed regulations did not, how-
ever, allow certain "extraordinary items"
to be prorated, and instead required that
those items be allocated according to spe-
cial rules. These regulations finalize the
method rules of the 2009 proposed regu-
lations with certain modifications.

i. Use of more than one method and
convention during the same taxable
year.

Proposed § 1.706-4(a)(1) required the
partnership and all of its partners to use
the same method for all variations in the
partners' interests occurring within the
partnership's taxable year, whether result-
ing from a complete or partial termination
of a partner's interest or the entry of a new
partner. Commenters recommended that
the final regulations allow a partnership to
use different methods for separate varia-
tions during the partnership's taxable
year, provided that the overall combina-
tion of methods is reasonable based on the
overall facts and circumstances. Com-
menters stated that it would be reasonable
for a partnership to be allowed to apply
the interim closing method to a transfer of
a large interest in the partnership, where
the partnership or transferee or transferor
partner is willing to pay for the additional
accounting costs associated with the in-
terim closing method, and in the same
year apply the proration method for trans-
fers of small interests (or other large trans-
fers of interests if, for example, the parties
are unwilling to bear the costs of closing
the books), in order to minimize the costs
and administrative burden of accounting
for such transfers. The Treasury Depart-
ment and the IRS agree that partnerships
may be more willing to use the interim
closing method, which is generally more
accurate but more costly, for significant
variations if doing so would not require
the partnership to use the interim closing
method for all variations, regardless of
size, that occur throughout the year.
Therefore, in response to comments, the
final regulations allow a partnership to use
different methods for different variations
within the partnership's taxable year, as
explained in Part 1.B.iii of this Preamble.
Accordingly, a partnership may use the
interim closing method with respect to
one variation and may choose to use the
proration method for another variation in
the same year. However, the final regula-
tions provide that the Commissioner may
place restrictions on the ability of a part-
nership to use different methods during
the same taxable year in guidance pub-
lished in the Internal Revenue Bulletin.

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ii. Optional regular monthly or semi-
monthly interim closings.

The 2009 proposed regulations require
partnerships applying the interim closing
method to perform the interim closing at
the time the variation is deemed to occur,
and do not require or permit a partnership
to perform an interim closings of its books
except at the time of any variation for
which the partnership uses the interim
closing method. One commenter stated
that of the partnerships that close their
books at times other than year end, most
do so at month end, and some close their
books semi-monthly. The commenter
stated that most partnerships that currently
are subject to the interim closing method
do not actually close their books other
than at month end as they do not have the
resources and systems organized in order
to do that. The commenter requested that
partnerships using the interim closing
method and the calendar day convention
be allowed under the final regulations to
determine income on a calendar day basis
by closing their books at month's end, and
then prorating the last month's income to
the periods of the month before and after
the calendar day on which the variation
occurred. The Treasury Department and
the IRS agree that partnerships should be
permitted to perform regular monthly or
semi-monthly interim closings, and to
prorate items within each month or semi-
month, as applicable. Therefore, the final
regulations provide that a partnership
may, by agreement of the partners, per-
form regular interim closings of its books
on a monthly or semi-monthly basis, re-
gardless of whether any variation occurs.
The Treasury Department and the IRS be-
lieve that this combination of the use of
regular interim closings and the proration
method with respect to variations should
generally achieve the results sought by the
commenter. The final regulations continue
to require a partnership using the interim
closing method with respect to a variation
to perform the interim closing at the time
the variation is deemed to occur, and do
not require a partnership to perform an
interim closing of its books except at the
time of any variation for which the part-
nership uses the interim closing method.

The final regulations provide guidance
on the meaning of the term "agreement of

the partners," including for purposes of
the decision to perform regular monthly or
semi-monthly interim closings. Because
that term applies to several different deci-
sions in § 1.706-4, the discussion of
"agreement of the partners" is consoli-
dated into Part 1.E of this preamble.

#### iii. Segments and Proration Periods

For purposes of accounting for the
partners' varying interests in the partner-
ship, the 2009 proposed regulations re-
quired the partnership to maintain, for
each partner whose interest changes in the
taxable year, segments to account for such
changes. Under the 2009 proposed regu-
lations, a segment was a specific portion
of a partnership's taxable year created by
a variation, regardless of whether the part-
nership used the interim closing method
or the proration method for that variation.
The final regulations continue to rely on
the concept of segments; however, be-
cause the final regulations now permit
partnerships to use both the interim clos-
ing method and the proration method in
the same taxable year, the final regulations
also contain a new concept of proration
periods. Under the final regulations, seg-
ments are specific periods of the partner-
ship's taxable year created by interim
closings of the partnership's books, and
proration periods are specific portions of a
segment created by a variation for which
the partnership chooses to apply the pro-
ration method. The partnership must di-
vide its year into segments and proration
periods, and spread its income among the
segments and proration periods according
to the rules for the interim closing method
and proration method, respectively.

Under the final regulations, the first
segment commences with the beginning
of the taxable year of the partnership and
ends at the time of the first interim closing
of the partnership's books. Any additional
segment shall commence immediately af-
ter the closing of the prior segment and
ends at the time of the next interim clos-
ing. However, the last segment of the part-
nership's taxable year ends no later than
the close of the last day of the partner-
ship's taxable year. If there are no interim
closings, the partnership has one segment,
which corresponds to its entire taxable
year.

Under the final regulations, the first
proration period in each segment begins at
the beginning of the segment, and ends at
the time of a variation for which the part-
nership uses the proration method. The
next proration period begins immediately
after the close of the prior proration period
and ends at the time of the next variation
for which the partnerships uses the prora-
tion method. However, each proration pe-
riod ends no later than the close of the
segment. Thus, segments close proration
periods. Therefore, the only items subject
to proration are the partnership's items
attributable to the segment containing the
proration period.

#### a. Rules for determining the items in each segment

Proposed § 1.706-4(a)(2)(i) required
that a partnership using the interim clos-
ing method treat each segment as though
the segment was a separate distributive
share period and that therefore a partner-
ship using the interim closing method may
compute a capital loss for a segment of a
taxable year even though the partnership
has a net capital gain for the entire taxable
year. Similarly, proposed § 1.706-
4(a)(2)(ii) provided that any limitation ap-
plicable to the partnership year as a whole
(for example, the limitation under section
179 relating to elections to expense cer-
tain depreciable business assets) must be
apportioned among the segments using
any reasonable method, provided that the
total amount of the items apportioned
among the segments does not exceed the
limitation applicable to the partnership
year as a whole.

Commenters expressed concern that
the examples do not clarify how a part-
nership accounts for items that are not
determined until the end of the taxable
year, such as waterfall allocations, mini-
mum gain chargebacks, and certain re-
serves. Commenters specifically inquired
whether these determinations are made at
the interim closing dates or at the end of
the partnership's taxable year. Other com-
menters questioned whether the distribu-
tive share periods are treated as separate
taxable years for purposes of sections
461(h) (relating to economic perfor-
mance) and 404(a)(5) (relating to deduc-
tions for contributions to employee plans).

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Finally, other commenters requested guid-
ance on the interaction of sections 168
(relating to the modified accelerated cost
recovery system) and 471 (relating to ac-
counting for inventories) with the 2009
proposed regulations.

Proposed § 1.706-4(a)(2)(i) and (ii)
were intended to demonstrate that year-
end determinations and annual limitations
are evaluated only at the end of the part-
nership's taxable year. The final regula-
tions continue to provide that each seg-
ment is generally treated as a separate
distributive share period. Additionally, the
final regulations provide that for purposes
of determining allocations to segments,
any special limitation or requirement re-
lating to the timing or amount of income,
gain, loss, deduction, or credit applicable
to the entire partnership taxable year will
be applied based on the partnership's sat-
isfaction of the limitation or requirements
as of the end of the partnership's taxable
year. For example, the expenses related to
the election to expense a section 179 asset
must first be calculated (and limited if
applicable) based on the partnership's full
taxable year, and then the effect of any
limitation must be apportioned among the
segments in accordance with the interim
closing method or the proration method
using any reasonable method. Thus, the
segments are not treated as separate tax-
able years for purposes of sections 461(h)
and 404(a)(5). The final regulations do not
address inventory accounting under sec-
tion 471 because those issues are beyond
the scope of this project.

Moreover, other provisions of the Code
providing a convention for making a par-
ticular determination still apply. For ex-
ample, section 168 provides conventions
for determining when property is placed
in service and when property is disposed
of. The convention in section 168 would
apply first to determine when the property
is placed in service or when the property
is disposed of, and section 706 would
apply second to determine who was a
partner during that segment. The Treasury
Department and the IRS are studying is-
sues relating to the interaction of section
706 and the partnership minimum gain
provisions in § 1.704-2 and therefore the
final regulations do not address these is-
sues. As discussed in Part 1.F of this pre-
amble, the interaction of sections 704 and

706 is generally beyond the scope of these
final regulations; accordingly, these final
regulations do not address the treatment of
waterfall allocations.

#### b. Determining the items in each proration period

Under the 2009 proposed regulations,
if the partners agreed to use the proration
method, the partnership was required to
allocate the distributive share of partner-
ship items among the partners in accor-
dance with their pro rata shares of the
items for the entire taxable year. The
Treasury Department and the IRS re-
ceived several comments suggesting var-
ious modifications to the proration
method. Commenters stated that the 2009
proposed regulations provided less flexi-
bility in accounting for partners' varying
interests under the proration method than
the current regulations under section 706.
Commenters recommended that the final
regulations retain the flexibility of the cur-
rent regulations by allowing partnerships
to use any reasonable proration method to
determine partners' distributive shares of
partnership items and that the final regu-
lations provide examples of reasonable
proration methods. The Treasury Depart-
ment and the IRS believe that, because the
final regulations provide partnerships with
flexibility to use either the interim closing
method or the proration method for each
variation, and because the proration
method can be less accurate than the in-
terim closing method, it is appropriate to
generally retain the rules applicable to the
proration method from the 2009 proposed
regulations. Accordingly, the final regula-
tions do not adopt this suggestion. How-
ever, because the final regulations permit
partnerships to use both the proration
method and the interim closing method in
the same taxable year, the rules for the
proration method are now based upon the
items in each segment, rather than the
items for the partnership's entire taxable
year. Section 1.706-4(a)(4) of the final
regulations contains a detailed example
illustrating the interaction of segments
and proration periods.

Proposed § 1.706-4(d)(1) provided
that, for purposes of the proration method,
specific items aggregated by the partner-
ship at the end of the year (other than

extraordinary items) shall be disregarded,
and the aggregate of the items shall be
considered to be the partnership item for
the year. Commenters questioned whether
proposed § 1.706-4(a)(2)(i) and (ii) and
(d)(1) were intended to provide the same
rules for both the interim closing method
and the proration method. These sections
address different issues. Proposed
§ 1.706-4(d)(1) was intended to allow
partnerships that have multiple items that
are aggregated by the partnership at the
end of the year to also treat those items as
a single item for purposes of the proration
method (for example, capital gains and
capital losses). By contrast, proposed
§ 1.706-4(a)(2)(i) and (ii) were intended
to demonstrate that for purposes of deter-
mining allocations to segments, any an-
nual limitation will be disregarded as long
as the limitation is satisfied by the end of
the partnership's taxable year.

One commenter requested that the final
regulations allow publicly traded partner-
ships (as defined in section 7704(b)) that
are treated as partnerships ("PTPs") using
the proration method and calendar day
convention to prorate their annual aggre-
gate tax items by the number of months
instead of the number of days. Because
the use of the proration method can be less
accurate than the interim closing method
in certain circumstances, the Treasury De-
partment and the IRS believe that partner-
ships using the proration method should
prorate by the number of days. Therefore,
the final regulations do not adopt this rec-
ommendation.

#### iv. Agreement of the partners to use the proration method

Consistent with the 2009 proposed reg-
ulations, under the final regulations the
proration method may be used only by
"agreement of the partners." Commenters
requested guidance on the meaning of this
term, and the final regulations provide
guidance as described in Part 1.E of this
preamble.

C. Varying Interest Rule Conventions:
Calendar Day, Semi-Monthly, and
Monthly

The 2009 proposed regulations ac-
knowledged that for certain partnerships

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using the interim closing method, such as
partnerships in which interests are fre-
quently transferred, determining the part-
nership items for each segment could cre-
ate a significant administrative burden.
Accordingly, the 2009 proposed regula-
tions allowed the use of simplifying con-
ventions. Conventions are rules of admin-
istrative convenience that determine when
each variation is deemed to occur for pur-
poses of § 1.706-4. Because the timing of
each variation determines the partner-
ship's segments and proration periods,
which in turn are used to determine the
partners' distributive shares, the conven-
tion used by the partnership with respect
to a variation will generally affect the
allocation of partnership items. However,
as discussed in Part 1.D.ii of this pream-
ble, extraordinary items generally must be
allocated without regard to the partner-
ship's convention.

The 2009 proposed regulations pro-
vided that a partnership using the interim
closing method could use either the cal-
endar day convention or the semi-monthly
convention to determine the segments of
the partnership's taxable year, and pro-
vided that a partnership using the prora-
tion method shall use the calendar day
convention. The 2009 proposed regula-
tions required the partnership to use the
same convention for all variations during
a taxable year. The 2009 proposed regu-
lations requested comments with regard to
the possible expansion of these rules to
include other conventions or other meth-
ods. The final regulations generally final-
ize the rules for conventions from the
2009 proposed regulations with the mod-
ifications described in this Part 1.C of the
preamble.

#### i. Allowance of monthly conventions

Commenters noted that the legislative
history of section 706(d) contemplated
that regulations under section 706 would
provide a monthly convention for all part-
nerships. These commenters also argued
that the administrative burden and ac-
counting complexity inherent in the in-
terim closing method would be alleviated
by a monthly convention. Accordingly,
the commenters recommended that the
monthly convention be available to all
partnerships, regardless of method, pro-

vided that the overall allocation of part-
nership items is reasonable.

The legislative history indicates that
Congress did consider providing for a
statutory election to use a monthly con-
vention:

[T]o prevent undue complexity, the
bill provides, that in any case where
there is a disposition of less than an
entire interest in the partnership by a
partner (including the entry of a new
partner), the partnership may elect
(on an annual basis) to determine
the varying interests of the partners
by using a monthly convention that
treats any changes in any partner's
interest in the partnership during the
taxable year as occurring on the first
day of the month.

S. REP. No. 98-169, at 221 (1984).
However, this statutory provision was not
enacted and the House-Senate Conference
Committee report explains that it was
omitted because Congress expected the
Secretary to provide for a monthly con-
vention by regulation. H.R. REP. No. 98-
861, at 858 (1984). In accordance with
this Congressional intent, the final regula-
tions provide that any partnership using
the interim closing method (but not part-
nerships using the proration method) may
use a monthly convention to account for
partners' varying interests. Under the
monthly convention, in the case of a vari-
ation occurring on the first through the
15th day of a calendar month, the varia-
tion is deemed to occur for purposes of
§ 1.706-4 at the end of the last day of the
immediately preceding calendar month.
And in the case of a variation occurring on
the 16th through the last day of a calendar
month, the variation is deemed to occur
for purposes of § 1.706-4 at the end of
the last day of that calendar month.

Consistent with the rules for the selec-
tion of the proration method, the final
regulations provide that the selection of
the convention must be made by agree-
ment of the partners by satisfying the pro-
visions of § 1.706-4(f) of these final reg-
ulations as explained in Part 1.E of this
preamble. In the absence of an agreement
to use a convention, the partnership will
be deemed to have chosen the calendar
day convention.

ii. Convention for partnerships using the
proration method

Commenters also requested that the fi-
nal regulations allow partnerships using
the proration method to allocate extraor-
dinary items under either the calendar day
convention or the semi-monthly conven-
tion to mirror the rules under the interim
closing method. As explained in Part 1.D.i
of this preamble, the final regulations pro-
vide that extraordinary items must gener-
ally be allocated based on the date and
time on which the extraordinary items
arise, without regard to the partnership's
convention or use of the proration method
or interim closing method. Thus, under
the final regulations the allocation of ex-
traordinary items will generally be the
same regardless of the partnership's se-
lected method or convention.

The partnership's method and conven-
tion are generally relevant in determining
allocations of non-extraordinary items.
The final regulations retain the require-
ment that partnerships using the proration
method must use a calendar day conven-
tion. Partnerships using the interim clos-
ing method have the option of using a
semi-monthly or monthly convention in
addition to the calendar day convention
because of the additional administrative
burdens inherent in using the more accu-
rate interim closing method. Although the
proration method may impose less admin-
istrative burdens on a partnership, it is less
accurate than the interim closing method.
Thus, the Treasury Department and the
IRS believe it is necessary to retain the
requirement of a calendar day convention
for the proration method.

#### iii. Conventions for PTPs

Proposed § 1.706-4(b)(3) provided a
safe harbor for PTPs that permitted a PTP
using either the interim closing method or
the proration method to treat all transfers
of its publicly traded units (as described in
§ 1.7704-1(b)(1)) except for certain block
transfers during the calendar month as oc-
curring, for purposes of determining part-
ner status, on the first day of the following
month under a consistent method adopted
by the partnership. Proposed § 1.706-
4(b)(3) also provided that, alternatively,
PTPs could use the semi-monthly conven-

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tion described in proposed § 1.706-
4(e)(2). The proposed PTP safe harbor
referenced both rules for determining
partner status and conventions in the same
sentence, which could cause confusion.
To eliminate this confusion, the Treasury
Department and the IRS have decided to
incorporate the rules of the PTP safe har-
bor from the 2009 proposed regulations,
modified in response to comments as de-
scribed in this section of the preamble,
into the portions of the regulations provid-
ing rules for partnership conventions and
methods. Therefore, the PTP safe harbor
from the 2009 proposed regulations is no
longer necessary and has been removed
from the final regulations. However, as
described below, the substantive rules
from the PTP safe harbor remain largely
unchanged in these final regulations.

Commenters on the PTP safe harbor
recommended that PTPs should be able to
apply their conventions to all transfers of
units, not just publicly traded units, in-
cluding block transfers. The IRS and the
Treasury Department agree that the rules
from the proposed regulations should be
extended to block transfers, but believe
that transfers of non-publicly traded units
should be accounted for similar to trans-
fers of interests in non-publicly traded
partnerships. Accordingly, the final regu-
lations provide that a PTP may, by agree-
ment of the partners, use any of the cal-
endar day, the semi-monthly, or the
monthly convention with respect to all
variations during the taxable year relating
to its publicly-traded units, regardless of
whether the PTP uses the proration
method with respect to those variations. A
PTP must use the same convention for all
variations during the taxable year relating
to its publicly traded units. The final reg-
ulations provide that a PTP must use the
calendar day convention with respect to
all variations relating to its non-publicly
traded units for which the PTP uses the
proration method. In addition, consistent
with the rules from the PTP safe harbor in
the 2009 proposed regulations, the final
regulations provide that a PTP using a
monthly convention generally may con-
sistently treat all variations occurring dur-
ing each month as occurring at the end of
the last day of that calendar month, if the
PTP uses the monthly convention for
those variations.

The preamble to the 2009 proposed
regulations acknowledged that some PTPs
use conventions not described in the 2009
proposed regulations and requested com-
ments concerning the use of additional
conventions. In response to this request
for comments, one commenter on the PTP
safe harbor also recommended that the
final regulations allow PTPs to use a quar-
terly convention. This commenter stated
that PTPs generally declare cash distribu-
tions quarterly to their unit holders of re-
cord on the last day of the quarter to align
the distributions with the PTPs' quarterly
financial reporting. The Treasury Depart-
ment and the IRS believe that a quarterly
convention could significantly reduce the
accuracy of the allocations of a partner-
ship's tax items to a particular partner.
Accordingly, the final regulations do not
permit PTPs to use a quarterly convention.
As discussed in Part 1.D.iii.a of this pre-
amble, however, proposed regulations un-
der section 706 (REG-109370-10) are
being published concurrently with these
final regulations, and, subject to certain
exceptions, provide that PTPs may, by
agreement of their partners, treat all items
of income that are amounts subject to
withholding as defined in § 1.1441-2(a)
(excluding income effectively connected
with the conduct of a trade or business
within the United States) or withholdable
payments under § 1.1473-1(a) as extraor-
dinary items. If the partners so agree, then
for purposes of section 706 such items are
treated as occurring at the next time as of
which the recipients of a distribution by
the PTP are determined, or, to the extent
such income items arise between the final
time during the taxable year as of which
the recipients of a distribution are deter-
mined and the end of the taxable year,
such items shall be treated as occurring at
the final time during the taxable year that
the recipients of a distribution by the PTP
are determined. This proposed rule does
not apply unless the PTP has a regular
practice of making at least four distribu-
tions (other than de minimis distributions)
to its partners during each taxable year.
The Treasury Department and the IRS be-
lieve that this proposed rule is desirable to
link each partner's distributive share to
the related cash distributions, thereby en-
abling PTPs and their transfer agents to
satisfy their withholding obligations under

chapter 4 of the Code and under sections
1441 through 1443 from distributions.

The convention rules in proposed
§ 1.706-4(c)(2) and (d)(2) did not apply
to existing PTPs (existing PTP exception).
Solely for purposes of the 2009 proposed
regulations, an existing PTP was a part-
nership described in section 7704(b) that
was formed on a date before the 2009
proposed regulations were published.
Commenters noted that an existing PTP
that terminates under section 708(b)(1)(B)
due to the sale or exchange of 50 percent
or more of the total interests in partnership
capital and profits (a "technical termina-
tion") on or after the publication of the
2009 proposed regulations would not re-
ceive the benefit of the existing PTP ex-
ception. These commenters noted that a
technical termination is a tax concept and
does not result in any changes to the part-
nership agreement, including any provi-
sions relating to section 706(d). Com-
menters also noted that disregarding
technical terminations of PTPs would be
consistent with other regulation provi-
sions (such as § 1.731-2(g)(2), which pro-
vides that a successor partnership formed
as a result of technical termination is dis-
regarded for purposes of applying section
731(c)). The final regulations adopt this
recommendation and provide that, for pur-
poses of the effective date provision, the
termination of a PTP under section
708(b)(1)(B) is disregarded in determin-
ing whether the PTP is an existing PTP.

#### iv. Use of more than one convention during a taxable year

The 2009 proposed regulations re-
quired the partnership to use the same
convention for all variations during a tax-
able year. Because the final regulations
permit partnerships to use both the prora-
tion and interim closing methods during a
taxable year, the final regulations provide
that the partnership and all of its partners
must use the same convention for all vari-
ations for which the partnership chooses
to use the interim closing method. Fur-
thermore, because PTPs are also permitted
to use the semi-monthly and monthly con-
ventions with respect to variations for
which the PTP uses the proration method,
the final regulations provide that PTPs

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must use the same convention for all vari-
ations during the taxable year.

#### v. Deemed timing of variations

Under the semi-monthly convention in
the 2009 proposed regulations, the first
segment of the partnership's taxable year
commenced with the beginning of the
partnership's taxable year, and with re-
spect to a variation in interest occurring
on the first through the 15th day of the
month, was deemed to close at the end of
the last day of the immediately preceding
calendar month. Thus, although the 2009
proposed regulations provided that the
first segment commences with the begin-
ning of the partnership's taxable year,
they also provided that a variation occur-
ring on the first through the 15th day of
the first calendar month of the partner-
ship's taxable year was deemed to occur
at the end of the last day of the immedi-
ately preceding calendar month, which
would be the last day of the prior taxable
year. The final regulations provide that all
variations within a taxable year are
deemed to occur no earlier than the first
day of the partnership's taxable year, and
no later than the close of the final day of
the partnership's taxable year. Thus, un-
der the semi-monthly or monthly conven-
tion, a variation occurring on January 1st
through January 15th for a calendar year
partnership will be deemed to occur for
purposes of § 1.706-4 at the beginning of
the day on January 1. The conventions are
not applicable to a sale or exchange of an
interest in the partnership that causes a
termination of the partnership under sec-
tion 708(b)(1)(B); instead, such a sale or
exchange will be considered to occur
when it actually occurred.

vi. Exception for admission to and exit
from the partnership within a convention
period

The Treasury Department and the IRS
recognize that, while the conventions are
rules of administrative convenience that
simplify the partnership's determination
of the partners' distributive shares, the
application of the conventions could result
in some partners not being allocated any
share of partnership items at all. For ex-
ample, under the monthly convention, if a

new partner buys a partnership interest on
or after the 16th day of a month, and sells
the entire partnership interest on or before
the 15th day of the following month, that
partner would not be treated as having
been a partner at all for purposes of
§ 1.706-4, even if that partner otherwise
is treated as a partner for purposes of other
Code and regulations provisions, includ-
ing section 6031(b) (relating to the part-
nership's obligation to furnish each part-
ner a Schedule K-1, "Partner's Share of
Income, Deductions, Credits, etc.") and
§§ 1.6012-1(b) and 1.6012-2(g) (relating
to the obligation of certain foreign persons
engaged in a U.S. trade or business to file
a return). However, the Treasury Depart-
ment and the IRS believe that the appli-
cation of the conventions should not cause
persons who are admitted to and exit from
a partnership during a single convention
period to avoid all allocations under
§ 1.706-4. Accordingly, the final regula-
tions provide that in the case of a partner
who becomes a partner during the partner-
ship's taxable year as a result of a varia-
tion, and ceases to be a partner as a result
of another variation, and under the appli-
cation of the partnership's conventions
both such variations would be deemed to
occur at the same time, the variations with
respect to that partner's interest will in-
stead be treated as occurring when they
actually occurred. Thus, in such a case,
the partnership must treat the partner as a
partner for the entire portion of its taxable
year during which the partner actually
owned an interest. However, in recogni-
tion of the increased administrative diffi-
cultly this exception would have for PTPs,
this exception does not apply to PTPs with
respect to holders of publicly traded units
(as described in § 1.7704-1(b) or (c)(1)).

#### D. Extraordinary items

Section 1.706-4(d)(3) of the 2009 pro-
posed regulations required a partnership
using the proration method to allocate ex-
traordinary items among the partners in
proportion to their interests at the begin-
ning of the day on which they are taken
into account. Section 1.706-4(d)(3) of the
2009 proposed regulations contained a list
of nine enumerated extraordinary items.
These final regulations continue to pro-
vide special rules for the allocation of

extraordinary items; in addition, as dis-
cussed in this Part 1.D of the preamble,
the final regulations expand the applica-
tion of the extraordinary item rules to
cover partnerships using the interim clos-
ing method, modify the list of extraordi-
nary items and the timing of extraordinary
item inclusions, and add a small item ex-
ception.

##### i. Extraordinary items and the interim closing method

The 2009 proposed regulations did not
require partnerships using the interim
closing method to separately account for
extraordinary items. However, the Trea-
sury Department and the IRS are aware
(and commenters pointed out) that part-
nerships using the interim closing method
and either the semi-monthly convention or
the monthly convention to account for ex-
traordinary items may achieve inappropri-
ate tax consequences by shifting the tax
consequences of extraordinary items to
partners that were not partners in the part-
nership when the partnership incurred the
extraordinary item. The Treasury Depart-
ment and the IRS believe that extraordi-
nary items should generally be taken into
account by the partners that were partners
at the time the partnership incurred the
extraordinary item. Therefore, the final
regulations provide that the extraordinary
item rules also apply to partnerships using
the interim closing method.

Thus, the final regulations require the
allocation of extraordinary items as an
exception to (1) the proration method,
which would otherwise ratably allocate
the extraordinary items across the seg-
ment, and (2) the conventions, which
might otherwise inappropriately shift ex-
traordinary items between a transferor and
transferee. The final regulations also pro-
vide that extraordinary items continue to
be subject to any special limitation or re-
quirement relating to the timing or amount
of income, gain, loss, deduction, or credit
applicable to the entire partnership taxable
year (for example, the limitation for sec-
tion 179 expenses).

#### ii. Timing of extraordinary items

Proposed § 1.706-4(d)(3) provided
that a partnership must allocate extraordi-

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nary items among the partners in propor-
tion to their interests at the beginning of
the calendar day on which they are taken
into account (beginning of the day rule).
One commenter noted that under this rule,
if a partnership interest is transferred on a
given date and an extraordinary item is
recognized by the partnership after the
transfer, but still on the transfer date, the
2009 proposed regulations required the
item to be allocated to the transferor. This
commenter noted that other regulation
sections use a "next day rule" (for exam-
ple, §§ 1.1502-76(b)(1)(ii)(B) and 1.338-
1(d)). According to the commenter, under
the next day rule, an item would be treated
as occurring at the beginning of the day
following the day on which the extraordi-
nary item is taken into account by the
partnership. Another commenter ex-
pressed concern that the beginning of the
day rule was incompatible with partner-
ship agreements that provide that part-
ners' distributive shares are determined on
the basis of hurdles, waterfalls, or other
income/loss thresholds.

The Treasury Department and the
IRS agree that extraordinary items
should generally be allocated according
to the partners' interests in the item at
the time the extraordinary item arose.
However, the Treasury Department and
the IRS believe that a "next day" rule
could result in inappropriate shifts of
extraordinary items between a transferor
and a transferee in situations in which
the extraordinary items arise before, but
on the same day as, the transfer of a
partnership interest. In addition, the
Treasury Department and the IRS be-
lieve that allowing allocation of extraor-
dinary items based upon end of year
threshold determinations such as hurdles
or waterfalls would be inconsistent with
the purpose of the varying interest rule
and could result in inappropriate shifts
in extraordinary items. Therefore, to
avoid inappropriate shifts in extraordi-
nary items, the final regulations provide
that extraordinary items must be allo-
cated in accordance with the partners'
interests in the partnership item at the
time of day that the extraordinary item
occurs, regardless of the method and
convention otherwise used by the part-
nership. Thus, if a partner disposes of its
entire interest in a partnership before an

extraordinary item occurs (but on the
same day), the partnership and all of its
partners must allocate the extraordinary
item in accordance with the partners'
interests in the partnership item at the
time of day on which the extraordinary
item occurred; in such a case, the trans-
feror will not be allocated a portion of
the extraordinary item, regardless of
when the transfer is deemed to occur
under the partnership's convention.
However, the final regulations provide
that PTPs (as defined in section 7704(b))
may, but are not required to, respect the
applicable conventions in determining
who held their publicly traded units (as
described in § 1.7704-1(b) or 1.7704-
1(c)(1)) at the time of the occurrence of
an extraordinary item. The Treasury De-
partment and the IRS believe that this
exception is necessary for administra-
tive convenience given the frequency of
variations experienced by PTPs. Exam-
ples 1 through 4 of § 1.706-4(e)(4)
illustrate these timing rules.

As discussed in Part 1.B.i of this pre-
amble, proposed § 1.706-4(a)(1) required
the partnership and all of its partners to
use the same method for all variations in
the partners' interests occurring within the
partnership's taxable year, whether in
complete or partial termination of the
partners' interests. Proposed § 1.706-
4(d)(3) provided that partnerships using
the proration method must allocate ex-
traordinary items among the partners in
proportion to their interests at the begin-
ning of the calendar day of the day on
which they are taken into account, thus
prohibiting the partnership from allocat-
ing extraordinary items using the prora-
tion method. Commenters stated that pro-
posed § 1.706-4(a)(1) and (d)(3), when
read together, could be interpreted to pro-
hibit partnerships with extraordinary
items from the using the proration
method. These commenters also stated
that these provisions could be interpreted
to prohibit the use of the so-called "hybrid
method." One commenter explained that
under a hybrid method, a partnership sep-
arates certain extraordinary items and al-
locates them to partners based on their
interests in the partnership on particular
days or periods (for example, the date of
sale), effectively using the interim closing
method and a calendar day convention

with respect to these extraordinary items.
According to this commenter, the partner-
ship then allocates the remaining partner-
ship items in accordance with the prora-
tion method. A commenter also requested
that the final regulations permit partner-
ships using the proration method to use
the interim closing method and a semi-
monthly convention to account for ex-
traordinary items. Under the final regula-
tions, a partnership with extraordinary
items may use the proration method. As a
result, the final regulations effectively per-
mit the hybrid method described by the
commenter. However, the final regula-
tions provide that partnerships must allo-
cate extraordinary items according to the
partners' interests in the partnership item
at the time of day that the extraordinary
item arose, generally without regard to the
method and convention otherwise used by
the partnership.

#### iii. List of extraordinary items

The 2009 proposed regulations de-
fined an extraordinary item as (i) any
item from the disposition or abandon-
ment (other than in the ordinary course
of business) of a capital asset as defined
in section 1221 (determined without the
application of any other rules of law);
(ii) any item from the disposition or
abandonment of property used in a trade
or business (other than in the ordinary
course of business) as defined in section
1231(b) (determined without the appli-
cation of any holding period require-
ment); (iii) any item from the disposi-
tion or abandonment of an asset
described in section 1221(a)(1), (3), (4),
or (5), if substantially all the assets in
the same category from the same trade
or business are disposed of or aban-
doned in one transaction (or series of
related transactions); (iv) any item from
assets disposed of in an applicable asset
acquisition under section 1060(c); (v)
any section 481(a) adjustment; (vi) any
item from the discharge or retirement of
indebtedness (for example, if a debtor
partnership transfers a capital or profits
interest in such partnership to a creditor
in satisfaction of its recourse or nonre-
course indebtedness, any discharge of
indebtedness income recognized under
section 108(e)(8) must be allocated

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among the persons who were partners in
the partnership immediately before the
discharge); (vii) any item from the set-
tlement of a tort or similar third-party
liability; (viii) any credit, to the extent it
arises from activities or items that are
not ratably allocated (for example, the
rehabilitation credit under section 47,
which is based on placement in service);
and (ix) any item which, in the opinion
of the Commissioner, would, if ratably
allocated, result in a substantial distor-
tion of income in any consolidated re-
turn or separate return in which the item
is included.

The 2009 proposed regulations re-
quested comments on whether any items
should be added to or removed from the
definition of extraordinary items. After
consideration of the comments received,
the Treasury Department and the IRS
have decided to generally retain the list of
enumerated extraordinary items, subject
to changes that are discussed in this Part
1.D.iii of the preamble.

#### a. Two additional extraordinary items and two additional proposed extraordinary items

In response to comments, the final reg-
ulations add two items to the extraordi-
nary item list. First, commenters re-
quested that the final regulations provide
partnerships with more flexibility in deter-
mining what items are extraordinary
items. One commenter argued that the
definition of extraordinary item should be
tied to the uniqueness of the partnership
and materiality of the item. Another com-
menter recommended the final regulations
remove the mandatory treatment of the
specifically enumerated items as extraor-
dinary items and instead highlight these
specific items as items the partnership
may agree to treat as extraordinary. In
addition, commenters recommended that
the final regulations allow the partners to
agree to treat other nonenumerated items
as extraordinary items. The commenters
noted that this could prevent distortion of
the economic deal of the partners in cer-
tain circumstances. The final regulations
adopt the recommendation to allow a part-
nership to treat additional nonenumerated
items as extraordinary items for a taxable
year if, for that taxable year, there is an

agreement of the partners (as described in
Part 1.E of this preamble) to treat consis-
tently such items as extraordinary items.
However, this rule does not apply if treat-
ing that additional item as an extraordi-
nary item would result in a substantial
distortion of income in any partner's re-
turn. Any additional extraordinary items
continue to be subject to any special lim-
itation or requirement relating to the tim-
ing or amount of income, gain, loss, de-
duction, or credit applicable to the entire
partnership taxable year (for example, the
limitation for section 179 expenses).

Second, the final regulations provide
that an extraordinary item includes any
item identified as an additional class of
extraordinary item in guidance published
in the Internal Revenue Bulletin. The
Treasury Department and the IRS believe
that this addition is necessary to provide
flexibility and guidance in the event that
additional classes of items should be
treated as extraordinary items.

In addition, proposed regulations under
section 706 (REG-109370-10) being
published concurrently with these final
regulations propose to add two additional
extraordinary items. The first proposed
additional extraordinary item responds to
comments regarding the administrative
difficulty PTPs face in satisfying certain
withholding obligations if the PTPs are
not permitted to use a quarterly conven-
tion. As discussed in Part 1.C.iii of this
preamble, the final regulations do not per-
mit PTPs to use a quarterly convention.
However, the proposed regulations being
published concurrently with these final
regulations would add an optional extraor-
dinary item for PTPs, which the Treasury
Department and the IRS believe is desir-
able to link each partner's distributive
share to the related cash distributions,
thereby enabling PTPs and their transfer
agents to satisfy their withholding obliga-
tions under Chapter 4 of the Code and
sections 1441 through 1443 from distribu-
tions. Specifically, the proposed regula-
tions provide that, for PTPs, all items of
income that are amounts subject to with-
holding as defined in § 1.1441-2(a) (ex-
cluding income effectively connected
with the conduct of a trade or business
within the United States) or withholdable
payments under § 1.1473-1(a) occurring
during a taxable year may be treated as

extraordinary items if, for that taxable
year, the partners agree to consistently
treat all such items as extraordinary items
for that taxable year. If the partners so
agree, then for purposes of section 706
such items shall be treated as occurring at
the next time as of which the recipients of
a distribution by the PTP are determined,
or, to the extent such income items arise
between the final time during the taxable
year as of which the recipients of a distri-
bution are determined and the end of the
taxable year, such items shall be treated as
occurring at the final time during the tax-
able year as of which the recipients of a
distribution are determined. This pro-
posed rule does not apply unless the PTP
has a regular practice of making at least
four distributions (other than de minimis
distributions) to its partners during each
taxable year. The proposed regulations
provide that taxpayers may rely on this
proposed additional extraordinary item for
PTPs until final regulations are issued.

The second proposed additional ex-
traordinary item addresses partnership de-
ductions attributable to the transfer of
partnership equity in connection with the
performance of services. Specifically, the
proposed regulations being published con-
currently with these final regulations
would add as an additional extraordinary
item any deduction for the transfer of an
interest in the partnership in connection
with the performance of services and
would provide that such deduction is
treated as occurring immediately before
the transfer or vesting of the partnership
interest that results in compensation in-
come for the person who performs the
services. Moreover, for such deductions
the proposed regulations would "turn off"
the exceptions to the extraordinary item
rules which would otherwise apply to cer-
tain small items and for partnerships for
which capital is not a material income-
producing factor. The Treasury Depart-
ment and the IRS believe that this rule is
necessary to ensure that, in the case of a
transfer of partnership equity in connec-
tion with the performance of services, no
portion of the deduction for the transfer of
a partnership interest in connection with
the performance of services will be allo-
cated to the person who performs the ser-
vices.

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b. Clarification of certain enumerated
items

This Part 1.D.iii.b provides additional
clarification on five of the extraordinary
items from the 2009 proposed regulations.

First, the 2009 proposed regulations
provided that an extraordinary item in-
cludes any item from the disposition or
abandonment (other than in the ordinary
course of business) of a capital asset as
defined in section 1221 (determined with-
out the application of any other rules of
law). One commenter requested that the
final regulations clarify that gains or
losses from the actual or deemed sale of
securities by securities partnerships (as
defined in § 1.704-3(e)(3)(iii)) are items
resulting from the disposition or abandon-
ment of a capital asset (as defined in sec-
tion 1221) in the ordinary course of busi-
ness. Without such a rule, the commenter
noted that a securities partnership would
incur significant administrative and ac-
counting costs to account for each security
bought and sold. The Treasury Depart-
ment and the IRS believe that it is unnec-
essary to provide a special rule for secu-
rities partnerships; if a securities
partnership is engaged in the trade or busi-
ness of trading securities then it will gen-
erally be true that any gains or losses from
the actual or deemed sale of securities are
items from the disposition of a capital
asset in the ordinary course of the partner-
ship's business. Accordingly, the final
regulations do not modify this extraordi-
nary item.

Second, commenters inquired as to
whether revaluations of partnership prop-
erty under § 1.704-1(b)(2)(iv)(e) or (f)
are extraordinary items. Section 1.704-
1(b)(2)(iv)(e) generally requires that a
partner's capital account be decreased by
the fair market value of property distrib-
uted by the partnership to such partner. To
do so, the partners' capital accounts are
adjusted to reflect the manner in which the
unrealized income, gain, loss, and deduc-
tion inherent in the property would be
allocated among the partners if there were
a taxable disposition of the property for
fair market value on the date of distribu-
tion. Section 1.704-1(b)(2)(iv)(f) pro-
vides that a partnership may increase or
decrease the capital accounts of the part-
ners to reflect a revaluation of partnership

property on the partnership's books upon
the occurrence of certain events. The ad-
justments to the partners' capital accounts
must reflect the manner in which the un-
realized income, gain, loss, or deduction
inherent in the property would be allo-
cated among the partners if there were a
taxable disposition of the property for fair
market value on that date. Under § 1.704-
3(a)(6)(i), section 704(c) principles apply
to allocations with respect to property for
which differences between book value
and adjusted tax basis are created when a
partnership revalues partnership property
pursuant to § 1.704-1(b)(2)(iv)(f) (re-
verse section 704(c) allocations). How-
ever, partnerships are not generally re-
quired to revalue their property on the
occurrence of these events. The Treasury
Department and the IRS believe that the
treatment of an item as an extraordinary
item should not depend upon whether the
partnership chooses to revalue its assets.
Additionally, as discussed in Part 1.F of
this preamble, the final regulations gener-
ally do not address the interaction of sec-
tions 704(b), 704(c), and 706. Accord-
ingly, the final regulations do not include
book items from partnership revaluations
as extraordinary items.

Third, the 2009 proposed regulations
provided that an extraordinary item in-
cluded any item which, in the opinion of
the Commissioner, would, if ratably allo-
cated, result in a substantial distortion of
income in any consolidated return or sep-
arate return in which the item is included.
One commenter recommended that the fi-
nal regulations provide that the Commis-
sioner may only treat a nonenumerated
item as an extraordinary item where the
Commissioner has provided advance no-
tice by notice or regulation of the types of
income subject to scrutiny, or where there
is evidence that the proration method was
chosen with the intent to substantially dis-
tort income. However, the Treasury De-
partment and the IRS believe that such a
rule would unduly impede the ability of
the IRS to correct substantial distortions
of income, and accordingly the final reg-
ulations do not adopt this suggestion.

Fourth, the 2009 proposed regulations
provided that an extraordinary item in-
cluded any section 481(a) adjustment. The
Treasury Department and the IRS have
determined that the inclusion of section

481(a) adjustments within the meaning of
"extraordinary items" for purposes of sec-
tion 706 may be overbroad. The purpose
of the extraordinary items rule is to avoid
substantial distortions of income among
partners by requiring a partnership to al-
locate certain significant, nonrecurring
items incurred other than in the ordinary
course of business among its partners in
proportion to their ownership interests in
the partnership on the date the extraordi-
nary item was incurred. Section 481 re-
quires a taxpayer that has changed its
method of accounting to compute its in-
come by taking into account adjustments
necessary to prevent any duplication or
omission that would otherwise result from
the change. Under certain circumstances,
these adjustments may be spread over a
period of years, and in all circumstances,
the adjustments relate to a change of ac-
counting method by the taxpayer rather
than a particular item incurred by the tax-
payer. Because the new accounting
method that triggers the section 481 ad-
justment applies to the entire taxable year
of the change, the adjustment similarly
relates to that entire taxable year rather
than any specific date within that taxable
year. Therefore, the Treasury Department
and the IRS believe that not all section
481 adjustments should be treated as ex-
traordinary items. However, in situations
in which the change in accounting method
is initiated after the occurrence of a vari-
ation, the Treasury Department and the
IRS believe it is appropriate to allocate
any resulting item attributable to the
change among the partners in accordance
with their percentage interests at and after
the time the method change is initiated.
Therefore, the final regulations have
changed this extraordinary item to include
only the effects of any change in account-
ing method initiated by the filing of the
appropriate form after a variation occurs.

Fifth, the 2009 proposed regulations
provided that an extraordinary item in-
cluded:

Any item from the discharge or re-
tirement of indebtedness (for exam-
ple, if a debtor partnership transfers
a capital or profits interest in such
partnership to a creditor in satisfac-
tion of its recourse or nonrecourse
indebtedness, any discharge of in-
debtedness income recognized un-

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der section 108(e)(8) must be allo-
cated among the persons who were
partners in the partnership immedi-
ately before the discharge).

Section 108(e)(8) and (i) generally re-
quire that a partnership allocate discharge
of indebtedness income (COD income) to
the partners that were partners immedi-
ately prior to the transaction giving rise to
the COD income. Thus, the rules under
section 108(e)(8) and (i) and section 706
could provide conflicting results if items
of a partnership subject to section
108(e)(1) or 108(i) were treated as an ex-
traordinary item. This could occur where
section 108(e)(8) or 108(i) provides a rule
regarding the timing of COD income that
is different from the extraordinary item
timing rules under section 706. Thus, be-
cause section 108(e)(8) and (i) already
provide special timing rules, the Treasury
Department and the IRS believe it is un-
necessary to treat these items as extraor-
dinary items. Accordingly, the final regu-
lations provide a limited exception in the
definition of extraordinary items in
§ 1.706-4(e)(1)(v) for amounts subject to
section 108(e)(8) or 108(i).

#### iv. Small item exception for extraordinary items

In addition to receiving comments on
the items on the extraordinary item list,
the Treasury Department and the IRS re-
ceived many comments requesting that
the final regulations provide a de minimis
rule for extraordinary items. One com-
menter suggested that an extraordinary
item would be considered de minimis if,
for the partnership's taxable year: (i) the
total of the particular class of extraordi-
nary items is less than five percent of the
partnership's (a) gross income in the case
of income or gain items, or (b) gross ex-
penses and losses, including section
705(a)(2)(B) expenditures, in the case of
losses and expenses; and (ii) all extraor-
dinary items in total do not exceed $10
million. Another commenter recom-
mended using a dollar amount threshold
per item, a cumulative amount (for exam-
ple, $100,000), or an amount that varies
depending on the size of the partnership or
whether the partnership is a PTP.

The Treasury Department and the IRS
recognize that accounting for extraordi-

nary items can be burdensome to partner-
ships. Accordingly, the final regulations
adopt the recommendation to include a
small item exception. Specifically, the fi-
nal regulations allow a partnership to treat
an otherwise extraordinary item as not
extraordinary if, for the partnership's tax-
able year: (1) the total of all items in the
particular class of extraordinary items (for
example, all tort or similar liabilities) is
less than five percent of the partnership's
(a) gross income, including tax-exempt
income described in section 705(a)(1)(B),
in the case of income or gain items, or (b)
gross expenses and losses, including sec-
tion 705(a)(2)(B) expenditures, in the case
of losses and expense items; and (2) the
total amount of the extraordinary items
from all classes of extraordinary items
amounting to less than five percent of the
partnership's (a) gross income, including
tax-exempt income described in section
705(a)(1)(B), in the case of income or
gain items, or (b) gross expenses and
losses, including section 705(a)(2)(B) ex-
penditures, in the case of losses and ex-
pense items, does not exceed $10 million
in the taxable year, determined by treating
all such extraordinary items as positive
amounts. Examples 5 and 6 of § 1.706-
4(e)(4) illustrate the small item exception.

#### E. Agreement of the Partners

As discussed in this preamble, the final
regulations provide that partnerships may
make certain decisions under § 1.706-4
by agreement of the partners. See Part
1.B.ii (agreement to perform regular
monthly or semi-monthly interim clos-
ings), Part 1.B.iv (selection to use the
proration method), Part 1.C.i (choice of
convention), and Part 1.D.iii.a (adding ex-
traordinary items).

Proposed § 1.706-4(a)(1) provided
that a partnership may only use the prora-
tion method by agreement of the partners.
Proposed § 1.706-4(c)(3) and -(d)(4) pro-
vided examples that indicated that the
agreement of the partners to use the pro-
ration method must be part of the partner-
ship agreement. Commenters requested
clarification on the meaning of "by agree-
ment of the partners" and on whether a
partnership may delegate the authority to
select the proration method. Another com-
menter suggested that the final regulations

adopt different rules for a variation caused
by a transaction between the partnership
and one or more partners, and for a vari-
ation caused by a transaction between
partners. One commenter noted that exist-
ing partnerships may not be able to amend
the partnership agreement within the time-
frame prescribed by section 761(c). Sec-
tion 1.706-4(f) of the final regulations
provides guidance on the meaning of
"agreement of the partners."

The Treasury Department and the IRS
believe that the final regulations should
provide the partners with a voice in the
choice of methods, conventions, and ad-
ditional extraordinary items, and should
allow the IRS to easily ascertain what the
partnership selected, without unduly bur-
dening the partnership. In response to
comments, the Treasury Department and
the IRS have determined that each of
these objectives can be achieved by allow-
ing partnerships to select their method,
convention, or additional extraordinary
items through a dated, written statement
maintained with the partnership's books
and records by the due date, including
extensions, of the partnership's tax return.
The final regulations provide that such a
statement would include, for example, a
selection included in the partnership
agreement. The final regulations also per-
mit the selection of the method, conven-
tion, or additional extraordinary item to be
made by a person authorized to make that
selection (including under a grant of gen-
eral authority provided for by either state
law or in the partnership agreement), if
that person's selection is in a dated, writ-
ten statement maintained with the partner-
ship's books and records by the due date,
including extensions, of the partnership's
tax return. That person's selection will be
binding on the partnership and the part-
ners.

#### F. Interaction of sections 706(d) and 704

The 2009 proposed regulations did not
address the interaction of section 706(d)
with the rules under section 704. Section
1.704-1(b)(1) generally provides that, un-
der section 704(b), if a partnership agree-
ment does not provide for the allocation of
income, gain, loss, deduction, or credit (or
item thereof) to a partner, or if the part-

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nership agreement provides for the alloca-
tion of income, gain, loss, deduction, or
credit (or item thereof) to a partner but
such allocation does not have substantial
economic effect, then the partner's distrib-
utive share of such income, gain, loss,
deduction, or credit (or item thereof) shall
be determined in accordance with such
partner's interest in the partnership (tak-
ing into account all facts and circum-
stances). However, § 1.704-1(b)(1)(iii)
provides that the determination of a part-
ner's distributive share of income, gain,
loss, deduction, or credit (or item thereof)
under section 704(b) and the regulations
thereunder is not conclusive as to the tax
treatment of a partner with respect to such
distributive share. Section 1.704-
1(b)(1)(iii) further provides that an alloca-
tion that is respected under section 704(b)
and the regulations nevertheless may be
reallocated under other provisions, such as
section 706(d) (and related assignment of
income principles).

The Treasury Department and the IRS
received several comments requesting
guidance on the interaction of sections
706(d) and 704. One commenter re-
quested clarification on the effect of a
reallocation under section 706(d) on the
application of provisions of section
704(b), particularly regarding the capital
account maintenance provisions in
§ 1.704-1(b)(2)(iv). Another commenter
indicated that partnership agreements are
drafted to apply section 706 to section
704(b) items and allocate tax items in the
same manner as the corresponding book
items, subject to the application of section
704(c). This commenter asked that the
final regulations address whether section
706(d) applies to the allocation of book
items rather than tax items.

The Treasury Department and the IRS
have carefully considered the comments
relating to the interaction of sections
706(d) and 704 and believe that the issues
require further consideration and are gen-
erally outside the scope of these final reg-
ulations. However, the Treasury Depart-
ment and the IRS may consider
addressing these issues in future guidance.

#### 2. Deemed dispositions

Proposed § 1.706-1(c)(2)(iii) provided
that a deemed disposition of a partner's

interest pursuant to § 1.1502-76(b)(2)(vi)
(relating to corporate partners that become
or cease to be members of a consolidated
group within the meaning of § 1.1502-
1(h)), § 1.1362-3(c)(1) (relating to the
termination of the subchapter S election of
an S corporation partner), or § 1.1377-
1(b)(3)(iv) (regarding an election to ter-
minate the taxable year of an S corpora-
tion partner) shall be treated as a
disposition of the partner's entire interest
in the partnership. The preamble to the
2009 proposed regulations indicated that
this treatment is solely for purposes of
section 706. One commenter explained
that unless the regulatory language specif-
ically limits the disposition treatment to
section 706, taxpayers could deem these
transactions to be dispositions for other
purposes of the Code, thereby achieving
unintended results. For example, the com-
menter stated that, unless clarified, the
2009 proposed regulations could cause
unintended consequences under sections
708, 743(b), or 1001 when a member of a
consolidated group sells an interest in a
partnership that exits the consolidated
group after the sale. Consistent with the
preamble to the 2009 proposed regula-
tions, the final regulations clarify that
deemed dispositions under §§ 1.1502-
76(b)(2)(vi), 1.1362-3(c)(1), or 1.1377-
1(b)(3)(iv) are treated as a disposition of
the partner's entire interest in the partner-
ship solely for purposes of section 706.

##### Effective/Applicability Dates

With respect to amendments to
§§ 1.706-1 (with the exception of two
special rules applicable to § 1.706-
1(b)(6)(iii)), 1.706-4 (with the exception
of a special rule applicable to § 1.706-
4(c)(3)), and 1.706-5, these final regula-
tions are applicable to partnership taxable
years that begin on or after August 3,
2015.

With respect to the final regulations
contained in § 1.706-1(b)(6)(iii), the reg-
ulations apply to partnership taxable years
that begin on or after August 3, 2015,
subject to two special rules. First, under
the current regulations, partnerships
formed prior to September 23, 2002 (ex-
isting partnerships) generally are exempt
from the rules of § 1.706-1(b)(6) unless
they have voluntarily chosen to apply

them or unless they have undergone a
technical termination under section
708(b)(1)(B). The final regulations retain
this special rule, such that an existing part-
nership will not be subject to the modified
minority interest rule in § 1.706-
1(b)(6)(iii) unless there has been such an
election or technical termination of the
partnership. Second, because the final reg-
ulations modify § 1.706-1(b)(6)(iii) but
otherwise leave the rules of § 1.706-
1(b)(6) unchanged, it is appropriate to ex-
empt other partnerships from the modified
minority interest rule if they are already
subject to § 1.706-1(b)(6) and the minor-
ity interest rule of the current regulations
(interim period partnerships). Thus, in-
terim period partnerships will be exempt
from the modified minority interest rule of
§ 1.706-1(b)(6)(iii) unless they volun-
tarily elect to be subject to this rule or
undergo a technical termination.

The final regulations under § 1.706-4
generally apply for partnership taxable
years that begin on or after August 3,
2015; however, the rules of § 1.706-
4(c)(3) do not apply to existing PTPs. For
purposes of this effective date provision,
an existing PTP is a partnership described
in section 7704(b) that was formed prior
to April 14, 2009. For purposes of this
effective date provision, the termination
of a PTP under section 708(b)(1)(B) due
to the sale or exchange of 50 percent or
more of the total interests in partnership
capital and profits is disregarded in deter-
mining whether the PTP is an existing
PTP.

### Special Analyses

It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these final
regulations. It is hereby certified that the
collection of information in this Treasury
decision will not have a significant eco-
nomic impact on a substantial number of
small entities within the meaning of sec-
tion 601(6) of the Regulatory Flexibility
Act (5 U.S.C. chapter 6). The Treasury
Department and the IRS believe that the

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economic impact on small entities as a
result of the collection of information in
this Treasury decision will not be signifi-
cant. The small entities subject to the col-
lection are business entities formed as
partnerships that choose to adopt the pro-
ration method, the semi-monthly or
monthly convention, perform semi-
monthly or monthly interim closings, or to
add an additional class of extraordinary
item, in which case the partnership must
keep a written statement with its books
and records evidencing the decision or
delegation. Thus, the collection only ap-
plies if the partnership does not wish to
accept the default method, convention,
and list of extraordinary items provided in
these regulations. Furthermore, the infor-
mation required to be maintained with the
partnership's books and records is simply
a short statement evidencing the agree-
ment of the partners. For these reasons,
the Treasury Department and the IRS do
not believe that the collection of informa-
tion in this Treasury decision has a signif-
icant economic impact.

Pursuant to section 7805(f) of the
Code, this regulation was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business and no com-
ments were received.

### Drafting Information

The principal author of these final reg-
ulations is Benjamin H. Weaver, Office of
the Associate Chief Counsel (Pass-
throughs and Special Industries). How-
ever, other personnel from the Treasury
Department and the IRS participated in
their development.

* * * * *

### Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602
are amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding a new entry
in numerical order to read as follows:

Authority: 26 U.S.C. 7805
Section 1.706-4 also issued under 26
U.S.C. 706(d). * * *

Par. 2. Section 1.706-0 is added to
read as follows:

§ 1.706-0 Table of contents.

This section lists the captions con-
tained in the regulations under section
706.

§ 1.706-1 Taxable years of partner and
partnership.

(a) Year in which partnership income
is includible.

(b) Taxable year.

(1) Partnership treated as taxpayer.

(2) Partnership's taxable year.

(i) Required taxable year.

(ii) Exceptions.

(3) Least aggregate deferral.

(i) Taxable year that results in the least
aggregate deferral of income.

(ii) Determination of the taxable year
of a partner or partnership that uses a
52-53 week taxable year.

(iii) Special de minimis rule.

(iv) Examples.

(4) Measurement of partner's profits
and capital interest.

(i) In general.

(ii) Profits interest.

(A) In general.

(B) Percentage share of partnership net
income.

(C) Distributive share.

(iii) Capital interest.

(5) Taxable year of a partnership with
tax-exempt partners.

(i) Certain tax-exempt partners disre-
garded.

(ii) Example.

(iii) Effective date.

(6) Certain foreign partners disre-
garded.

(i) Interests of disregarded foreign
partners not taken into account.

(ii) Definition of foreign partner.

(iii) Minority interest rule.

(iv) Example.

(v) Effective date.

(A) Generally.

(B) Voluntary change in taxable year.

(C) Subsequent sale or exchange of
interests.

(D) Transition rule.

(7) Adoption of taxable year.

(8) Change in taxable year.

(i) Partnerships.

(A) Approval required.

(B) Short period tax return.

(C) Change in required taxable year.

(ii) Partners.

(9) Retention of taxable year.

(10) Procedures for obtaining approval
or making a section 444 election.

(11) Effect on partner elections under
section 444.

(i) Election taken into account.

(ii) Effective date.

(c) Closing of partnership year.

(1) General rule.

(2) Disposition of entire interest.

(i) In general.

(ii) Example.

(iii) Deemed dispositions.

(3) Disposition of less than entire in-
terest.

(4) Determination of distributive
shares.

(5) Transfer of interest by gift.

(6) Foreign taxes.

(d) Effective/applicability date.

§ 1.706-2 Certain allocable cash basis
items. [Reserved]

§ 1.706-2T Temporary regulations;
question and answer under the Tax
Reform Act of 1984 (temporary).

§ 1.706-3 Items attributable to
interest in lower tier partnership.
[Reserved]

§ 1.706-4 Determination of
distributive share when a partner's
interest varies.

(a) General rule.

(1) Variations subject to this section.

(2) Coordination with section
706(d)(2) and (3).

(3) Allocation of items subject to this
section.

(4) Example.

(b) Exceptions.

(1) Permissible changes among con-
temporaneous partners.

(2) Safe harbor for partnerships for
which capital is not a material income-
producing factor.

(c) Conventions.

(1) In general.

(i) Calendar day convention.

(ii) Semi-monthly convention.

(iii) Monthly convention.

(2) Exceptions.

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(3) Permissible conventions for each
variation.

(i) Rules applicable to all partnerships.

(ii) Publicly traded partnerships.

(4) Examples.

(d)(1) Optional regular monthly or
semi-monthly interim closings.

(2) Example.

(e) Extraordinary items.

(1) General principles.

(2) Definition.

(3) Small item exception.

(4) Examples.

(f) Agreement of the partners.

(g) Effective/applicability date.

§ 1.706-5 Taxable year determination.

(a) In general.

(b) Effective/applicability date.

Par. 3. Section 1.706-1 is amended as
follows:

a. The language "this paragraph (a)(1)"
in the first sentence of paragraph (a)(2) is
removed and the language "paragraph
(a)(1) of this section" is added in its place.

b. The language "capital or profits" in
the first sentence in paragraph (b)(6)(iii) is
removed and the language "capital and
profits" is added in its place.

c. Paragraph (b)(6)(v)(A) is revised.

d. The last sentence of paragraph
(b)(6)(v)(B) is removed and four new sen-
tences are added in its place.

e. Paragraph (b)(6)(v)(C) is revised.

f. Add a sentence at the end of para-
graph (b)(6)(v)(D).

g. Paragraph (c)(2) is revised.

h. Paragraph (c)(3) is removed.

i. Paragraph (c)(4) is redesignated as
paragraph (c)(3) and the last sentence of
newly designated paragraph (c)(3) is re-
moved.

j. New paragraph (c)(4) is added.

k. Paragraph (d) is revised.

The revisions and additions read as fol-
lows:

§ 1.706-1 Taxable years of partner and
partnership.

** * * *

(b) * * *

(6) * * *

(v) * * *

(A) Generally. The provisions of this
paragraph (b)(6) (other than paragraph

(b)(6)(iii) of this section) apply to partner-
ship taxable years, other than those of an
existing partnership, that begin on or after
July 23, 2002. The provisions of para-
graph (b)(6)(iii) of this section apply to
partnership taxable years, other than those
of an existing partnership or an interim
period partnership, that begin on or after
August 3, 2015. For partnership taxable
years beginning on or after July 23, 2002,
and before August 3, 2015, see the provi-
sions of § 1.706-1(b)(6)(iii) as contained
in the 26 CFR part 1 on July 31, 2015. For
purposes of paragraph (b)(6) of this sec-
tion, an existing partnership is a partner-
ship that was formed prior to September
23, 2002, and an interim period partner-
ship is a partnership that was formed on or
after September 23, 2002, and prior to
August 3, 2015.

(B) * * * An existing partnership that
makes such a change prior to August 3,
2015 will generally cease to be exempted
from the requirements of this paragraph
(b)(6) of this section, and thus will be
subject to the requirements of paragraph
(b)(6) of this section, except for paragraph
(b)(6)(iii) of this section-instead, such
partnership will be subject to the provi-
sions of § 1.706-1(b)(6)(iii) as contained
in the 26 CFR part 1 on July 31, 2015. An
existing partnership that makes such a
change on or after August 3, 2015 will
cease to be exempted from the require-
ments of this paragraph (b)(6). An interim
period partnership may change its taxable
year to a year determined in accordance
with paragraph (b)(6)(iii) of this section.
An interim period partnership that makes
such a change will cease to be exempted
from the requirements of paragraph
(b)(6)(iii) of this section.

(C) Subsequent sale or exchange of
interests. If an existing partnership or an
interim period partnership terminates un-
der section 708(b)(1)(B), the resulting
partnership is not an existing partnership
or an interim period partnership for pur-
poses of paragraph (b)(6)(v) of this sec-
tion.

(D) * * * If, in a partnership taxable
year beginning on or after August 3, 2015,
an interim period partnership voluntarily
changes its taxable year to a year deter-
mined in accordance with paragraph
(b)(6)(iii) of this section, then the partners
of that partnership may apply the provi-

sions of § 1.702-3T to take into account
all items of income, gain, loss, deduction,
and credit attributable to the partnership
year of change ratably over a four-year
period.

* * * * *

(c) * * *

(2) Disposition of entire interest-(i)
In general. A partnership taxable year
shall close with respect to a partner who
sells or exchanges his entire interest in the
partnership, with respect to a partner
whose entire interest in the partnership is
liquidated, and with respect to a partner
who dies. In the case of a death, liquida-
tion, or sale or exchange of a partner's
entire interest in the partnership, the part-
ner shall include in his taxable income for
his taxable year within or with which the
partner's interest in the partnership ends
the partner's distributive share of items
described in section 702(a) and any guar-
anteed payments under section 707(c) for
the partnership taxable year ending with
the date of such termination. If the dece-
dent partner's estate or other successor
sells or exchanges its entire interest in the
partnership, or if its entire interest is liq-
uidated, the partnership taxable year with
respect to the estate or other successor in
interest shall close on the date of such sale
or exchange, or the date of the completion
of the liquidation. The sale or exchange of
a partnership interest does not, for the
purpose of this rule, include any transfer
of a partnership interest which occurs at
death as a result of inheritance or any
testamentary disposition.

(ii) Example. H is a partner of a partnership
having a taxable year ending December 31. Both H
and his wife W are on a calendar year and file joint
returns. H dies on March 31, 2015. Administration of
the estate is completed and the estate, including the
partnership interest, is distributed to W as legatee on
November 30, 2015. Such distribution by the estate
is not a sale or exchange of H's partnership interest.
The taxable year of the partnership will close with
respect to H on March 31, 2015, and H will include
in his final return for his final taxable year (January
1, 2015, through March 31, 2015) his distributive
share of partnership items for that period under the
rules of sections 706(d)(2), 706(d)(3), and
§ 1.706-4. W will include in her return for the
taxable year ending December 31, 2015, her distrib-
utive share of partnership items for the period of
April 1, 2015, through December 31, 2015, under the
rules of sections 706(d)(2), 706(d)(3), and
§ 1.706-4.

(iii) Deemed dispositions. A deemed
disposition of the partner's interest pursu-

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ant to § 1.1502-76(b)(2)(vi) (relating to
corporate partners that become or cease to
be members of a consolidated group
within the meaning of §§ 1.1502-1(h)),
1.1362-3(c)(1) (relating to the termina-
tion of the subchapter S election of an S
corporation partner), or 1.1377-
1(b)(3)(iv) (regarding an election to ter-
minate the taxable year of an S corpora-
tion partner), shall be treated as a
disposition of the partner's entire interest
in the partnership solely for purposes of
section 706.

* * * * *

(4) Determination of distributive
shares. See section 706(d)(2), 706(d)(3),
and § 1.706-4 for rules regarding the
methods to be used in determining the
distributive shares of items described in
section 702(a) for partners whose interests
in the partnership vary during the partner-
ship's taxable year as a result of a dispo-
sition of a partner's entire interest in a
partnership as described in paragraph
(c)(2) of this section or as a result of a
disposition of less than a partner's entire
interest as described in paragraph (c)(3) of
this section.

* * * * *

(d) Effective/applicability date. (1) The
rules for paragraphs (a) and (b) of this
section apply for partnership taxable years
ending on or after May 17, 2002, except
for paragraphs (b)(5) and (6) of this sec-
tion, which generally apply to partnership
taxable years beginning on or after July
23, 2002 (however, see paragraphs
(b)(5)(iii) and (b)(6)(v) of this section for
certain exceptions to and transition relief
from the applicability dates of paragraphs
(b)(5) and (6) of this section).

(2) The rules for paragraph (c)(1) of
this section apply for partnership taxable
years beginning after December 31, 1953.
All other paragraphs under paragraph (c)
of this section apply for partnership tax-
able years that begin on or after August 3,
2015.

Par. 4. Add reserved § 1.706-2 with
the following heading:

§ 1.706-2 Certain allocable cash basis
items. [Reserved]

Par. 5. Add reserved § 1.706-3 with
the following heading:

§ 1.706-3 Items attributable to interest
in lower tier partnership. [Reserved]

Par. 6. Section 1.706-4 is added to
read as follows:

§ 1.706-4 Determination of distributive
share when a partner's interest varies.

(a) General rule-(1) Variations sub-
ject to this section. Except as provided in
paragraph (a)(2) of this section, this sec-
tion provides rules for determining the
partners' distributive shares of partnership
items when a partner's interest in a part-
nership varies during the taxable year as a
result of the disposition of a partial or
entire interest in a partnership as de-
scribed in § 1.706-1(c)(2) and (3), or with
respect to a partner whose interest in a
partnership is reduced as described in
§ 1.706-1(c)(3), including by the entry of
a new partner (collectively, a "variation").

(2) Coordination with sections
706(d)(2) and 706(d)(3) and other Code
sections. Items subject to allocation under
other rules, including sections 108(e)(8)
and 108(i) (which provide special alloca-
tion rules for certain items from the dis-
charge or retirement of indebtedness), sec-
tion 706(d)(2) (relating to the
determination of partners' distributive
shares of allocable cash basis items) and
section 706(d)(3) (relating to the determi-
nation of partners' distributive share of
any item of an upper tier partnership at-
tributable to a lower tier partnership), are
not subject to the rules of this section. In
all cases, all partnership items for each
taxable year must be allocated among the
partners, and no partnership items may be
duplicated, regardless of the particular
provision of section 706 (or other Code
section) which applies, and regardless of
the method or convention adopted by the
partnership.

(3) Allocation of items subject to this
section. In determining the distributive
share under section 702(a) of partnership
items subject to this section, the partner-
ship shall follow the steps described in
this paragraph (a)(3)(i) through (x).

(i) First, determine whether either of
the exceptions in paragraph (b) of this
section (regarding certain changes among
contemporaneous partners and partner-

ships for which capital is not a material
income-producing factor) applies.

(ii) Second, determine which of its
items are subject to allocation under the
special rules for extraordinary items in
paragraph (e) of this section, and allocate
those items accordingly.

(iii) Third, determine with respect to
each variation whether it will apply the
interim closing method or the proration
method. Absent an agreement of the part-
ners (within the meaning of paragraph (f)
of this section) to use the proration
method, the partnership shall use the in-
terim closing method. The partnership
may use different methods (interim clos-
ing or proration) for different variations
within each partnership taxable year;
however, the Commissioner may place re-
strictions on the ability of partnerships to
use different methods during the same
taxable year in guidance published in the
Internal Revenue Bulletin.

(iv) Fourth, determine when each vari-
ation is deemed to have occurred under
the partnership's selected convention (as
described in paragraph (c) of this section).

(v) Fifth, determine whether there is an
agreement of the partners (within the
meaning of paragraph (f) of this section)
to perform regular monthly or semi-
monthly interim closings (as described in
paragraph (d) of this section). If so, then
the partnership will perform an interim
closing of its books at the end of each
month (in the case of an agreement to
perform monthly closings) or at the end
and middle of each month (in the case of
an agreement to perform semi-monthly
closings), regardless of whether any vari-
ation occurs. Absent an agreement of the
partners to perform regular monthly or
semi-monthly interim closings, the only
interim closings during the partnership's
taxable year will be at the deemed time of
the occurrence of variations for which the
partnership uses the interim closing
method.

(vi) Sixth, determine the partnership's
segments, which are specific periods of
the partnership's taxable year created by
interim closings of the partnership's
books. The first segment shall commence
with the beginning of the taxable year of
the partnership and shall end at the time of
the first interim closing. Any additional
segment shall commence immediately af-

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ter the closing of the prior segment and
shall end at the time of the next interim
closing. However, the last segment of the
partnership's taxable year shall end no
later than the close of the last day of the
partnership's taxable year. If there are no
interim closings, the partnership has one
segment, which corresponds to its entire
taxable year.

(vii) Seventh, apportion the partner-
ship's items for the year among its seg-
ments. The partnership shall determine the
items of income, gain, loss, deduction,
and credit of the partnership for each seg-
ment. In general, a partnership shall treat
each segment as though the segment were
a separate distributive share period. For
example, a partnership may compute a
capital loss for a segment of a taxable year
even though the partnership has a net cap-
ital gain for the entire taxable year. For
purposes of determining allocations to
segments, any special limitation or re-
quirement relating to the timing or amount
of income, gain, loss, deduction, or credit
applicable to the entire partnership taxable
year will be applied based upon the part-
nership's satisfaction of the limitation or
requirement as of the end of the partner-
ship's taxable year. For example, the ex-
penses related to the election to expense a
section 179 asset must first be calculated
(and limited if applicable) based on the
partnership's full taxable year, and then
the effect of any limitation must be appor-
tioned among the segments in accordance
with the interim closing method or the
proration method using any reasonable
method.

(viii) Eighth, determine the partner-
ship's proration periods, which are spe-
cific portions of a segment created by a
variation for which the partnership
chooses to apply the proration method.
The first proration period in each segment
begins at the beginning of the segment,
and ends at the time of the first variation
within the segment for which the partner-
ship selects the proration method. The
next proration period begins immediately
after the close of the prior proration period
and ends at the time of the next variation
for which the partnership selects the pro-
ration method. However, each proration
period shall end no later than the close of
the segment.

(ix) Ninth, prorate the items of income,
gain, loss, deduction, and credit in each
segment among the proration periods
within the segment.

(x) Tenth, determine the partners' dis-
tributive shares of partnership items under
section 702(a) by taking into account the
partners' interests in such items during
each segment and proration period.

(4) Example. At the beginning of 2015, PRS, a
calendar year partnership, has three equal partners,
A, B, and C. On April 16, 2015, A sells 50% of its
interest in PRS to new partner D. On August 6, 2015,
B sells 50% of its interest in PRS to new partner E.
During 2015, PRS earned $75,000 of ordinary in-
come, incurred $33,000 of ordinary deductions,
earned $12,000 of capital gain in the ordinary course
of its business, and sustained $9,000 of capital loss
in the ordinary course of its business. Within that
year, PRS earned $60,000 of ordinary income, in-
curred $24,000 of ordinary deductions, earned
$12,000 of capital gain, and sustained $6,000 of
capital loss between January 1, 2015, and July 31,
2015, and PRS earned $15,000 of gross ordinary
income, incurred $9,000 of gross ordinary deduc-
tions, and sustained $3,000 of capital loss between
August 1, 2015, and December 31, 2015. None of
PRS's items are extraordinary items within the
meaning of paragraph (e)(2) of this section. Capital
is a material income-producing factor for PRS. For
2015, PRS determines the distributive shares of A,
B, C, D, and E as follows.

(i) First, PRS determines that none of the excep-
tions in paragraph (b) of this section apply because
capital is a material-income producing factor and no
variation is the result of a change in allocations
among contemporaneous partners.

(ii) Second, PRS determines that none of its
items are extraordinary items subject to allocation
under paragraph (e) of this section.

(iii) Third, the partners of PRS agree (within the
meaning of paragraph (f) of this section) to apply the
proration method to the April 16, 2015, variation,
and PRS accepts the default application of the in-
terim closing method to the August 6, 2015, varia-
tion.

(iv) Fourth, PRS determines the deemed date of
the variations for purposes of this section based upon
PRS's selected convention. Because PRS applied the
proration method to the April 16, 2015, variation,
PRS must use the calendar day convention with
respect to the April 16, 2015, variation pursuant to
paragraph (c) of this section. Therefore, the variation
that resulted from A's sale to D on April 16, 2015, is
deemed to occur for purposes of this section at the
end of the day on April 16, 2015. Further, the part-
ners of PRS agree (within the meaning of paragraph
(f) of this section) to apply the semi-monthly con-
vention to the August 6, 2015, variation. Therefore,
the August 6, 2015, variation is deemed to occur at
the end of the day on July 31, 2015.

(v) Fifth, the partners of PRS do not agree to
perform regular semi-monthly or monthly closings
as described in paragraph (d) of this section. There-
fore, PRS will have only one interim closing for
2015, occurring at the end of the day on July 31.

(vi) Sixth, PRS determines that it has two seg-
ments for 2015. The first segment commences Jan-
uary 1, 2015, and ends at the close of the day on July
31, 2015. The second segment commences at the
beginning of the day on August 1, 2015, and ends at
the close of the day on December 31, 2015.

(vii) Seventh, PRS determines that during the
first segment of its taxable year (beginning January
1, 2015, and ending July 31, 2015), it had $60,000 of
ordinary income, $24,000 of ordinary deductions,
$12,000 of capital gain, and $6,000 of capital loss.
PRS determines that during the second segment of
its taxable year (beginning August 1, 2015, and
ending December 31, 2015), it had $15,000 of gross
ordinary income, $9,000 of gross ordinary deduc-
tions, and $3,000 of capital loss.

(viii) Eighth, PRS determines that it has two
proration periods. The first proration period begins
January 1, 2015, and ends at the close of the day on
April 16, 2015; the second proration period begins
April 17, 2015, and ends at the close of the day on
July 31, 2015.

(ix) Ninth, PRS prorates its income from the first
segment of its taxable year among the two proration
periods. Because each proration period has 106 days,
PRS allocates 50% of its items from the first segment
to each proration period. Thus, each proration period
contains $30,000 gross ordinary income, $12,000
gross ordinary deductions, $6,000 capital gain, and
$3,000 capital loss.

(x) Tenth, PRS calculates each partner's distrib-
utive share. Because A, B, and C were equal partners
during the first proration period, each is allocated
one-third of the partnership's items attributable to
that proration period. Thus, A, B, and C are each
allocated $10,000 gross ordinary income, $4,000
gross ordinary deductions, $2,000 capital gain, and
$1,000 capital loss for the first proration period. For
the second proration period, A and D each had a
one-sixth interest in PRS and B and C each had a
one-third interest in PRS. Thus, A and D are each
allocated $5,000 gross ordinary income, $2,000
gross ordinary deductions, $1,000 capital gain, and
$500 capital loss, and B and C are each allocated
$10,000 gross ordinary income, $4,000 gross ordi-
nary deductions, $2,000 capital gain, and $1,000
capital loss for the second proration period. For the
second segment of PRS's taxable year, A, B, D, and
E each had a one-sixth interest in PRS and C had a
one-third interest in PRS. Thus, A, B, D, and E are
each allocated $2,500 gross ordinary income, $1,500
gross ordinary deductions, and $500 capital loss, and
C is allocated $5,000 gross ordinary income, $3,000
gross ordinary deductions, and $1,000 capital loss
for the second segment.

(b) Exceptions-(1) Permissible
changes among contemporaneous part-
ners. The general rule of paragraph (a)(3)
of this section, with respect to the varying
interests of a partner described in
§ 1.706-1(c)(3), will not preclude
changes in the allocations of the distribu-
tive share of items described in section
702(a) among contemporaneous partners
for the entire partnership taxable year (or
among contemporaneous partners for a

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segment if the item is entirely attributable
to a segment), provided that-

(i) Any variation in a partner's interest
is not attributable to a contribution of
money or property by a partner to the
partnership or a distribution of money or
property by the partnership to a partner;
and

(ii) The allocations resulting from the
modification satisfy the provisions of sec-
tion 704(b) and the regulations promul-
gated thereunder.

(2) Safe harbor for partnerships for
which capital is not a material income-
producing factor. Notwithstanding para-
graph (a)(3) of this section, with respect to
any taxable year in which there is a
change in any partner's interest in a part-
nership for which capital is not a material
income-producing factor, the partnership
and such partner may choose to determine
the partner's distributive share of partner-
ship income, gain, loss, deduction, and
credit using any reasonable method to ac-
count for the varying interests of the part-
ners in the partnership during the taxable
year provided that the allocations satisfy
the provisions of section 704(b).

(c) Conventions-(1) In general. Con-
ventions are rules of administrative con-
venience that determine when each varia-
tion is deemed to occur for purposes of
this section. Because the timing of each
variation is necessary to determine the
partnership's segments and proration pe-
riods, which are used to determine the
partners' distributive shares, the conven-
tion used by the partnership with respect
to a variation will generally affect the
allocation of partnership items. However,
see paragraph (e) of this section for spe-
cial rules regarding extraordinary items,
which generally must be allocated without
regard to the partnership's convention.
Subject to the limitations set forth in para-
graphs (c)(2) and (3) of this section, part-
nerships may generally choose from the
following three conventions:

(i) Calendar day convention. Under the
calendar day convention, each variation is
deemed to occur for purposes of this sec-
tion at the end of the day on which the
variation occurs.

(ii) Semi-monthly convention. Under
the semi-monthly convention, each varia-
tion is deemed to occur for purposes of
this section either:

(A) In the case of a variation occurring
on the 1st through the 15th day of a cal-
endar month, at the end of the last day of
the immediately preceding calendar
month; or

(B) In the case of a variation occurring
on the 16th through the last day of a
calendar month, at the end of the 15th
calendar day of that month.

(iii) Monthly convention. Under the
monthly convention, each variation is
deemed to occur for purposes of this sec-
tion either:

(A) In the case of a variation occurring
on the 1st through the 15th day of a cal-
endar month, at the end of the last day of
the immediately preceding calendar
month; or

(B) In the case of a variation occurring
on the 16th through the last day of a
calendar month, at the end of the last day
of that calendar month.

(2) Exceptions. (i) Notwithstanding
paragraph (c)(1) of this section, all varia-
tions within a taxable year shall be
deemed to occur no earlier than the first
day of the partnership's taxable year, and
no later than the close of the final day of
the partnership's taxable year. Thus, in the
case of a calendar year partnership apply-
ing either the semi-monthly or monthly
convention to a variation occurring on
January 1st through January 15th, the
variation will be deemed to occur for pur-
poses of this section at the beginning of
the day on January 1st.

(ii) In the case of a partner who be-
comes a partner during the partnership's
taxable year as a result of a variation, and
ceases to be a partner as a result of another
variation, if both such variations would be
deemed to occur at the same time under
the rules of paragraph (c)(1) of this sec-
tion, then the variations with respect to
that partner's interest will instead be
treated as occurring on the dates each
variation actually occurred. Thus, the
partnership must treat such a partner as a
partner for the entire portion of its taxable
year during which the partner actually
owned an interest. See Example 2 of para-
graph (c)(4) of this section. However, this
paragraph (c)(2)(ii) does not apply to pub-
licly traded partnerships (as defined in
section 7704(b)) that are treated as part-
nerships with respect to holders of pub-

licly traded units (as described in
§ 1.7704-1(b) or 1.7704-1(c)(1)).

(iii) Notwithstanding paragraph
(c)(1)(iii) of this section, a publicly traded
partnership (as defined in section 7704(b))
that is treated as a partnership may con-
sistently treat all variations occurring dur-
ing each month as occurring at the end of
the last day of that calendar month if the
publicly traded partnership uses the
monthly convention for those variations.

(3) Permissible conventions for each
variation-(i) Rules applicable to all
partnerships. A partnership generally
shall use the calendar day convention for
each variation; however, for all variations
during a taxable year for which the part-
nership uses the interim closing method,
the partnership may instead use the semi-
monthly or monthly convention by agree-
ment of the partners (within the meaning
of paragraph (f) of this section). The part-
nership must use the same convention for
all variations for which the partnership
uses the interim closing method.

(ii) Publicly traded partnerships. A
publicly traded partnership (as defined in
section 7704(b)) that is treated as a part-
nership may, by agreement of the partners
(within the meaning of paragraph (f) of
this section) use any of the calendar day,
the semi-monthly, or the monthly conven-
tions with respect to all variations during
the taxable year relating to its publicly-
traded units (as described in § 1.7704-
1(b) or (c)(1)), regardless of whether the
publicly traded partnership uses the pro-
ration method with respect to those vari-
ations. A publicly traded partnership must
use the same convention for all variations
during the taxable year relating to its pub-
licly traded units. A publicly traded part-
nership must use the calendar day conven-
tion with respect to all variations relating
to its non-publicly traded units for which
the publicly traded partnership uses the
proration method.

(4) Examples. The following examples
illustrate the principles in this paragraph
(c).

Example 1. PRS is a calendar year partnership
with four equal partners A, B, C, and D. PRS is not
a publicly traded partnership. PRS has the following
three variations that occur during its 2015 taxable
year: on March 11, A sells its entire interest in PRS
to new partner E; on June 12, PRS partially redeems
B's interest in PRS with a distribution comprising a
partial return of B's capital; on October 21, C sells

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part of C's interest in PRS to new partner E. These
transfers do not result in a termination of PRS under
section 708. Pursuant to paragraph (a)(3)(iii) of this
section, the partners of PRS agree (within the mean-
ing of paragraph (f) of this section) to use the interim
closing method with respect to the variations occur-
ring on March 11 and October 21 and agree to use
the proration method with respect to the variation
occurring on June 12. Pursuant to paragraph (c)(3) of
this section, the partners of PRS may agree (within
the meaning of paragraph (f) of this section) to use
any of the calendar day, semi-monthly, or monthly
conventions with respect to the March 11 and Octo-
ber 21 variations, but must use the same convention
for both variations. If the partners of PRS agree to
use the calendar day convention, the March 11 and
October 21 variations will be deemed to occur for
purposes of this section at the end of the day on
March 11, 2015, and October 21, 2015, respectively.
If the partners of PRS agree to use the semi-monthly
convention, the March 11 and October 21 variations
will be deemed to occur for purposes of this section
at the end of the day on February 28, 2015, and
October 15, 2015, respectively. If the partners of
PRS agree to use the monthly convention, the March
11 and October 21 variations will be deemed to
occur for purposes of this section at the end of the
day on February 28, 2015, and October 31, 2015,
respectively. Pursuant to paragraph (c)(3) of this
section PRS must use the calendar day convention
with respect to the June 12 variation; thus, the June
12 variation is deemed to occur for purposes of this
section at the end of the day on June 12, 2015.

Example 2. PRS is a calendar year partnership
that uses the interim closing method and monthly
convention to account for variations during its tax-
able year. PRS is not a publicly traded partnership.
On January 20, 2015, new partner A purchases an
interest in PRS from one of PRS's existing partners.
On February 14, 2015, A sells its entire interest in
PRS. These transfers do not result in a termination of
PRS under section 708. Under the rules of paragraph
(c)(1)(iii) of this section, the January 20, 2015, vari-
ation and the February 14, 2015, variation would
both be deemed to occur at the same time: the end of
the day on January 31, 2015. Therefore, under the
exception in paragraph (c)(2)(ii) of this section, the
rules of paragraph (c)(1) of this section do not apply,
and instead the January 20, 2015, variation and the
February 14 variation are considered to occur on
January 20, 2015, and February 14, 2015, respec-
tively. PRS must perform a closing of the books on
both January 20, 2015, and February 14, 2015, and
allocate A a share of PRS's items attributable to that
segment.

(d)(1) Optional regular monthly or
semi-monthly interim closings. Under the
rules of this section, a partnership is not
required to perform an interim closing of
its books except at the time of any varia-
tion for which the partnership uses the
interim closing method (taking into ac-
count the applicable convention). How-
ever, a partnership may, by agreement of
the partners (within the meaning of para-
graph (f) of this section) perform regular

monthly or semi-monthly interim closings
of its books, regardless of whether any
variation occurs. Regardless of whether
the partners agree to perform these regular
interim closings, the partnership must
continue to apply the interim closing or
proration method to its variations accord-
ing to the rules of this section.

(2) Example. The following example
illustrates the principles in this paragraph
(d).

Example. (i) PRS is a calendar year partnership
with five equal partners A, B, C, D, and E. PRS has
the following two variations that occur during its
2015 taxable year: on August 29, A sells its entire
interest in PRS to new partner F; on December 27,
PRS completely liquidates B's interest in PRS with a
distribution. These variations do not result in a ter-
mination of PRS under section 708.

(ii) The partners of PRS agree (within the mean-
ing of paragraph (f) of this section) to use the interim
closing method and the semi-monthly convention
with respect to the variation occurring on August 29.
Thus, the August variation is deemed to occur for
purposes of this section at the end of the day on
August 15, 2015. The partners of PRS agree (within
the meaning of paragraph (f) of this section) to use
the proration method with respect to the December
27 variation. Therefore, PRS must use the calendar
day convention with respect to the December varia-
tion pursuant to paragraph (c) of this section. Thus,
the December variation is deemed to occur for pur-
poses of this section at the end of the day on De-
cember 27, 2015.

(iii) Pursuant to paragraph (d)(1) of this section,
the partners of PRS agree (within the meaning of
paragraph (f) of this section) to perform regular
monthly interim closings. Therefore, PRS will have
twelve interim closings for its 2015 taxable year, one
at the end of every month and one at the end of the
day on August 15. Therefore, PRS will have thirteen
segments for 2015, one corresponding to each month
from January through July, one segment from Au-
gust 1 through August 15, one segment from August
16 through August 31, and one corresponding to
each month from September through December.
PRS must apportion its items among these segments
under the rules of paragraph (a)(3) of this section.

(iv) PRS will have two proration periods for
2015, one from December 1 through December 27,
and one from December 28 through December 31.
Pursuant to the rules of paragraph (a)(3) of this
section, PRS will prorate the items in its December
segment among these two proration periods. There-
fore, PRS will apportion 27/31 of all items in its
December segment to the proration period from De-
cember 1 through December 27, and 4/31 of all items
in its December segment to the proration period from
December 28 through December 31.

(v) Pursuant to the rules of paragraph (a)(3)(x) of
this section, PRS determines the partners' distribu-
tive shares of partnership items under section 702(a)
by taking into account the partners' interests in such
items during each of the thirteen segments and two
proration periods. Thus, A, B, C, D, and E will each
be allocated one-fifth of all items in the following

segments: January, February, March, April, May,
June, July, and August 1 through August 15. B, C, D,
E, and F will each be allocated one-fifth of all items
in the following segments: August 16 through Au-
gust 31, September, October, and November. B, C,
D, E, and F will each be allocated one-fifth of all
items in the proration period from December 1
through December 27. C, D, E, and F will each be
allocated one-quarter of all items in the proration
period from December 28 through December 31.

(e) Extraordinary items-(1) General
principles. Extraordinary items may not
be prorated. The partnership must allocate
extraordinary items among the partners in
proportion to their interests in the partner-
ship item at the time of day on which the
extraordinary item occurred, regardless of
the method (interim closing or proration
method) and convention (daily, semi-
monthly, or monthly) otherwise used by
the partnership. These rules require the
allocation of extraordinary items as an
exception to the proration method, which
would otherwise ratably allocate the ex-
traordinary items across the segment, and
the conventions, which could otherwise
inappropriately shift extraordinary items
between a transferor and transferee. How-
ever, publicly traded partnerships (as de-
fined in section 7704(b)) that are treated
as partnerships may, but are not required
to, apply their selected convention in de-
termining who held publicly traded units
(as described in § 1.7704-1(b) or (c)(1))
at the time of the occurrence of an extraor-
dinary item. Extraordinary items continue
to be subject to any special limitation or
requirement relating to the timing or
amount of income, gain, loss, deduction,
or credit applicable to the entire partner-
ship taxable year (for example, the limi-
tation for section 179 expenses).

(2) Definition. Except as provided in
paragraph (e)(3) of this section, an ex-
traordinary item is:

(i) Any item from the disposition or
abandonment (other than in the ordinary
course of business) of a capital asset as
defined in section 1221 (determined without
the application of any other rules of law);

(ii) Any item from the disposition or
abandonment (other than in the ordinary
course of business) of property used in a
trade or business as defined in section
1231(b) (determined without the applica-
tion of any holding period requirement);

(iii) Any item from the disposition or
abandonment of an asset described in sec-
tion 1221(a)(1), (a)(3), (a)(4), or (a)(5) if

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substantially all the assets in the same
category from the same trade or business
are disposed of or abandoned in one trans-
action (or series of related transactions);

(iv) Any item from assets disposed of
in an applicable asset acquisition under
section 1060(c);

(v) Any item resulting from any
change in accounting method initiated by
the filing of the appropriate form after a
variation occurs;

(vi) Any item from the discharge or re-
tirement of indebtedness (except items sub-
ject to section 108(e)(8) or 108(i), which are
subject to special allocation rules provided
in section 108(e)(8) and 108(i));

(vii) Any item from the settlement of a
tort or similar third-party liability or pay-
ment of a judgment;

(viii) Any credit, to the extent it arises
from activities or items that are not ratably
allocated (for example, the rehabilitation
credit under section 47, which is based on
placement in service);

(ix) For all partnerships, any additional
item if, the partners agree (within the
meaning of paragraph (f) of this section)
to consistently treat such item as an ex-
traordinary item for that taxable year;
however, this rule does not apply if treat-
ing that additional item as an extraordi-
nary item would result in a substantial
distortion of income in any partner's re-
turn; any additional extraordinary items
continue to be subject to any special lim-
itation or requirement relating to the tim-
ing or amount of income, gain, loss, de-
duction, or credit applicable to the entire
partnership taxable year (for example, the
limitation for section 179 expenses);

(x) Any item which, in the opinion of
the Commissioner, would, if ratably allo-
cated, result in a substantial distortion of
income in any return in which the item is
included;

(xi) Any item identified as an addi-
tional class of extraordinary item in guid-
ance published in the Internal Revenue
Bulletin.

(3) Small item exception. A partnership
may treat an item described in paragraph
(e)(2) of this section as other than an
extraordinary item for purposes of this
paragraph (e) if, for the partnership's tax-
able year the total of all items in the
particular class of extraordinary items (as
enumerated in paragraphs (e)(2)(i)

through (xi) of this section, for example,
all tort or similar liabilities, but in no
event counting an extraordinary item
more than once) is less than five percent
of the partnership's gross income, includ-
ing tax-exempt income described in sec-
tion 705(a)(1)(B), in the case of income or
gain items, or gross expenses and losses,
including section 705(a)(2)(B) expendi-
tures, in the case of losses and expense
items; and the total amount of the extraor-
dinary items from all classes of extraordi-
nary items amounting to less than five
percent of the partnership's gross income,
including tax-exempt income described in
section 705(a)(1)(B), in the case of income
or gain items, or gross expenses and losses,
including section 705(a)(2)(B) expendi-
tures, in the case of losses and expense
items, does not exceed $10 million in the
taxable year, determined by treating all such
extraordinary items as positive amounts.

(4) Examples. The following examples
illustrate the provisions of this paragraph (e).

Example 1. PRS, a calendar year partnership,
uses the proration method and calendar day conven-
tion to account for varying interests of the partners.
At 3:15 p.m. on December 7, 2015, PRS recognizes
an extraordinary item within the meaning of para-
graph (e)(2) of this section. On December 12, 2015,
A, a partner in PRS, disposes of its entire interest in
PRS. PRS does not experience a termination under
section 708 during 2015. PRS has no other extraor-
dinary items for the taxable year, the small item
exception of paragraph (e)(3) of this section does not
apply, the exceptions in paragraph (b) of this section
do not apply, and PRS is not a publicly traded
partnership. Pursuant to paragraph (e)(1) of this sec-
tion, the item of income, gain, loss, deduction, or
credit attributable to the extraordinary item will be
allocated in accordance with the partners' interests in
the extraordinary item at 3:15 p.m. on December 7,
2015. The remaining partnership items of PRS that
are subject to this section must be prorated across the
partnership's taxable year in accordance with para-
graph (a)(3) of this section.

Example 2. Assume the same facts as in Example
1, except that PRS uses the interim closing method
and monthly convention to account for varying in-
terests of the partners. Pursuant to paragraph
(c)(1)(iii) of this section, the December 12 variation
is deemed to have occurred for purposes of this
section at the end of the day on November 30, 2015.
Thus, A will not generally be allocated any items of
PRS attributable to the segment between December
1, 2015, and December 31, 2015; however, pursuant
to paragraph (e)(1) of this section, PRS must allocate
the item of income, gain, loss, deduction, or credit
attributable to the extraordinary item in accordance
with the partners' interests in the extraordinary item
at the time of day on which the extraordinary item
occurred, regardless of the convention used by PRS.
Thus, because A was a partner in PRS at 3:15 p.m.
on December 7, 2015 (ignoring application of PRS's

convention), A must be allocated a share of the
extraordinary item.

Example 3. Assume the same facts as in Example
2, except that PRS is a publicly traded partnership
(within the meaning of section 7704(b)) and A held
a publicly traded unit (as described in § 1.7704-1(b)
or 1.7704-1(c)(1)) in PRS. Under PRS's monthly
convention, the December 12 variation is deemed to
have occurred for purposes of this section at the end
of the day on November 30, 2015. Pursuant to para-
graph (e)(1) of this section, a publicly traded part-
nership (as defined in section 7704(b)) may choose
to respect its conventions in determining who held
its publicly traded units (as described in § 1.7704-
1(b) or § 1.7704-1(c)(1)) at the time of the occur-
rence of an extraordinary item. Therefore, PRS may
choose to treat A as not having been a partner in PRS
for purposes of this paragraph (e) at the time the
extraordinary item arose, and thus PRS may choose
not to allocate A any share of the extraordinary item.

Example 4. A and B each own a 15 percent
interest in PRS, a partnership that is not a publicly
traded partnership and for which capital is a material
income-producing factor. At 9:00 a.m. on April 25,
2015, A sells its entire interest in PRS to new partner
D. At 3:00 p.m. on April 25, 2015, PRS incurs an
extraordinary item (within the meaning of paragraph
(e)(2) of this section). At 5:00 p.m. on April 25,
2015, B sells its entire interest in PRS to new partner
E. Under paragraph (e)(1) of this section, PRS must
allocate the extraordinary item in accordance with
the partners' interests at 3:00 p.m. on April 25, 2015.
Accordingly, a portion of the extraordinary item will
be allocated to each of B and D, but no portion will
be allocated to A or E.

Example 5. PRS, a calendar year partnership that
is not a publicly traded partnership, has a variation in
a partner's interest during 2015 and the exceptions in
paragraph (b) of this section do not apply. During
2015 PRS has two extraordinary items: PRS recog-
nizes $8 million of gross income on the sale outside
the ordinary course of business of an asset described
in paragraph (e)(2)(ii) of this section, and PRS also
recognizes $12 million of gross income from a tort
settlement as described in paragraph (e)(2)(vii) of
this section. PRS's gross income (including the gross
income from the extraordinary items) for the taxable
year is $200 million. The gain from all items de-
scribed in paragraph (e)(2)(ii) of this section is less
than five percent of PRS's gross income ($8 million
gross income from the asset sale divided by $200
million total gross income, or four percent) and all of
the extraordinary items of PRS from classes that are
less than five percent of PRS's gross income ($8
million), in the aggregate, do not exceed $10 million
for the taxable year. Thus, the $8 million gain rec-
ognized on the asset sale is considered a small item
under paragraph (e)(3) of this section and is there-
fore excepted from the rules of paragraph (e)(1) of
this section. Because the gross income attributable to
the tort settlement exceeds five percent of PRS's
gross income (six percent), the tort settlement gross
income is not considered a small item under para-
graph (e)(3) of this section. Therefore, the $12 mil-
lion gross income attributable to the tort settlement
must be allocated according to the rules of paragraph
(e)(1) of this section in accordance with PRS's part-

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ners' interests in the item at the time of the day that
the tort settlement income arose.

Example 6. Assume the same facts as Example 5,
except that during the year, PRS also recognizes two
additional extraordinary items: $2 million of gross
income from the sale of a capital asset described in
paragraph (e)(2)(i) of this section, and $1 million of
gross income from discharge of indebtedness de-
scribed in paragraph (e)(2)(vi) of this section. Al-
though the gain from items described in each of
paragraphs (e)(2)(i), (e)(2)(ii), and (e)(2)(vi) of this
section is each less than five percent of PRS's gross
income, the extraordinary items of PRS from classes
that are less than five percent of PRS's gross income
($11 million), in the aggregate, exceeds $10 million
for the taxable year. Thus, none of the items are
considered a small item under paragraph (e)(3) of
this section. Therefore, the items attributable to the
sale of the capital asset, the sale of the trade or
business asset, the discharge of indebtedness in-
come, and the tort settlement must each be allocated
according to the rules of paragraph (e)(1) of this
section in accordance with PRS's partners' interests
in the items at the time of the day that the items
arose.

(f) Agreement of the partners. For pur-
poses of paragraphs (a)(3)(iii) (relating to
selection of the proration method), (c)(3)
(relating to selection of the semi-monthly
or monthly convention), (d) (relating to
performance of regular monthly or semi-
monthly interim closings), and (e)(2)(ix)
(relating to selection of additional extraor-
dinary items) of this section, the term
agreement of the partners means either an
agreement of all the partners to select the
method, convention, or extraordinary item
in a dated, written statement maintained
with the partnership's books and records,
including, for example, a selection that is
included in the partnership agreement, or
a selection of the method, convention, or
extraordinary item made by a person au-
thorized to make that selection, including
under a grant of general authority pro-

vided for by either state law or in the
partnership agreement, if that person's se-
lection is in a dated, written statement
maintained with the partnership's books
and records. In either case, the dated writ-
ten agreement must be maintained with
the partnership's books and records by the
due date, including extension, of the part-
nership's tax return.

(g) Effective/applicability date. Except
with respect to paragraph (c)(3) of this sec-
tion, this section applies for partnership tax-
able years that begin on or after August 3,
2015. The rules of paragraph (c)(3) of this
section apply for taxable years of partner-
ships other than existing publicly traded
partnerships that begin on or after August 3,
2015. For purposes of the immediately
preceding sentence, an existing publicly
traded partnership is a partnership described
in section 7704(b) that was formed prior to
April 14, 2009. For purposes of this effec-
tive date provision, the termination of a pub-
licly traded partnership under section
708(b)(1)(B) due to the sale or exchange of
50 percent or more of the total interests in
partnership capital and profits is disregarded
in determining whether the publicly traded
partnership is an existing publicly traded
partnership.

Par. 7. Section 1.706-5 is added to
read as follows:

§ 1.706-5 Taxable year determination.

(a) In general. For purposes of
§ 1.706-4, the taxable year of a partner-
ship shall be determined without regard to
section 706(c)(2)(A) and its regulations.

(b) Effective/applicability date. This
section applies for partnership taxable years
that begin on or after August 3, 2015.

## PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 8. The authority for part 602 con-
tinues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 9. In § 602.101, paragraph (b) is
amended by adding the following entry in
numerical order to the table to read as
follows:

§ 602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR Part or
section where
identified and
described

Current OMB
control no.

* * * * *

1.706-4(f)

1545-0123

* * * * *

Karen M. Schiller,
Acting Deputy Commissioner
for Services and Enforcement.

Approved: June 3, 2015

Mark J. Mazur,
Assistant Secretary of the
Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 31, 2015,
8:45 a.m., and published in the issue of the Federal Register
for August 3, 2015, 80 F.R. 18816)

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# Part III. Administrative, Procedural, and Miscellaneous

## Updated Static Mortality Tables for Defined Benefit Pension Plans for 2016 Notice 2015-53

### PURPOSE

This notice provides updated static
mortality tables to be used for defined
benefit pension plans under
§ 430(h)(3)(A) of the Internal Revenue
Code (Code) and § 303(h)(3)(A) of the
Employee Retirement Income Security
Act of 1974, Pub. L. No. 93-406, as
amended (ERISA). These updated tables,
which are being issued using the method-
ology in the existing final regulations un-
der § 430(h)(3)(A), apply for purposes of
calculating the funding target and other
items for valuation dates occurring during
calendar year 2016.

This notice also includes a modified
unisex version of the mortality tables for
use in determining minimum present
value under § 417(e)(3) of the Code and
§ 205(g)(3) of ERISA for distributions
with annuity starting dates that occur dur-
ing stability periods beginning in the 2016
calendar year.

## BACKGROUND

Section 412 of the Code provides min-
imum funding requirements that generally
apply for defined benefit plans. Section
412(a)(2) provides that § 430 specifies the
minimum funding requirements that gen-
erally apply to defined benefit plans that
are not multiemployer plans. Section
430(a) defines the minimum required con-
tribution for such a plan by reference to
the plan's funding target for the plan year.

Section 430(h)(3) provides rules re-
garding the mortality tables to be used
under § 430. Under § 430(h)(3)(A), ex-
cept as provided in § 430(h)(3)(C) or (D),
the Secretary is to prescribe by regulation
mortality tables to be used in determining

any present value or making any compu-
tation under § 430. Those tables are to be
based on the actual experience of pension
plans and projected trends in that experi-
ence. Section 430(h)(3)(B) provides that
periodically (at least every 10 years) these
mortality tables shall be revised to reflect
the actual experience of pension plans and
projected trends in that experience.

Section 430(h)(3)(C) provides that,
upon request by a plan sponsor and ap-
proval by the Secretary, substitute mortal-
ity tables that meet the applicable require-
ments may be used in lieu of the standard
mortality tables provided under
§ 430(h)(3)(A). Section 430(h)(3)(D) pro-
vides for the use of separate mortality
tables with respect to certain individuals
who are entitled to benefits on account of
disability, with separate tables for those
whose disabilities occurred in plan years
beginning before January 1, 1995, and
those whose disabilities occurred in plan
years beginning after December 31, 1994.
These separate mortality tables are per-
mitted to be used with respect to disabled
individuals in lieu of the generally appli-
cable mortality tables provided pursuant
to § 430(h)(3)(A) or the substitute mortal-
ity tables under § 430(h)(3)(C).

### Determination of Minimum Funding Requirements under § 430

Section 1.430(h)(3)-1 of the regula-
tions provides for mortality tables, based
on the tables contained in the RP-2000
Mortality Tables Report,1 adjusted for
mortality improvement using Projection
Scale AA as recommended in that report.
Section 1.430(h)(3)-1 generally requires
the use of separate tables for nonannuitant
and annuitant periods for large plans
(those with over 500 participants as of the
valuation date). Sponsors of small plans
(those with 500 or fewer participants as of
the valuation date) are permitted to use
combined tables that apply the same mor-

tality rates to both annuitants and nonan-
nuitants.

Section 1.430(h)(3)-1 describes the
methodology that the IRS will use to es-
tablish mortality tables as provided under
§ 430(h)(3)(A). The mortality tables set
forth in § 1.430(h)(3)-1 are based on ex-
pected mortality as of 2000 and reflect the
impact of expected improvements in mor-
tality. The regulations permit plan spon-
sors to apply the projection of mortality
improvement in either of two ways:
through use of static tables that are up-
dated annually to reflect expected im-
provements in mortality, or through use of
generational tables. The regulations in-
clude static mortality tables for use in
actuarial valuations as of valuation dates
occurring in 2008 and provide that the
mortality tables for valuation dates occur-
ring in future years are to be provided in
the Internal Revenue Bulletin. Notice
2008-85, 2008-42 IRB 905, sets forth
the static mortality tables that apply under
§ 430(h)(3)(A) for valuation dates during
2009 through 2013. Notice 2013-49,
2013-32 IRB 127, provides static mortal-
ity tables for valuation dates during 2014
and 2015.

Notice 2013-49 also requested com-
ments regarding the publication of mortal-
ity tables for future years, and several
comments were received. The Treasury
Department and the IRS also received ad-
ditional comments in response to the RP-
2014 Mortality Tables Report2 and the
Mortality Improvement Scale MP-2014
Report.3 The Treasury Department and
the IRS are considering the comments re-
ceived and expect to issue proposed reg-
ulations revising the base mortality rates
and projection factors in § 1.430(h)(3)-1.
However, in order to give time for notice
and comment on the proposed regulations,
the new regulations will not apply until
2017.

After regulations implementing new
mortality tables are finalized, as additional

1The RP-2000 Mortality Tables Report was released by the Society of Actuaries in July 2000 and updated in May 2001. Society of Actuaries, RP-2000 Mortality Tables Report, at
www.soa.org/Research/Experience-Study/Pension/research-rp-2000-mortality-tables.aspx.

2The RP-2014 Mortality Tables Report was released by the Society of Actuaries in October 2014 and revised in November 2014. Society of Actuaries, RP-2014 Report, at
www.soa.org/Research/Experience-Study/pension/research-2014-rp.aspx.

3The Mortality Improvement Scale MP-2014 Report was released by the Society of Actuaries in October 2014. Society of Actuaries, Mortality Improvement Scale MP-2014 Report, at
www.soa.org/Research/Experience-Study/pension/research-2014-mp.aspx.

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data regarding mortality improvement for
more recent years becomes available, the
Treasury Department and IRS expect to
regularly review trends in mortality im-
provement and will update the projection
of mortality improvement as necessary.

### Application of These Tables for Other Funding Rules

For a plan for which the effective
date of § 430 is delayed pursuant to
section 104 of the Pension Protection
Act of 2006, Public Law 109-280, as
amended (PPA'06), current liability un-
der § 412(l)(7) (as in effect prior to the
enactment of PPA'06) must be deter-
mined in order to calculate the plan's
minimum required contribution. For this
purpose, § 1.412(1)(7)-1(a) provides
that for plan years beginning on or after
January 1, 2008, the mortality tables
described in § 430(h)(3)(A) are to be
used to determine current liability under
§ 412(l)(7) for nondisabled participants.

Section 1.431(c)(6)-1 provides that
the same mortality assumptions that ap-
ply for purposes of § 430(h)(3)(A) and
§ 1.430(h)(3)-1(a)(2) are used to deter-
mine a multiemployer plan's current li-
ability for purposes of applying the full-
funding rules of § 431(c)(6). For this
purpose, a multiemployer plan is permit-
ted to apply either the annually-adjusted
static mortality tables or the generational
mortality tables.

Section 433 provides the minimum
funding standards for CSEC plans, which
are described in section 414(y). Section
433(h)(3)(B)(i) provides that the Secre-
tary may by regulation prescribe mortality
tables to be used in determining current
liability for purposes of § 433(c)(7)(C).
The Treasury Department and the IRS ex-
pect to issue regulations prescribing that
the mortality tables described in
§ 430(h)(3)(A) are to be used to determine
current liability under § 433(c)(7)(C).

### Application of Mortality Tables for Minimum Present Value Requirements under § 417(e)(3)

Section 417(e)(3) generally provides
that the present value of certain benefits
under a qualified pension plan (including
single-sum distributions) cannot be less
than the present value of the accrued ben-
efit using applicable interest rates and the
applicable mortality table. Under
§ 1.417(e)-1(d), these rules must also be
used to compute the present value of a
plan benefit for purposes of determining
whether consent for a distribution is re-
quired under § 411(a)(11)(A).

Section 417(e)(3)(B) defines the term
"applicable mortality table" as the mortal-
ity table specified for the plan year under
§ 430(h)(3)(A) (without regard to
§ 430(h)(3)(C) or (D)), modified as appro-
priate by the Secretary.

Rev. Rul. 2007-67, 2007-2 CB 1047,
provides that, except as otherwise stated
in future guidance, the applicable mortal-
ity table under § 417(e)(3) for 2008 is
based on a fixed blend of 50% of the static
male combined mortality rates and 50% of
the static female combined mortality rates
promulgated under § 1.430(h)(3)-1(c)(3)
of the proposed regulations (which have
since been issued as final regulations).
The applicable mortality table for pur-
poses of § 417(e)(3) is not a generational
table. Rev. Rul. 2007-67 also provides
that the applicable mortality table for a
given year applies to distributions with
annuity starting dates that occur during
stability periods that begin during that cal-
endar year. Rev. Rul. 2007-67 further
states that the § 417(e)(3) applicable
mortality table for each subsequent year
will be published in future guidance and,
except as provided in that future guid-
ance, will be determined from the
§ 430(h)(3)(A) tables on the same basis as
the applicable mortality table for 2008.

Notice 2008-85 set forth the § 417(e)(3)
applicable mortality tables for distribu-
tions with annuity starting dates that occur
during stability periods beginning during
calendar years 2009 through 2013. Notice
2013-49 set forth the § 417(e)(3) appli-
cable mortality tables for distributions
with annuity starting dates that occur dur-
ing stability periods beginning during cal-
endar years 2014 and 2015.

## STATIC MORTALITY TABLES FOR 2016

This notice sets forth the mortality ta-
bles for minimum funding and present
value requirements for 2016.

The static mortality tables that apply
under § 430(h)(3)(A) for valuation dates
occurring during 2016 are set forth in the
appendix to this notice. The mortality
rates in these tables have been developed
from the base mortality rates, projection
factors, and weighting factors set forth in
§ 1.430(h)(3)-1(d), using the blending
techniques described in the preamble to
those regulations.

The static mortality tables that apply
under § 417(e)(3) for distributions with
annuity starting dates occurring during
stability periods beginning in 2016 are set
forth in the appendix to this notice in the
column labeled "Unisex." These tables
were derived from the tables used for
§ 430(h)(3)(A) following the procedures
set forth in Rev. Rul. 2007-67.

### Drafting Information

The principal authors of this notice are
Michael P. Brewer and Linda S. F. Mar-
shall of the Office of the Associate Chief
Counsel (Tax Exempt and Government
Entities). For further information regard-
ing this notice, contact Michael Brewer or
Linda Marshall (202) 317-6700 (not a
toll-free number).

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# APPENDIX Mortality tables for valuation dates occurring during 2016 and distributions subject to § 417(e)(3) with annuity starting dates occurring during stability periods beginning in 2016

Age

MALE

MALE

MALE

FEMALE

FEMALE

FEMALE

UNISEX

2016 Non-Annuitant Table

2016 Annuitant Table

2016 Optional Combined Table for Small Plans

2016 Non-Annuitant Table

2016 Annuitant Table

2016 Optional Combined Table for Small Plans

2016 Table for Distributions Subject to § 417(e)(3)

1

0.000341

0.000341

0.000341

0.000305

0.000305

0.000305

0.000323

2

0.000230

0.000230

0.000230

0.000199

0.000199

0.000199

0.000215

3

0.000191

0.000191

0.000191

0.000149

0.000149

0.000149

0.000170

4

0.000149

0.000149

0.000149

0.000111

0.000111

0.000111

0.000130

5

0.000136

0.000136

0.000136

0.000101

0.000101

0.000101

0.000119

6

0.000130

0.000130

0.000130

0.000094

0.000094

0.000094

0.000112

7

0.000125

0.000125

0.000125

0.000088

0.000088

0.000088

0.000107

8

0.000115

0.000115

0.000115

0.000079

0.000079

0.000079

0.000097

9

0.000112

0.000112

0.000112

0.000075

0.000075

0.000075

0.000094

10

0.000113

0.000113

0.000113

0.000075

0.000075

0.000075

0.000094

11

0.000117

0.000117

0.000117

0.000076

0.000076

0.000076

0.000097

12

0.000122

0.000122

0.000122

0.000079

0.000079

0.000079

0.000101

13

0.000128

0.000128

0.000128

0.000083

0.000083

0.000083

0.000106

14

0.000140

0.000140

0.000140

0.000092

0.000092

0.000092

0.000116

15

0.000148

0.000148

0.000148

0.000103

0.000103

0.000103

0.000126

16

0.000157

0.000157

0.000157

0.000111

0.000111

0.000111

0.000134

17

0.000166

0.000166

0.000166

0.000119

0.000119

0.000119

0.000143

18

0.000174

0.000174

0.000174

0.000121

0.000121

0.000121

0.000148

19

0.000183

0.000183

0.000183

0.000119

0.000119

0.000119

0.000151

20

0.000190

0.000190

0.000190

0.000116

0.000116

0.000116

0.000153

21

0.000203

0.000203

0.000203

0.000113

0.000113

0.000113

0.000158

22

0.000215

0.000215

0.000215

0.000114

0.000114

0.000114

0.000165

23

0.000233

0.000233

0.000233

0.000119

0.000119

0.000119

0.000176

24

0.000251

0.000251

0.000251

0.000126

0.000126

0.000126

0.000189

25

0.000275

0.000275

0.000275

0.000134

0.000134

0.000134

0.000205

26

0.000314

0.000314

0.000314

0.000147

0.000147

0.000147

0.000231

27

0.000327

0.000327

0.000327

0.000153

0.000153

0.000153

0.000240

28

0.000336

0.000336

0.000336

0.000162

0.000162

0.000162

0.000249

29

0.000353

0.000353

0.000353

0.000171

0.000171

0.000171

0.000262

30

0.000380

0.000380

0.000380

0.000193

0.000193

0.000193

0.000287

31

0.000427

0.000427

0.000427

0.000239

0.000239

0.000239

0.000333

32

0.000481

0.000481

0.000481

0.000273

0.000273

0.000273

0.000377

33

0.000540

0.000540

0.000540

0.000298

0.000298

0.000298

0.000419

34

0.000601

0.000601

0.000601

0.000319

0.000319

0.000319

0.000460

35

0.000662

0.000662

0.000662

0.000337

0.000337

0.000337

0.000500

36

0.000720

0.000720

0.000720

0.000354

0.000354

0.000354

0.000537

37

0.000774

0.000774

0.000774

0.000369

0.000369

0.000369

0.000572

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Age

MALE

MALE

MALE

FEMALE

FEMALE

FEMALE

UNISEX

2016 Non-Annuitant Table

2016 Annuitant Table

2016 Optional Combined Table for Small Plans

2016 Non-Annuitant Table

2016 Annuitant Table

2016 Optional Combined Table for Small Plans

2016 Table for Distributions Subject to § 417(e)(3)

38

0.000800

0.000800

0.000800

0.000386

0.000386

0.000386

0.000593

39

0.000821

0.000821

0.000821

0.000406

0.000406

0.000406

0.000614

40

0.000841

0.000841

0.000841

0.000442

0.000442

0.000442

0.000642

41

0.000863

0.000890

0.000863

0.000484

0.000484

0.000484

0.000674

42

0.000890

0.000987

0.000891

0.000533

0.000533

0.000533

0.000712

43

0.000922

0.001133

0.000925

0.000586

0.000586

0.000586

0.000756

44

0.000961

0.001328

0.000968

0.000644

0.000644

0.000644

0.000806

45

0.001005

0.001572

0.001018

0.000682

0.000689

0.000682

0.000850

46

0.001044

0.001864

0.001066

0.000719

0.000778

0.000720

0.000893

47

0.001085

0.002205

0.001121

0.000755

0.000912

0.000759

0.000940

48

0.001128

0.002595

0.001181

0.000817

0.001090

0.000826

0.001004

49

0.001172

0.003034

0.001248

0.000883

0.001313

0.000901

0.001075

50

0.001217

0.003521

0.001321

0.000985

0.001580

0.001015

0.001168

51

0.001262

0.003556

0.001376

0.001100

0.001697

0.001135

0.001256

52

0.001309

0.003546

0.001462

0.001271

0.001914

0.001319

0.001391

53

0.001401

0.003595

0.001610

0.001468

0.002193

0.001537

0.001574

54

0.001503

0.003643

0.001779

0.001700

0.002532

0.001799

0.001789

55

0.001671

0.003798

0.002110

0.001969

0.002935

0.002152

0.002131

56

0.001883

0.004033

0.002565

0.002287

0.003418

0.002610

0.002588

57

0.002132

0.004344

0.002968

0.002577

0.003908

0.003030

0.002999

58

0.002424

0.004758

0.003451

0.002817

0.004385

0.003425

0.003438

59

0.002677

0.005165

0.003918

0.003081

0.004929

0.003887

0.003903

60

0.002959

0.005656

0.004478

0.003365

0.005525

0.004435

0.004457

61

0.003369

0.006358

0.005263

0.003668

0.006166

0.005118

0.005191

62

0.003704

0.007004

0.006048

0.003986

0.006852

0.005877

0.005963

63

0.004180

0.007918

0.007134

0.004314

0.007582

0.006772

0.006953

64

0.004540

0.008761

0.008067

0.004648

0.008372

0.007643

0.007855

65

0.004892

0.009703

0.009141

0.004983

0.009235

0.008619

0.008880

66

0.005398

0.011004

0.010623

0.005314

0.010170

0.009742

0.010183

67

0.005731

0.012182

0.011866

0.005636

0.011175

0.010824

0.011345

68

0.005858

0.013160

0.012896

0.005945

0.012271

0.011969

0.012433

69

0.006143

0.014537

0.014297

0.006240

0.013503

0.013232

0.013765

70

0.006210

0.015686

0.015440

0.006517

0.014919

0.014634

0.015037

71

0.007026

0.017356

0.017114

0.007108

0.016177

0.015900

0.016507

72

0.008658

0.019271

0.019050

0.008290

0.017994

0.017731

0.018391

73

0.011106

0.021465

0.021276

0.010064

0.019543

0.019318

0.020297

74

0.014369

0.023946

0.023797

0.012429

0.021660

0.021473

0.022635

75

0.018448

0.027356

0.027240

0.015385

0.023365

0.023229

0.025235

76

0.023343

0.030490

0.030416

0.018932

0.025743

0.025650

0.028033

77

0.029054

0.034715

0.034671

0.023071

0.029017

0.028956

0.031814

78

0.035581

0.039486

0.039466

0.027801

0.031986

0.031958

0.035712

79

0.042924

0.044915

0.044910

0.033122

0.035314

0.035307

0.040109

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Age

MALE

MALE

MALE

FEMALE

FEMALE

FEMALE

UNISEX

2016 Non-Annuitant Table

2016 Annuitant Table

2016 Optional Combined Table for Small Plans

2016 Non-Annuitant Table

2016 Annuitant Table

2016 Optional Combined Table for Small Plans

2016 Table for Distributions Subject to § 417(e)(3)

80

0.051083

0.051083

0.051083

0.039034

0.039034

0.039034

0.045059

81

0.058516

0.058516

0.058516

0.043204

0.043204

0.043204

0.050860

82

0.066910

0.066910

0.066910

0.047896

0.047896

0.047896

0.057403

83

0.074584

0.074584

0.074584

0.053181

0.053181

0.053181

0.063883

84

0.084893

0.084893

0.084893

0.059146

0.059146

0.059146

0.072020

85

0.094233

0.094233

0.094233

0.067435

0.067435

0.067435

0.080834

86

0.104477

0.104477

0.104477

0.076970

0.076970

0.076970

0.090724

87

0.118458

0.118458

0.118458

0.087853

0.087853

0.087853

0.103156

88

0.134192

0.134192

0.134192

0.097854

0.097854

0.097854

0.116023

89

0.148298

0.148298

0.148298

0.111198

0.111198

0.111198

0.129748

90

0.167257

0.167257

0.167257

0.122890

0.122890

0.122890

0.145074

91

0.182177

0.182177

0.182177

0.134949

0.134949

0.134949

0.158563

92

0.202142

0.202142

0.202142

0.147094

0.147094

0.147094

0.174618

93

0.218060

0.218060

0.218060

0.162763

0.162763

0.162763

0.190412

94

0.233954

0.233954

0.233954

0.174573

0.174573

0.174573

0.204264

95

0.255453

0.255453

0.255453

0.185756

0.185756

0.185756

0.220605

96

0.271129

0.271129

0.271129

0.196137

0.196137

0.196137

0.233633

97

0.286358

0.286358

0.286358

0.210344

0.210344

0.210344

0.248351

98

0.308123

0.308123

0.308123

0.218852

0.218852

0.218852

0.263488

99

0.322695

0.322695

0.322695

0.226123

0.226123

0.226123

0.274409

100

0.336718

0.336718

0.336718

0.232065

0.232065

0.232065

0.284392

101

0.358628

0.358628

0.358628

0.244834

0.244834

0.244834

0.301731

102

0.371685

0.371685

0.371685

0.254498

0.254498

0.254498

0.313092

103

0.383040

0.383040

0.383040

0.266044

0.266044

0.266044

0.324542

104

0.392003

0.392003

0.392003

0.279055

0.279055

0.279055

0.335529

105

0.397886

0.397886

0.397886

0.293116

0.293116

0.293116

0.345501

106

0.400000

0.400000

0.400000

0.307811

0.307811

0.307811

0.353906

107

0.400000

0.400000

0.400000

0.322725

0.322725

0.322725

0.361363

108

0.400000

0.400000

0.400000

0.337441

0.337441

0.337441

0.368721

109

0.400000

0.400000

0.400000

0.351544

0.351544

0.351544

0.375772

110

0.400000

0.400000

0.400000

0.364617

0.364617

0.364617

0.382309

111

0.400000

0.400000

0.400000

0.376246

0.376246

0.376246

0.388123

112

0.400000

0.400000

0.400000

0.386015

0.386015

0.386015

0.393008

113

0.400000

0.400000

0.400000

0.393507

0.393507

0.393507

0.396754

114

0.400000

0.400000

0.400000

0.398308

0.398308

0.398308

0.399154

115

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

116

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

117

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

118

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

119

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

0.400000

120

1.000000

1.000000

1.000000

1.000000

1.000000

1.000000

1.000000

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26 CFR 601.204 Changes in accounting periods and
methods of accounting.
(Also: Part I, §§ 461; 1.461-4; 481)

Rev. Proc. 2015-39

## SECTION 1. PURPOSE

This revenue procedure provides a safe
harbor under which a taxpayer using an
accrual method of accounting may treat
economic performance as occurring on a
ratable basis for certain service contracts
described in section 4.02 of this revenue
procedure. This revenue procedure also
provides procedures for obtaining the au-
tomatic consent of the Commissioner to
change to the method of accounting de-
scribed in this revenue procedure.

## SECTION 2. BACKGROUND

.01 Section 461(a) of the Internal Rev-
enue Code provides that the amount of
any deduction or credit must be taken for
the taxable year that is the proper taxable
year under the method of accounting used
in computing taxable income.

.02 Section 1.461-1(a)(2)(i) of the In-
come Tax Regulations provides that, un-
der an accrual method of accounting, a
liability is incurred, and generally taken
into account for federal income tax pur-
poses, in the taxable year in which (1) all
the events have occurred that establish the
fact of the liability, (2) the amount of the
liability can be determined with reason-
able accuracy (requirements (1) and (2)
are collectively referred to as the "all
events test"), and (3) economic perfor-
mance has occurred with respect to the
liability. See also § 1.446-1(c)(1)(ii)(A).

.03 All the events have occurred that
establish the fact of the liability when (1)
the event fixing the liability occurs,
whether that is the required performance
or other event, or (2) the payment is due,
whichever happens earliest. Rev. Rul.
2007-3, 2007-1 C.B. 350; Rev. Rul. 80-
230, 1980-2 C.B. 169; Rev. Rul. 79-410,
1979-2 C.B. 213, amplified by Rev. Rul.
2003-90, 2003-2 C.B. 353.

.04 Section 461(h)(1) and § 1.461-
4(a)(1) provide that, for purposes of de-
termining whether an accrual basis tax-
payer can treat the amount of any liability
as incurred, the all events test is not
treated as met any earlier than the taxable

year in which economic performance oc-
curs with respect to the liability.

.05 Section 461(h)(2)(A)(i) provides
that if the liability of a taxpayer arises out
of the provision of services to the taxpayer
by another person, economic performance
occurs as the person provides those ser-
vices. See also § 1.461-4(d)(2)(i).

.06 Neither § 461(h)(2)(A)(i) nor
§ 1.461-4(d)(2)(i) explains when a person
has provided services for purposes of sat-
isfying the economic performance re-
quirement in the context of a Ratable Ser-
vice Contract as described in section 4.02
of this revenue procedure.

.07 There are two exceptions to the
general rule of economic performance in
§ 461(h)(2)(A) that allow a taxpayer to
accelerate the accrual of a liability into a
year prior to the year that the economic
performance requirement is satisfied.
These exceptions are the 31/2 month rule
and the recurring item exception.

.08 Under the 31/2 month rule in
§ 1.461-4(d)(6)(ii), a taxpayer may treat
economic performance as occurring as the
taxpayer makes payment to the person
providing the services if the taxpayer can
reasonably expect the person to provide
the services within 31/2 months after the
taxpayer makes the payment.

.09 Under the recurring item exception
in § 461(h)(3)(A) and § 1.461-5(b), a
liability is treated as incurred for a taxable
year if: (i) at the end of the taxable year,
all the events have occurred that establish
the fact of the liability and the amount can
be determined with reasonable accuracy;
(ii) economic performance occurs on or
before the earlier of (A) the date that the
taxpayer files a timely return (including
extensions) for the taxable year, or (B) the
15th day of the ninth calendar month after
the close of the taxable year; (iii) the
liability is recurring in nature; and (iv)
either (A) the amount of the liability is not
material or (B) the accrual of the liability
in the taxable year results in a better
matching of the liability with the income
to which it relates than would result from
accruing the liability for the taxable year
in which economic performance occurs.
See, Rev. Rul. 2012-1, 2012-1 I.R.B.
255.

.10 Section 1.461-4(d)(6)(iv) provides
that if different services are required to be
provided to the taxpayer under a single

contract, economic performance occurs
over the time each service is provided.

.11 In Caltex Oil Venture v. Commis-
sioner, 138 T.C. 18, 36 (2012), the Tax
Court construed the 31/2 month rule as
contemplating that all of the services
called for under an undifferentiated, non-
severable contract must be provided
within 31/2 months of payment.

.12 Under § 446(b), the Commissioner
has broad authority to determine whether
a method of accounting clearly reflects
income. Section 1.446-1(c)(2)(ii) pro-
vides that the Commissioner may autho-
rize a taxpayer to adopt or change to a
permissible method of accounting al-
though the method is not specifically de-
scribed in the regulations as permissible
if, in the opinion of the Commissioner,
that method clearly reflects income.

.13 Section 446(e) and § 1.446-
1(e)(2)(i) state that, except as otherwise
provided, a taxpayer must secure the con-
sent of the Commissioner before changing
a method of accounting for federal income
tax purposes. Section 1.446-1(e)(3)(ii)
authorizes the Commissioner to prescribe
administrative procedures setting forth the
limitations, terms, and conditions neces-
sary to obtain the Commissioner's consent
to effect the change in method of account-
ing and to prevent amounts from being
duplicated or omitted.

.14 Section 481(a) requires adjust-
ments necessary to prevent amounts from
being duplicated or omitted by reason of a
change in method of accounting.

.15 Rev. Proc. 2015-13, 2015-5 I.R.B.
419, provides the automatic change pro-
cedures by which a taxpayer may obtain
consent to change to a method of account-
ing described in the List of Automatic
Changes of Rev. Proc. 2015-14, 2015-5
I.R.B. 450.

## SECTION 3. SCOPE

This revenue procedure applies to an
accrual method taxpayer that wants to
change its method of accounting for lia-
bilities arising out of the provision of ser-
vices to the taxpayer under a Ratable Ser-
vice Contract, as defined in section 4.02 of
this revenue procedure, to the safe harbor
method provided in section 4.01 of this
revenue procedure.

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## SECTION 4. SAFE HARBOR METHOD

.01 In General. Under the safe harbor
method of accounting for Ratable Service
Contracts, as defined in section 4.02, a
taxpayer may treat economic performance
as occurring on a ratable basis over the
term of the service contract.

.02 Ratable Service Contract. For pur-
poses of this revenue procedure, a contract
is a Ratable Service Contract if: (1) the
contract provides for similar services to be
provided on a regular basis, such as daily,
weekly, or monthly; (2) each occurrence
of the service provides independent value,
such that the benefits of receiving each
occurrence of the service is not dependent
on the receipt of any previous or subse-
quent occurrence of the service, and; (3)
the term of the contract does not exceed
12 months (contract renewal provisions
will not be considered in determining
whether a contract exceeds 12 months). If
a single contract includes services that
satisfy the requirements of this section
and services (or other items) that do not
satisfy the requirements of this section,
the services (or other items) that do not
satisfy the requirements of this section
must be separately priced in the contract
for the contract to qualify as a Ratable
Service Contract.

.03 Examples. The following examples
illustrate the application of the safe harbor
method of accounting for Ratable Service
Contracts. In each example the taxpayer
uses an accrual method of accounting for
federal income tax purposes, including the
use of the 31/2 month rule and the recurring
item exception, and files its returns on a
calendar year basis.

Example 1. On December 31, 2015, Taxpayer
enters into a one-year service contract with X. Under
the contract, X will provide janitorial services on a
daily basis to Taxpayer until the end of 2016. Under
the contract, Taxpayer pays X $3,000 a month to
clean Taxpayer's offices. The contract requires Tax-
payer to pay for each month's service by the end of
the prior month. On December 31, 2015, Taxpayer
makes a $3,000 payment to X for the services to be
provided in January 2016. Taxpayer reasonably ex-
pects X to provide the janitorial services in January.
As of December 31, 2015, all events have occurred
to establish the fact of Taxpayer's $3,000
contractually-required payment and the amount of
the liability is determinable with reasonable accu-
racy.

The contract meets the requirements of a Ratable
Service Contract in section 4.02 of this revenue

procedure because the janitorial services are to be
provided on a regular basis (daily); each daily oc-
currence of the janitorial service provides indepen-
dent value, such that the benefits from each occur-
rence of the service are not dependent on the receipt
of previous or subsequent janitorial services; and the
contract term does not exceed 12 months. Under the
provisions of this revenue procedure, Taxpayer may
treat economic performance as occurring ratably un-
der the contract. Thus, under the 31/2 month rule
Taxpayer is allowed to incur a liability in 2015 for
the $3,000 paid in 2015. For the services provided
from February through December 2016, economic
performance occurs ratably as the services are pro-
vided to Taxpayer each day, and a liability of
$33,000 for these services is incurred in 2016.

Example 2. On December 31, 2015, Taxpayer
enters into a one-year service contract with X. Under
the contract, X will provide landscape maintenance
services to Taxpayer from January through Decem-
ber 2016 on a monthly basis. Under the contract
Taxpayer pays X $4,000 a month to maintain Tax-
payer's grounds. The contract requires Taxpayer to
prepay for the twelve months of services with the
full payment of $48,000 due on December 31, 2015.
On December 31, 2015, Taxpayer makes the
$48,000 payment to X for services to be provided
from January 1, 2016, through December 31, 2016.
As of December 31, 2015, all events have occurred
to establish the fact of Taxpayer's $48,000
contractually-required payment and the amount of
the liability is determinable with reasonable accuracy.

The contract meets the requirements of a Ratable
Service Contract in section 4.02 of this revenue
procedure because the maintenance services are to
be provided on a regular basis (monthly); each oc-
currence of the maintenance service provides inde-
pendent value, such that the benefits from each oc-
currence of the service are not dependent on the
receipt of prior or subsequent maintenance services;
and the contract term does not exceed 12 months.
Under the provisions of this revenue procedure, Tax-
payer may treat economic performance as occurring
ratably under the contract. Assuming that Taxpayer
satisfies the requirements of the recurring item ex-
ception, as described in section 2.09 of this revenue
procedure, and files its return on September 15,
2016, Taxpayer is allowed to incur a liability in 2015
of $34,000 (8.5 months/12 months x $48,000) for the
services provided from January 1 through September
15, 2016. For the services provided from September
16 through December 31, 2016, the period outside of
the recurring item exception, economic performance
occurs ratably as the services are provided to Tax-
payer during that time and a liability for these ser-
vices of $14,000 (3.5 months/12 months x $48,000)
is incurred in 2016.

Example 3. On November 30, 2015, Taxpayer
enters into a one-year contract for an environmental
impact study with Y. Under the contract, Y must
complete and deliver the study by November 30,
2016. In exchange, Taxpayer will pay Y $100,000
when the contract is signed and $400,000 when the
study is delivered on November 30, 2016. Taxpayer
makes the payments on the specified dates. Y per-
forms work on the study during 2015 and 2016 and
delivers the completed study to Taxpayer on Novem-
ber 30, 2016. On November 30, 2015, all the events

have occurred that establish the fact of Taxpayer's
contractually-required payment of $100,000 and the
amount of Taxpayer's liability under the contract can
be determined with reasonable accuracy.

The contract does not satisfy the definition of a
Ratable Service Contract in section 4.02 of this rev-
enue procedure because the contract does not pro-
vide for services to be provided on a regular basis.
Rather, the contract specifies that Y will provide to
Taxpayer only one service, namely a completed and
delivered impact study. Each instance of Y's work on
the study during the contract period does not provide
independent value to Taxpayer. Instead, each in-
stance of work on the study is dependent on the
previous and subsequent work on the study to
achieve its completion. Thus, Taxpayer may not treat
economic performance as occurring ratably over the
term of the service contract pursuant to the safe
harbor in section 4.02 of this revenue procedure and
may not rely on the safe harbor to incur a liability for
any portion of the $100,000 in 2015. Instead, eco-
nomic performance occurs when the study is com-
pleted and a liability of $500,000 for this service is
incurred upon its completion.

Example 4. On December 31, 2015, Taxpayer
enters into a one-year service contract with X. Under
the contract, X will provide various IT support and
maintenance services to Taxpayer, such as providing
help desk support to Taxpayer's employees and
maintaining Taxpayer's existing software and web
pages (IT services). The IT services will be provided
on a daily basis through December 31, 2016. In
addition, under the contract X will create an updated
human resources software application for Taxpayer
(HR software development service). Under the con-
tract, Taxpayer will pay X a flat fee of $3,000 a
month for the IT services and the HR software
development service. The contract requires Taxpayer
to pay for each month's services by the end of the
prior month. On December 31, 2015, Taxpayer
makes a $3,000 payment to X for the IT services and
HR software development to be provided in January
2016. Taxpayer reasonably expects X to provide the
IT services in January. As of December 31, 2015, all
events have occurred to establish the fact of Taxpay-
er's $3,000 contractually-required payment and the
amount of the liability is determinable with reason-
able accuracy.

The contract does not meet the requirements of
section 4.02 of this revenue procedure because the
contract includes the HR software development ser-
vice that is not provided on a regular basis. Under the
terms of the contract, the HR software development
service consists of only one service, an update to
Taxpayer's human resources software application.
Each instance of X's work on updating the software
application during the contract period is dependent
on the previous and subsequent work to complete the
update and does not provide independent value to
Taxpayer. Because the contract does not separately
price the HR software development service, which
does not meet the requirements for a Ratable Service
Contract in section 4.02 of this revenue procedure,
Taxpayer may not treat economic performance as
occurring on a ratable basis over the term of the
service contract pursuant to the safe harbor in section
4.02 of this revenue procedure.

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Example 5. Same facts as Example 4, except that
under the service contract the HR software develop-
ment service is separately priced at $12,000, with
$1,000 of the $3,000 monthly payment allocated to
the software development service. The IT services
described in the contract meet the requirements for a
Ratable Service Contract in section 4.02 of this rev-
enue procedure because the IT services are provided
on a regular basis (daily); each daily occurrence of
IT service provides independent value, such that the
benefits from each occurrence of the service are not
dependent on the receipt of prior or subsequent IT
services; and the contract term does not exceed 12
months. Under the provisions of this revenue proce-
dure, Taxpayer may treat economic performance for
the IT services as occurring ratably under the con-
tract. Taxpayer incurs a liability in 2015 for $2,000
of the $3,000 payment for IT services under the 31/2
month rule. For the IT services provided from Feb-
ruary through December 2016, economic perfor-
mance occurs ratably as the services are provided to
Taxpayer each day and a liability of $22,000 for
these services is incurred in 2016. For the HR soft-
ware development service liability, economic perfor-
mance occurs when the service is completed and a
liability of $12,000 for this service is incurred upon
completion.

## SECTION 5. CHANGE IN METHOD OF ACCOUNTING

.01 In general. A change in the treat-
ment of Ratable Service Contracts to con-
form to the safe harbor method provided by
this revenue procedure is a change in
method of accounting to which the provi-
sions of §§ 446 and 481 and the regulations
thereunder apply. A taxpayer that wants to
change to the method of accounting de-
scribed in this revenue procedure must, if
eligible, use the automatic change proce-
dures in Rev. Proc. 2015-13 and Rev. Proc.
2015-14, or successors, as modified by sec-
tion 5.02 of this revenue procedure.

.02 Rev. Proc. 2015-14 is modified to
add new section 19.12 to the List of Au-
tomatic Changes to read as follows:

.12 Economic Performance Safe Har-
bor for Ratable Service Contracts.

(1) Description of change. This change
applies to an accrual method taxpayer that
wants to change its treatment of Ratable
Service Contracts to conform to the safe
harbor method provided by Rev. Proc.
2015-39, 2015-33 I.R.B. 197.

(2) Eligibility rule temporarily inappli-
cable. The eligibility rule in section
5.01(1)(f) of Rev. Proc. 2015-13, does not
apply to a taxpayer that wants to make a
change for a taxpayer's first, second, or
third taxable years ending on or after July
30, 2015.

(3) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for changes in methods of ac-
counting under this section 19.12 is
"220."

(4) Contact information. For further in-
formation regarding a change under this sec-
tion, contact David Christensen or Peter
Ford at 202-317-7011 (not a toll-free call).

## SECTION 6. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2015-14 is modified to add
new section 19.12 to the List of Automatic
Changes.

## SECTION 7. REQUEST FOR COMMENTS

Section 461(h)(2)(A) and § 1.461-
4(d)(2)(i) do not define the phrase "as
services are provided" for purposes of
determining when economic perfor-
mance occurs for liabilities arising from
services to be provided to the taxpayer
by another person. The Treasury Depart-
ment and the Internal Revenue Service
invite comments regarding when eco-
nomic performance occurs for liabilities
arising from services to be provided to

the taxpayer by another person under
contracts for: (1) deliverable-type ser-
vices that are not completed on a peri-
odic basis, (2) multiple services that are
not separately priced, and (3) Ratable
Service Contracts that are longer than
one year.

Comments may be submitted in writ-
ing on or before November 15, 2015.
Comments should be submitted to Internal
Revenue Service, CC:PA:LPD:PR (Rev.
Proc. 2015-39), Room 5203, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044, or electronically to Notice.
comments@irscounsel.treas.gov. Please
include Rev. Proc. 2015-39 in the subject
line of any electronic communication.

Alternatively, comments may be hand
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (Rev. Proc. 2015-39),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, N.W., Wash-
ington, DC.

All comments will be available for
public inspection and copying.

## SECTION 8. EFFECTIVE DATE

This revenue procedure is effective for
taxable years ending on or after July 30,
2015.

## SECTION 9. DRAFTING INFORMATION

The principal author of this revenue
procedure is David M. Christensen of the
Office of Associate Chief Counsel (In-
come Tax & Accounting). For further in-
formation regarding this revenue proce-
dure contact David M. Christensen on
(202) 317-7011 (not a toll-free number).

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# Part IV. Items of General Interest

Statutory Changes/ Correction to
Revenue Procedure 2015-35, IRB
2015-26

## Announcement 2015-18

This document contains statutory
changes and corrections to Revenue Pro-
cedure 2015-35, as published on Monday,
June 29, 2015 (I. R. B. 2015-26 1142). In
particular, this announcement updates the
penalties for failure to file correct infor-
mation returns under section 6721 of the
Code as amended by Public Law 114-27,
section 806, signed June 29, 2015.

Correction 1:

In Section 1.3.3 Copy A Specifica-
tions. P.L. 114-27, signed June 29, 2015,
increased the penalties for failure to file
correct information returns under section
6721 of the Code. The correct penalties
are:

· $50 per information return if you cor-
rectly file within 30 days of the due
date of the return; maximum penalty
$500,000 per year ($175,000 for small
businesses).

· $100 per information return if you cor-
rectly file more than 30 days after the
due date but by August 1; maximum
penalty $1,500,000 per year ($500,000
for small businesses).

· $250 per information return if you file
after August 1 or you do not file re-
quired information returns; maximum
penalty $3,000,000 per year
($1,000,000 for small businesses).

Correction 2:

At the beginning of the revenue proce-
dure in section 26 CFR601.602 Forms
and Instructions, the error consists in not
including a regulation section. The regu-
lation section that should be included is
1.6047-2.

Correction 3:

In Section 1.1.5 What's New, under
the heading FATCA filing requirements
of certain foreign financial institutions
(FFIs). The error consists in including in
the last bullet of the bullet list Form

1042-S Foreign Person's U.S. Source
Income Subject to Withholding. Form
1042-S Foreign Person's U.S. Source
Income Subject to Withholding bullet
should be deleted from the bullet list.

## Allocable Cash Basis and Tiered Partnership Items

REG-109370-10

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Partial withdrawal of notice of
proposed rulemaking, and notice of pro-
posed rulemaking.

SUMMARY: This document contains
proposed regulations regarding the deter-
mination of a partner's distributive share
of certain allocable cash basis items and
items attributable to an interest in a lower-
tier partnership during a partnership tax-
able year in which a partner's interest
changes. These proposed regulations af-
fect partnerships and their partners.

DATES: Written or electronic comments
and requests for a public hearing must be
received by November 2, 2015. As of
August 3, 2015, the notice of proposed
rulemaking that was published in the Fed-
eral Register on May 24, 2005 (70 FR
29675), is partially withdrawn.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-109370-10), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG-109370-10), Cou-
rier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC, or sent electronically, via the Fed-
eral eRulemaking Portal at http://www.
regulations.gov/(IRS REG-109370-10).

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Benjamin H. Weaver, (202)
317-6850; concerning submissions of
comments and requests for public hearing,

Regina Johnson, (202) 317-6901 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:

### Background

Section 706 of the Internal Revenue
Code (the Code) generally provides rules
for the taxable years of partners and part-
nerships. Section 72 of the Deficit Reduc-
tion Act of 1984, Public Law 98-369 (98
Stat. 494 (1984)) added section 706(d) to
the Code to prevent a partner who ac-
quires an interest in the partnership late in
the taxable year from deducting partner-
ship expenses incurred prior to the part-
ner's entry into the partnership (retroac-
tive allocations). Section 706(d)(1)
provides that, except as provided in sec-
tion 706(d)(2) and (d)(3), if during any
taxable year of the partnership there is a
change in any partner's interest in the
partnership, each partner's distributive
share of any item of income, gain, loss,
deduction, or credit of the partnership for
such taxable year shall be determined by
the use of any method prescribed by reg-
ulations which takes into account the
varying interests of the partners in the
partnership during such taxable year.

On April 14, 2009, the Treasury De-
partment and the IRS published a notice
of proposed rulemaking (REG-144689-
04) (the 2009 proposed regulations) in the
Federal Register to provide guidance un-
der section 706(d)(1) and to conform the
Income Tax Regulations for certain pro-
visions of section 1246 of the Taxpayer
Relief Act of 1997, Public Law 105-34
(111 Stat. 788 (1997)) and section 72 of
the Deficit Reduction Act of 1984, Public
Law 98-369 (98 Stat. 494 (1984)). The
Treasury Department and the IRS are pub-
lishing final regulations under section
706(d)(1) (the final regulations) contem-
poraneously with these proposed regula-
tions. However, the Treasury Department
and the IRS have decided to propose an
amendment to the final regulations ex-
panding the list of extraordinary items to
include two new items: (1) for publicly
traded partnerships, any item of income
that is an amount subject to withholding
as defined in § 1.1441-2(a) (excluding
amounts effectively connected with the

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conduct of a trade or business within the
United States) or a withholdable payment
under § 1.1473-1(a) occurring during a
taxable year if, for that taxable year, the
partners agree to treat all such items as
extraordinary items, and (2) for any part-
nership, deductions for the transfer of
partnership equity in connection with the
performance of services. In addition, these
proposed regulations provide guidance
under sections 706(d)(2) and (3).

#### 1. Allocable cash basis items

Section 706(d)(2) provides rules for
certain allocable cash basis items. Section
706(d)(2)(A) provides that if during any
taxable year of the partnership there is a
change in any partner's interest in the
partnership, then (except to the extent pro-
vided in regulations) each partner's dis-
tributive share of any allocable cash basis
item shall be determined (i) by assigning
the appropriate portion of such item to
each day in the period to which it is at-
tributable, and (ii) by allocating the por-
tion assigned to any such day among the
partners in proportion to their interests in
the partnership at the close of such day.
Section 706(d)(2)(B) defines "allocable
cash basis item" as any of the following
items with respect to which the partner-
ship uses the cash receipts and disburse-
ments method of accounting (cash meth-
od): (i) interest, (ii) taxes, (iii) payments
for services or for the use of property, or
(iv) any other item of a kind specified in
regulations prescribed by the Secretary as
being an item with respect to which the
application of section 706(d)(2) is appro-
priate to avoid significant misstatements
of the income of the partners. Section
706(d)(2)(C) further provides that if any
portion of any allocable cash basis item is
attributable to (i) any period before the
beginning of the taxable year, such por-
tion shall be assigned under section
706(d)(2)(A)(i) to the first day of the tax-
able year, or (ii) any period after the close
of the taxable year, such portion shall be
assigned under section 706(d)(2)(A)(i) to
the last day of the taxable year. Finally,
section 706(d)(2)(D) provides that if any
portion of a deductible cash basis item is
assigned under section 706(d)(2)(C)(i) to
the first day of any taxable year, (i) such
portion shall be allocated among persons

who are partners in the partnership during
the period to which such portion is attrib-
utable in accordance with their varying
interests in the partnership during such
period, and (ii) any amount allocated un-
der section 706(d)(2)(D)(i) to a person
who is not a partner in the partnership on
such first day shall be capitalized by the
partnership and treated in the manner pro-
vided for in section 755.

The legislative history explains that
section 706(d)(2) was enacted to prevent
cash method partnerships from avoiding
the retroactive allocation rules:

[P]artnerships may attempt to avoid
the retroactive allocation rules by
using the cash method of accounting
and deferring actual payment of de-
ductible items until near the close of
the partnership's taxable year. For
example, if a partnership defers the
payment of an expense (e.g., inter-
est) until December 31, and the
partnership uses the interim closing
method of allocations, a partner ad-
mitted on December 31 may be al-
lowed a deduction for a full portion
of the expense. This may be the case
although the expense has economi-
cally accrued at an equal rate
throughout the taxable year. . . In
adding these rules, Congress re-
jected the argument that the retroac-
tive allocations were proper because
the funds invested by the new part-
ners served to reimburse the original
partners for their expenditures so
that, as an economic matter, the new
partners had incurred the costs for
which they were claiming
deductions.

H.R. REP. No. 98-432, AT 1212-1213
(1984).

On November 30, 1984, the Treasury
Department and the IRS issued temporary
regulations under section 706(d)(2)
(§ 1.706-2T (TD 7991)) to address the
interaction of sections 706(d)(2) and
267(a)(2). The temporary regulations pro-
vide that a deduction for any expense that
is deferred under section 267 constitutes
an allocable cash basis item under section
706(d)(2)(B)(iv). Specifically, the tempo-
rary regulations provide:

Question 1: For purposes of section
706(d), how is an otherwise deduct-

ible amount that is deferred under
section 267(a)(2) treated?
Answer 1: In the year the deduction
is allowed, the deduction will con-
stitute an allocable cash basis item
under section 706(d)(2)(B)(iv).

Neither the 2009 proposed regulations
nor the final regulations provide guidance
under section 706(d)(2). However, the
2009 proposed regulations specifically re-
quested comments on issues that arise
concerning allocable cash basis items, in
particular whether the list of items in sec-
tion 706(d)(2)(B) should be expanded (to
include, for example, items such as prop-
erty insurance), as well as any other issues
with regard to allocating cash basis items.
The Treasury Department and the IRS re-
ceived comments relating to allocable
cash basis items in response to the 2009
proposed regulations. The comments are
discussed in this preamble.

#### 2. Tiered Partnerships

Section 706(a) provides that, in com-
puting the taxable income of a partner for
a taxable year, the inclusions required by
section 702 and section 707(c) with re-
spect to a partnership shall be based on the
income, gain, loss, deduction, or credit of
the partnership for any taxable year of the
partnership ending within or with the tax-
able year of the partner. Prior to the issu-
ance of Rev. Rul. 77-311, 1977-2 CB
218, in 1977 and the enactment of section
706(d)(3) in 1984, some taxpayers took
the position that, in the case of tiered
partnerships, the language of section
706(a) means that an upper-tier partner-
ship's distributive share of items from a
lower-tier partnership is sustained by the
upper-tier partnership on the last day of
the lower-tier partnership's taxable year.
These taxpayers therefore allocated the
upper-tier partnership's share of the
lower-tier partnership's items based solely
upon the upper-tier partnership's partners'
interests as of the last day of the lower-tier
partnerships' taxable year. Rev. Rul. 77-
311 rejected that position, and explains
through an example that an upper-tier
partnership's distributive share of any
items of income, gain, loss, deduction, or
credit from a lower-tier partnership is con-
sidered to be realized or sustained by the
upper-tier partnership at the same time

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and in the same manner as such items
were realized or sustained by the lower-
tier partnership. Therefore, in allocating
items from a lower-tier partnership, the
upper-tier partnership must take into ac-
count variations among its partners' inter-
ests throughout the year, rather than
merely looking to its partners' interests as
of the last day of the lower-tier partner-
ship's taxable year.

Section 706(d)(3) was enacted in 1984
and confirms the analysis of Rev. Rul.
77-311. Section 706(d)(3) provides that if
during any taxable year of the partnership
there is a change in any partner's interest
in the partnership (the "upper-tier partner-
ship"), and such partnership is a partner in
another partnership (the "lower-tier part-
nership"), then (except to the extent pro-
vided in regulations) each partner's dis-
tributive share of any item of the upper-
tier partnership attributable to the lower-
tier partnership shall be determined by
assigning the appropriate portion (deter-
mined by applying principles similar to
the principles of section 706(d)(2)(C) and
(D)) of each such item to the appropriate
days during which the upper-tier partner-
ship is a partner in the lower-tier partner-
ship and by allocating the portion as-
signed to any such day among the partners
in proportion to their interests in the
upper-tier partnership at the close of such
day.

Neither the 2009 proposed regulations
nor the final regulations provide guidance
under section 706(d)(3). However, the
2009 proposed regulations specifically re-
quested comments on issues that arise
concerning tiered partnerships, and stated
that the daily allocation method, used for
cash basis items, applies to all items of the
lower-tier partnership if there is a change
in the partnership interests in the upper-
tier partnership. The Treasury Department
and the IRS received comments relating to
tiered partnerships in response to the 2009
proposed regulations. The comments are
discussed in this preamble.

### Explanation of Provisions and Summary of Comments

#### 1. Allocable cash basis items

With respect to allocable cash basis
items, the proposed regulations generally
restate the statutory provisions. Com-

menters requested that regulations clarify
whether section 706(d)(2) applies only to
items of deduction and loss or whether it
also applies to items of income and gain.
Generally, under the Code, the word
"item" includes items of income, gain,
deduction, and loss. Other than the item
"taxes," the items listed in section
706(d)(2)(B) can be either items of in-
come (and gain) or deduction (and loss),
depending on a taxpayer's particular cir-
cumstances. Section 706(d)(2)(B)(iv) also
provides broad regulatory authority for
the Secretary to add "any other item . . .
with respect to which the application of
this paragraph is appropriate to avoid sig-
nificant misstatements of the income of
the partners." A significant misstatement
of the income of partners can occur
equally through an item of deduction or
loss or an item of income or gain. Part-
nerships using the cash method that also
use the interim closing method for ac-
counting for partners' varying interests
can use this distortion to affect the alloca-
tion of income to an incoming or outgoing
partner. For these reasons, the proposed
regulations provide that the allocable cash
basis item rules apply to items of deduc-
tion, loss, income, and gain.

The proposed regulations provide that
the term "allocable cash basis item" gen-
erally includes items of deduction, loss,
income, or gain specifically listed in the
statute: (i) interest, (ii) taxes, and (iii) pay-
ments for services or for the use of prop-
erty. However, as discussed in part 4 of
this preamble, the proposed regulations
contain an exception for deductions for
the transfer of an interest in the partner-
ship in connection with the performance
of services; such deductions generally
must be allocated under the rules for ex-
traordinary items in § 1.706-4(d).

Section 706(d)(2)(B)(iv) specifically
grants the Secretary regulatory authority
to include additional items in the list
of allocable cash basis items to avoid
significant misstatements of the income
of the partners. Pursuant to the regula-
tory authority granted in section
706(d)(2)(B)(iv), the proposed regula-
tions provide that the term "allocable
cash basis item" includes any allowable
deduction that had been previously de-
ferred under section 267(a)(2). This pro-
vision incorporates the concept of

§ 1.706-2T and includes within the
meaning of "allocable cash basis item"
amounts deferred under section
267(a)(2) in the year in which the de-
duction is allowed. Accordingly,
§ 1.706-2T is proposed to be withdrawn
by final regulations issued under section
706(d)(2).

Finally, pursuant to the regulatory au-
thority granted in section 706(d)(2)(B)(iv),
the proposed regulations provide that the
term "allocable cash basis item" also in-
cludes any item of income, gain, loss, or
deduction that accrues over time and that
would, if not allocated as an allocable
cash basis item, result in the significant
misstatement of a partner's income. To
provide additional clarification on the
scope of the rule in proposed § 1.706-
2(a)(2)(v), the Treasury Department and
the IRS believe that items such as rebate
payments, refund payments, insurance
premiums, prepayments, and cash ad-
vances are examples of items which, if not
allocated in the manner described in sec-
tion 706(d)(2), could result in the signifi-
cant misstatement of a partner's income.
The Treasury Department and the IRS re-
quest comments on the inclusion of these
items and other items within the meaning
of "allocable cash basis items."

One commenter noted that section
706(d)(2) imposes the same administra-
tive burden on partnerships regardless of
the percentage of the partner's total ex-
penses that are allocable cash basis items
and therefore recommended that regula-
tions under section 706(d)(2) include a de
minimis rule. The Treasury Department
and the IRS agree that a de minimis rule is
appropriate given the scope of the pro-
posed regulations. Accordingly, the pro-
posed regulations provide that an alloca-
ble cash basis item will not be subject to
the rules in section 706(d)(2) if, for the
partnership's taxable year: (1) the total of
the particular class of allocable cash basis
items (for example, all interest income) is
less than five percent of the partnership's
(a) gross income, including tax-exempt
income described in section 705(a)(1)(B),
in the case of income or gain items, or (b)
gross expenses and losses, including sec-
tion 705(a)(2)(B) expenditures, in the case
of losses and expense items; and (2) the
total amount of allocable cash basis items
from all classes of allocable cash basis

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items amounting to less than five percent
of the partnership's (a) gross income, in-
cluding tax-exempt income described in
section 705(a)(1)(B), in the case of in-
come or gain items, or (b) gross expenses
and losses, including section 705(a)(2)(B)
expenditures, in the case of losses and
expense items, does not exceed $10 mil-
lion in the taxable year, determined by
treating all such allocable cash basis items
as positive amounts.

Additionally, the Treasury Department
and the IRS request comments on whether
the final regulations should provide an
exception for certain items of income or
deduction arising from payments for ser-
vices or for the use of property. For ex-
ample, comments are requested on
whether payments for services or for the
use of property should be excluded from
the rules in section 706(d)(2) if they arise
and are, as applicable, paid or received in
the ordinary course of the partnership's
business (such as the regular payment of
wages to employees), and whether de-
ferred compensation or contingency or
success-based fees and other payments for
services based on performance conditions
(which are not calculated based on an
hourly rate) should be subject to the rules
of section 706(d)(2) (and, if so, on the
proper method for assigning the appropri-
ate portion of such item to each day in the
period).

The proposed regulations contain two
examples illustrating the operation of sec-
tion 706(d)(2)(D)(ii), which requires cer-
tain portions of deductible cash basis
items to be capitalized in the manner pro-
vided in section 755 in the event that the
deduction is otherwise partially allocable
to a former partner who is no longer a
partner as of the first day of the partner-
ship's taxable year. The Treasury Depart-
ment and the IRS request comments on
the appropriate interaction between the
principles and rules of section 755 and
section 706(d), including whether the final
regulations should provide an exception to
the capitalization rules of section
706(d)(2)(D)(ii) in cases where the former
partner ceased to be a partner in the part-
nership as a result of the partner's contri-
bution of its partnership interest to another
entity in a non-recognition transaction.

#### 2. Tiered Partnerships

With respect to tiered partnerships, the
proposed regulations provide that the
daily allocation method used for cash ba-
sis items applies to all items of the lower-
tier partnership if there is a change in any
partner's interest in the upper-tier partner-
ship.

Commenters noted the administrative
burden of the daily allocation method on
tiered partnerships. Commenters stated
that obtaining information from a lower-
tier partnership to track changes in the
ownership interest in an upper-tier part-
nership is burdensome, and often imprac-
tical, unless the upper-tier partnership
owns a controlling interest in the lower-
tier partnership. One commenter sug-
gested that the Treasury Department and
the IRS issue interim guidance to provide
that section 706(d)(3) should not apply to
a change in a partner's interest in an
upper-tier partnership unless the upper-
tier partnership owns an interest in more
than 50 percent of the profits and capital
of the lower-tier partnership. Another
commenter recommended an exception
when the upper-tier partnership owns a
relatively small portion (such as 10 per-
cent or less) of the lower-tier partnership.
The Treasury Department and the IRS ac-
knowledge that a lack of information shar-
ing among tiered partnerships may make
it difficult to comply with a daily alloca-
tion requirement. Thus, the proposed reg-
ulations provide an exception from sec-
tion 706(d)(3) if the upper-tier partnership
directly owns an interest in less than 10
percent of the profits and capital of the
lower-tier partnership ("a de minimis
upper-tier partnership"), all de minimis
upper-tier partnerships in aggregate own
an interest in less than 30 percent of the
profits and capital of the lower-tier part-
nership, and if no partnership is created
with a purpose of avoiding the application
of the tiered partnership rules of section
706(d)(3). The application of this excep-
tion is determined at each tier, depending
on the interests held by the direct partners
at each tier. Thus, in the case of an upper-
tier partnership owning an interest in a
middle tier partnership, which in turn
owns an interest in a lower-tier partner-
ship, it may be the case that the exception
applies to the upper-tier partnership's in-

terest in the middle tier partnership, but
not to the middle tier partnership's interest
in the lower-tier partnership (or vice-
versa).

If the de minimis upper-tier partnership
exception applies, the upper-tier partner-
ship may, but is not required to, apply the
general rules of § 1.706-4 in allocating
items attributable to the lower-tier part-
nership. However, as explained in Rev.
Rul. 77-311, an upper-tier partnership's
distributive share of any items of income,
gain, loss, deduction, or credit from a
lower-tier partnership is considered to be
realized or sustained by the upper-tier
partnership at the same time and in the
same manner as such items were realized
or sustained by the lower-tier partnership.
Thus, if the de minimis upper-tier partner-
ship exception applies to an upper-tier
partnership using the interim closing
method, the upper-tier partnership's allo-
cations of the lower-tier partnership items
under the general rules of § 1.706-4 will
generally reach the same result as apply-
ing the rules of section 706(d)(3). On the
other hand, if the de minimis upper-tier
partnership exception applies to an upper-
tier partnership using the proration
method, the upper-tier partnership may
prorate the items from the lower-tier part-
nership across the upper-tier partnership's
segments (or, if the upper-tier partnership
has only one segment for its entire taxable
year, it may prorate the items across its
entire taxable year). Even if the de mini-
mis upper-tier partnership exception ap-
plies, the upper-tier partnership may
choose to allocate the items attributable to
the lower-tier partnership according the
tiered partnership rules instead. However,
the proposed regulations do not impose on
lower-tier partnerships an obligation to
disclose to upper-tier partnerships the tim-
ing of the lower-tier partnership's items.
The proposed regulations contain three
examples illustrating these principles.

Commenters also requested additional
guidance on the application of section
706(d)(3) in certain circumstances. One
commenter requested that the final regu-
lations provide guidance on tiered partner-
ships that would allow an upper-tier part-
nership to determine the items from the
lower-tier partnership that are allocable to
the upper-tier partnership segments based
on an interim closing method (as of any

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upper-tier partnership segment end) ap-
plied to the lower-tier partnership if the
upper-tier partnership: (i) has the same
taxable year as its lower-tier partnership;
(ii) holds a fixed percentage interest in the
lower-tier partnership during a taxable
year; and (iii) uses the interim closing
method. This commenter also recom-
mended that guidance provide that an
upper-tier partnership that has the same
taxable year as its lower-tier partnership
and holds a fixed percentage interest in
that lower-tier partnership during the
upper-tier partnership's taxable year may
prorate the non-extraordinary items of the
lower-tier partnership to each day of the
upper-tier partnership's taxable year,
without regard to whether the upper-tier
partnership uses the proration method or
the interim closing method.

However, as explained in this pream-
ble, the Treasury Department and the IRS
believe that because an upper-tier partner-
ship's distributive share of any items of
income, gain, loss, deduction, or credit
from a lower-tier partnership is consid-
ered to be realized or sustained by the
upper-tier partnership at the same time
and in the same manner as such items
were realized or sustained by the lower-
tier partnership, application of the interim
closing method will generally reach the
same result as applying the rules of sec-
tion 706(d)(3). The Treasury Department
and the IRS also believe that allowing an
upper-tier partnership that uses the interim
closing method to prorate items from a
lower-tier partnership across the upper-
tier partnership's entire taxable year
would be inconsistent with the principles
explained in Rev. Rul. 77-311. Therefore,
the proposed regulations do not adopt
these comments. However, the Treasury
Department and the IRS request com-
ments on safe harbors that might be ap-
propriate in these circumstances as well as
comments on the treatment of an upper-
tier partnership and a lower-tier partner-
ship that have different taxable years.

One commenter also recommended
that guidance provide that the default
method for tiered partnerships is the pro-
ration method unless the upper-tier part-
nership agrees to use the interim closing
method and receives sufficient informa-
tion from the lower-tier partnership to use
that method. Under section 706(d)(1) as

implemented by § 1.706-4, the interim
closing method is the default method un-
less the partners agree in writing to use the
proration method. Because the recom-
mended rule would be inconsistent with
section 706(d)(1) as implemented by
§ 1.706-4, the Treasury Department and
the IRS did not adopt this rule in the
proposed regulations.

A commenter further recommended
that any conventions applicable to the
upper-tier partnership should apply to in-
come from the lower-tier partnership. In
general, the Treasury Department and the
IRS believe that any conventions applica-
ble to the upper-tier partnership should
apply to items from the lower-tier partner-
ship, but are continuing to consider this
recommendation in the context of section
706(d)(3) and request comments on safe
harbors when the upper-tier partnership
and the lower-tier partnership use the
same method, but different conventions.

Another commenter recommended that
the final regulations permit partnerships to
voluntarily apply the rules of section
706(d)(3) if the upper-tier partnership and
the lower-tier partnership have an advance
agreement establishing the allocation
method for items derived from the upper-
tier partnership's interest in the lower-tier
partnership. As described in this pream-
ble, the Treasury Department and the IRS
are requesting comments on appropriate
safe harbors and will continue to consider
this recommendation.

The Treasury Department and the IRS
also request comments on appropriate
rules, if any, when there is a variance at
both the upper-tier partnership and lower-
tier partnership.

More generally, the Treasury Depart-
ment and the IRS request comments on
the appropriate coordination between the
rules of sections 706(d)(2) and (3) and the
rules of § 1.706-4. In particular, the Trea-
sury Department and the IRS request
comments on whether certain items such
as contingency or success-based fees and
other payments for services based on per-
formance conditions are more appropri-
ately addressed under the rules of section
706(d)(2) and (3), which require alloca-
tion of items across the period to which
they are attributable, or under the rules for
the allocation of extraordinary items un-
der § 1.706-4(e), which requires alloca-

tion of items according to the partners'
interests at the time of day on which the
extraordinary item occurs. Additionally,
the Treasury Department and the IRS re-
quest comments on whether certain items
subject to section 706(d)(2) and (3) may
instead be simply allocated under the pro-
ration method of § 1.706-4(d) without
impinging on the Congressional intent be-
hind sections 706(d)(2) and (3) or result-
ing in a substantial distortion of income.

#### 3. Additional Extraordinary Item for Publicly Traded Partnerships (PTPs)

Section 1.706-4(e) of the final regula-
tions provides rules for the allocation of
certain "extraordinary items." In general,
extraordinary items must be allocated
among the partners in proportion to their
interests in the partnership item at the time
of day on which the extraordinary item
occurs. Section 1.706-4(e)(2) contains a
list of extraordinary items. These pro-
posed regulations add two additional ex-
traordinary items to that list.

The first proposed additional extraordi-
nary item responds to comments received
on the 2009 proposed regulations regard-
ing the administrative difficulty PTPs face
in satisfying withholding obligations un-
der section 1441 if PTPs are not permitted
to use a quarterly convention. As ex-
plained in Part 1.C.iii of the preamble to
the final regulations, the final regulations
do not permit PTPs to use a quarterly
convention. One commenter on the 2009
proposed regulations suggested other op-
tions of addressing this issue if the Trea-
sury Department and the IRS are con-
cerned that allowing a quarterly
convention would be too broad. One op-
tion suggested was to permit PTPs that
have income subject to withholding under
section 1441 to treat that income as an
extraordinary item allocated to PTP unit
holders who are the record holders on the
date the distribution is declared. The Trea-
sury Department and the IRS agree that a
special rule is desirable to link each part-
ner's distributive share to the related cash
distributions, thereby enabling PTPs and
their transfer agents to satisfy their with-
holding obligations under chapter 4 of the
Code and sections 1441 through 1443
from distributions. Therefore, these pro-
posed regulations generally adopt this

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suggested alternative to a quarterly con-
vention.

Specifically, these proposed regula-
tions provide that for PTPs, all items of
income that are amounts subject to with-
holding as defined in § 1.1441-2(a) (ex-
cluding income effectively connected
with the conduct of a trade or business
within the United States) or withholdable
payments under § 1.1473-1(a) occurring
during a taxable year may be treated as
extraordinary items if the partners agree
(within the meaning of § 1.706-4(f)) to
consistently treat all such items as extraor-
dinary items for that taxable year. If the
partners so agree, then for purposes of
section 706 such items shall be treated as
occurring at the next time as of which the
recipients of a distribution by the PTP are
determined, or, to the extent such income
items arise between the final time during
the taxable year as of which the recipients
of a distribution are determined and the
end of the taxable year, such items shall
be treated as occurring at the final time
during the taxable year as of which the
recipients of a distribution by the PTP are
determined. However, this rule does not
apply unless the PTP has a regular prac-
tice of making at least four distributions
(other than de minimis distributions) to its
partners each taxable year. The proposed
regulations contain an example illustrat-
ing this rule.

The final regulations generally require
extraordinary items to be allocated with-
out regard to the partnership's method or
convention. However, § 1.706-4(e)(1) of
the final regulations provides that PTPs
may, but are not required to, respect the
applicable conventions in determining
who held their publicly traded units at the
time of the occurrence of an extraordinary
item. The Treasury Department and the
IRS believe that this exception should be
turned off for all items subject to the new
proposed extraordinary item rule for PTPs
to ensure that each partner's distributive
share of such items is linked to the related
cash distributions. Accordingly, the pro-
posed regulations modify the rule in
§ 1.706-4(e)(1) to provide that PTPs that
choose to treat items subject to withhold-
ing under section 1441 as extraordinary
items must allocate those items among the
partners in proportion to their interests in
those items at the time as of which the

recipients of the relevant distribution are
determined, regardless of the method and
convention otherwise used by the PTP.

Taxpayers may rely on this proposed
additional extraordinary item until final
regulations are published. The proposed
regulations do not use the phrase "record
holders on the date the distribution is de-
clared," because the Treasury Department
and the IRS understand that the recipients
of a distribution by a PTP may be deter-
mined as of a time other than on the date
the distribution is declared. The Treasury
Department and the IRS request com-
ments on the operation of this special rule,
and on the interaction between the rules
under section 706 and PTP allocations
generally.

#### 4. Coordination with proposed Partnership Equity for Services regulations

On May 24, 2005, the Treasury De-
partment and the IRS published a notice
of proposed rulemaking (REG-105346-
03, 70 FR 29675) in the Federal Regis-
ter, the proposed Partnership Equity for
Services regulations, relating to the tax
treatment of certain transfers of partner-
ship interests in connection with the per-
formance of services. The proposed Part-
nership Equity for Services regulations
provide rules for coordinating section 83
with partnership taxation principles. On
June 13, 2005, the Treasury Department
and the IRS published Notice 2005-43,
I.R.B. 2005-24, setting forth a proposed
revenue procedure providing additional
related guidance. The proposed Partner-
ship Equity for Services regulations and
the proposed revenue procedure are not
effective until finalized. Notice 2005-43
provides that, until then, taxpayers may
continue to rely on Rev. Proc. 93-27,
1993-2 C.B. 343, and Rev. Proc. 2001-
43, 2001-2 C.B. 191. The Treasury De-
partment and the IRS continue to consider
the interaction of section 83 with partner-
ship taxation principles. No inferences
should be drawn from these proposed reg-
ulations as to the resolution of the issues
addressed in the proposed Partnership Eq-
uity for Services regulations or any other
related issues.

The proposed Partnership Equity for
Services regulations contain two provi-

sions relating to the varying interest rule
under section 706. First, proposed
§ 1.706-3(a) of the proposed Partnership
Equity for Services regulations is intended
to provide an exception to the allocable
cash basis item rules of section 706(d)(2)
for deductions for the transfer of partner-
ship interests and other property subject to
section 83. The preamble to the proposed
Partnership Equity for Services regula-
tions indicates that the exception was in-
tended to allow partnerships to allocate
such deductions under a closing of the
books method. The preamble indicates
that the Treasury Department and the IRS
had concluded that, absent treatment un-
der the allocable cash basis item rules of
section 706(d)(2), the application of sec-
tion 706(d)(1) would adequately ensure
that partnership deductions that are attrib-
utable to the portion of the partnership's
taxable year prior to a new partner's entry
into the partnership are allocated to the
historic partners.

The Treasury Department and the IRS
have concluded that, in the case of a trans-
fer of a partnership interest in connection
with the performance of services, no por-
tion of the partnership's deduction should
be allocated to the person who performs
the services. However, the Treasury De-
partment and the IRS have also concluded
that the scope of the exception to allocable
cash basis treatment in proposed § 1.706-
3(a) may have been too broad because it
applies to all transfers of property subject
to section 83, for which the Treasury De-
partment and the IRS request comments
under these proposed regulations. There-
fore, the Treasury Department and the IRS
withdraw proposed § 1.706-3(a). Instead,
these proposed regulations provide an ex-
ception to allocable cash basis treatment
for deductions for transfers of partnership
interests in connection with the perfor-
mance of services. Additionally, to ensure
that such deductions are allocated solely
to partners other than the person who per-
formed the services, the proposed regula-
tions add to the list of extraordinary items
in § 1.706-4(e)(2) any deduction for the
transfer of an interest in the partnership in
connection with the performance of ser-
vices, and clarify that such extraordinary
item is treated as occurring immediately
before the transfer or vesting of the part-
nership interest that results in compensa-

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tion income for the person who performs
the services.

As explained in the final § 1.706-4 in
the Rules and Regulations section of this
issue of the Federal Register, extraordi-
nary items generally must be allocated
among the partners in proportion to their
interests in the partnership item at the time
of day on which the extraordinary item
occurs. However, there are exceptions to
the extraordinary item rules for certain
small items in § 1.704-4(e)(3) and for
partnerships for which capital is not a
material income-producing factor in
§ 1.706-4(b)(2)). To ensure that part-
nership deductions attributable to the
transfer of interests in the partnership in
connection with the performance of ser-
vices are always allocated solely to the
historic partners, the proposed regula-
tions turn off these exceptions to ex-
traordinary item treatment for such de-
ductions. Thus, treatment as an
extraordinary item subject to the special
timing rule will ensure that, for both
accrual and cash-method partnerships,
no portion of the deduction for the trans-
fer of a partnership interest in connec-
tion with the performance of services
will be allocated to the person who per-
forms the services.

Second, proposed § 1.706-3(b) of
the proposed Partnership Equity for
Services regulations provides that a
partnership must make certain forfeiture
allocations upon forfeiture of a partner-
ship interest for which a section 83(b)
election was made. In particular, pro-
posed § 1.706-3(b) provides that al-
though the person forfeiting the interest
may not have been a partner for the
entire taxable year, forfeiture alloca-
tions may be made out of the partner-
ship's items for the entire taxable year.
The Treasury Department and the IRS
anticipate that if the rules for forfeiture
allocations in proposed § 1.706-3(b) are
adopted when the proposed Partnership
Equity for Services regulations are fi-
nalized, those rules will include in
§ 1.706-3(b) an additional exception to
the general application of the varying
interest rule. In the meantime, these pro-
posed regulations move § 1.706-3(b) of
the proposed Partnership Equity for Ser-
vices regulations to new proposed

§ .706-6(a) to accommodate the new
proposed regulations in § 1.706-3.

### Proposed Effective Date

The regulations are proposed to apply
to partnership taxable years beginning on
or after the date of publication of the
Treasury decision adopting these regula-
tions as final regulations in the Federal
Register.

### Reliance on Proposed Regulations

Taxpayers may rely on §§ 1.706-
4(e)(1) and 1.706-4(e)(2)(ix) of the pro-
posed regulations (relating to a publicly
traded partnership's treatment of all
amounts subject to withholding as defined
in § 1.1441-2(a) that are not effectively
connected with the conduct of a trade or
business within the United States or with-
holdable payments under § 1.1473-1(a) as
extraordinary items) until final regulations
are issued.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this
proposed regulation, and because this pro-
posed regulation does not impose a col-
lection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, these regula-
tions have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.

## Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and the IRS specifically request
comments on the clarity of the proposed

rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying. A
public hearing will be scheduled if re-
quested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
ing will be published in the Federal Reg-
ister.

## Drafting Information

The principal author of these proposed
regulations is Benjamin H. Weaver,
Office of the Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.

## Withdrawal of Notice of Proposed Rulemaking

Accordingly, under the authority of 26
U.S.C. 7805 and 706(d)(2), § 1.706-3(a)
of the notice of proposed rulemaking that
was published in the Federal Register on
May 24, 2005 (70 FR 29675), is with-
drawn.

* * * * *

## Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

# PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

§ 1.706-2 also issued under 26 U.S.C.
706(d)(2)

§ 1.706-3 also issued under 26 U.S.C.
706(d)(3).

§ 1.706-4 also issued under 26 U.S.C.
706(d) .* * *

Par. 2. Section 1.706-0 is amended by
removing the entry for § 1.706-2T and
adding entries for §§ 1.706-2, 1.706-3,
and 1.706-6 to read as follows:

§ 1.706-0 Table of contents.

* * * * *

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§ 1.706-2 Certain allocable cash basis
items.

(a) Allocable cash basis items prorated
over period to which attributable.

(1) In general.

(2) Allocable cash basis item.

(3) Items attributable to periods not
within taxable year.

(4) Treatment of deductible items at-
tributable to prior periods.

(b) Example.

(c) De minimis exception.

(d) Effective/applicability date.

§ 1.706-3 Items attributable to interest
in lower-tier partnership.

(a) General rule.

(b) Safe harbor.

(c) De minimis upper-tier partner ex-
ception.

(d) Effective/applicability date.
* * * * *

§ 1.706-6 Property transferred in
connection with the performance of
services.

(a) Forfeiture allocations.

(b) Effective date.

Par. 3. Section 1.706-2 is added to
read as follows:

§ 1.706-2 Certain allocable cash basis
items.

(a) Allocable cash basis items prorated
over period to which attributable-(1) In
general. If during any taxable year of the
partnership there is a change in any part-
ner's interest in the partnership, then each
partner's distributive share of any alloca-
ble cash basis item shall be determined-

(i) By assigning the appropriate portion
of such item to each day in the period to
which it is attributable; and

(ii) By allocating the portion assigned
to any such day among the partners in
proportion to their interests in the partner-
ship at the close of such day.

(2) Allocable cash basis item. For pur-
poses of this section, the term allocable
cash basis item means any of the follow-
ing items of deduction, loss, income, or
gain with respect to which the partnership
uses the cash receipts and disbursements
method of accounting:

(i) Interest;

(ii) Taxes;

(iii) Payments for the use of property or
for services (other than deductions for the
transfer of an interest in the partnership in
connection with the performance of ser-
vices; such deductions generally must be
allocated under the rules for extraordinary
items in § 1.706-4(e));

(iv) Any allowable deduction that had
been previously deferred under section
267(a)(2);

(v) Any deduction, loss, income, or
gain item that accrues over time and that
would, if not allocated as an allocable
cash basis item, result in the significant
misstatement of a partner's income.

(3) Items attributable to periods not
within taxable year. If any portion of any
allocable cash basis item is attributable
to-

(i) Any period before the beginning of
the taxable year, such portion shall be
assigned under paragraph (a)(1)(i) of this
section to the first day of the taxable year,
or

(ii) Any period after the close of the
taxable year, such portion shall be as-
signed under paragraph (a)(1)(i) of this
section to the last day of the taxable year.

(4) Treatment of deductible items at-
tributable to prior periods. If any portion
of a deductible cash basis item is assigned
under paragraph (a)(3)(i) of this section to
the first day of any taxable year-

(i) Such portion shall be allocated
among persons who are partners in the
partnership during the period to which
such portion is attributable in accordance
with their varying interests in the partner-
ship during such period; and

(ii) Any amount allocated under para-
graph (a)(4)(i) of this section to a person
who is not a partner in the partnership on
such first day shall be capitalized by the
partnership and allocated among partner-
ship assets under the principles of section
755 (applying the principles of § 1.755-
1(b) for partners who sold or exchanged
their interest, and the principles of
§ 1.755-1(c) for partners who received a
distribution from the partnership in ex-
change for their interest).

(b) Example 1. On January 1, 2015, A, B, and
C are equal one-third partners in PRS, a calendar
year partnership that uses the cash receipts and
disbursements method of accounting. On July 1,
2015, A sells her entire interest in PRS to D. On

December 1, 2015, PRS pays a $12,000 interest
expense that is attributable to every day in PRS's
taxable year. Assume the de minimis exception of
paragraph (c) of this section does not apply, and
that the $12,000 interest expense must be allocated
under the rules of paragraph (a) of this section. A
was a partner in PRS for 181 days, and D was a
partner in PRS for 184 days, including on July 1
pursuant to paragraph (a)(1)(ii) of this section.
Under paragraph (a) of this section, A is entitled to
181/365 of her otherwise allocable share of deduc-
tions for the $12,000 interest expense, and D is
entitled to 184/365 of his otherwise allocable
share of deductions for the $12,000 interest ex-
pense. Thus, PRS allocates the interest expense
deductions $1,983.56 to A, $2,016.44 to D, and
$4,000 to each B and C.

Example 2. In 2015, E, F, and G are equal
one-third partners in PRS, a calendar year partner-
ship that uses the cash receipts and disbursements
method of accounting. On December 31, 2015, E
sells her entire interest in PRS to H. In November
2016, PRS makes a $6,000 payment for the use of
property that is attributable to the period from
January 1, 2015 to December 31, 2016. Assume
the de minimis exception of paragraph (c) of this
section does not apply, and that the $6,000 pay-
ment for the use of property must be allocated
under the rules of paragraph (a) of this section.
Under paragraph (a)(3)(i) of this section, half of
the $6,000 expense is attributable to 2015 and
must be assigned to January 1, 2016. Of this
$3,000 assigned to January 1, 2016, one-third is
allocable to each E, F, and G under paragraph
(a)(4)(i) of this section. However, because E is not
a partner in 2016, PRS must capitalize E's $1,000
share of the expense under paragraph (a)(4)(ii) of
this section. Because E sold her interest to H, PRS
must treat the capitalized $1,000 similar to a sec-
tion 743(b) adjustment for H allocated among
PRS's property under the principles of § 1.755-
1(b).

Example 3. Assume the same facts as Example
2, except that on December 31, 2015, PRS distrib-
uted property to E in complete redemption of E's
interest, and H never becomes a partner in PRS.
PRS must capitalize E's $1,000 share of the ex-
pense under paragraph (a)(4)(ii) of this section.
However, because E was redeemed, PRS must
instead treat the capitalized $1,000 similar to a
section 734(b) common basis adjustment allocated
among PRS's property under the principles of
§ 1.755-1(c).

(c) De minimis exception. An item de-
scribed in paragraph (a)(2) of this section
will not be subject to the rules of this
section if, for the partnership's taxable
year the total amount of the particular
class of allocable cash basis items de-
scribed in paragraph (a)(2)(i) through (v)
of this section (but in no event counting an
item more than once) is less than five
percent of the partnership's gross income,
including tax-exempt income described in
section 705(a)(1)(B), in the case of in-
come or gain items, or gross expenses and

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losses, including section 705(a)(2)(B) ex-
penditures, in the case of losses and ex-
pense items; and the total amount of allo-
cable cash basis items from all classes of
allocable cash basis items amounting to
less than five percent of the partnership's
gross income, including tax-exempt in-
come described in section 705(a)(1)(B), in
the case of income or gain items, or gross
expenses and losses, including section
705(a)(2)(B) expenditures, in the case of
losses and expense items, does not exceed
$10 million in the taxable year, deter-
mined by treating all such allocable cash
basis items as positive amounts.

(d) Effective/applicability date. This
section applies to taxable years beginning
on or after the date of publication of the
Treasury decision adopting these rules as
a final regulation in the Federal Register.

§ 1.706-2T [Removed]

Par. 4. Section 1.706-2T is removed.

Par. 5. Section 1.706-3 is added to
read as follows:

§ 1.706-3 Items attributable to interest
in lower-tier partnership.

(a) General rule. Except as provided in
paragraphs (b) and (c) of this section, if
during any taxable year of the partner-
ship-

(1) There is a change in any partner's
interest in the partnership (the upper-tier
partnership); and

(2) Such partnership is a partner in
another partnership (the lower-tier part-
nership), then each partner's distributive
share of any item of the upper-tier part-
nership attributable to the lower-tier part-
nership shall be determined by assigning
the appropriate portion (determined by ap-
plying principles similar to the principles
of § 1.706-2(a)(3) and (4)) of each such
item to the appropriate days during which
the upper-tier partnership is a partner in
the lower-tier partnership and by allocat-
ing the portion assigned to any such day
among the partners in proportion to their
interests in the upper-tier partnership at
the close of such day. An upper-tier part-
nership's distributive share of any items
of income, gain, loss, deduction, or credit
from a lower-tier partnership is consid-
ered to be realized or sustained by the

upper-tier partnership at the same time
and in the same manner as such items
were realized or sustained by the lower-
tier partnership. For an additional example
of the application of the principles of this
paragraph (a), see Revenue Ruling 77-
311, 1977-2 CB 218. See section
601.601(d)(2)(ii)(b).

(b) De minimis upper-tier partnership
exception. A de minimis upper-tier part-
nership is not required to, but may, apply
paragraph (a) of this section. For purposes
of this paragraph, a de minimis upper-tier
partnership is a partnership that directly
owns an interest in less than 10 percent of
the profits and capital of the lower-tier
partnership. This paragraph (b) only ap-
plies if all de minimis upper-tier partner-
ships own an interest in, in the aggregate,
less than 30 percent of the profits and
capital of the lower-tier partnership, and if
no partnership is created with a purpose of
avoiding the application of this section.

(c) Example 1. On January 1, 2015, A, B, and C
are equal one-third partners in UTP, a calendar year
partnership that uses the proration method and cal-
endar day convention to account for variations dur-
ing its taxable year. UTP is itself a partner in a
lower-tier partnership, LTP, which is also a calendar
year partnership. UTP owns a 15 percent interest in
the profits and capital of LTP throughout 2015. On
August 1, 2015, A sells her entire interest in UTP to
D. During 2015, LTP incurred $100,000 of ordinary
deductions, which were attributable to the period
from January 1, 2015, to July 1, 2015. None of
LTP's deductions were extraordinary items within
the meaning of § 1.706-4(e). UTP's distributive
share of LTP's deductions is $15,000. Under para-
graph (a) of this section, UTP must assign the
$15,000 equally among all days from January 1,
2015 to July 1, 2015, and allocate the assigned daily
portions among its partners in accordance with their
interests in UTP on those days. Accordingly, A, B,
and C are each allocated $5,000 of the deduction,
and D is not allocated any portion of the deduction.

Example 2. Assume the same facts as Example 1,
except that UTP owned a 9 percent interest in the
profits and capital of LTP throughout 2015, and that
LTP had only one other partner, which owned the
remaining 91 percent of LTP. UTP's distributive
share of LTP's $100,000 ordinary deductions is
$9,000. UTP qualifies as a de minimis upper-tier
partnership under paragraph (b) of this section, and
therefore UTP is not required to apply the rules of
paragraph (a) of this section. Instead, UTP may
apply the rules of § 1.706-4 to the $9,000 ordinary
deduction. If UTP decides to apply the rules of
§ 1.706-4, UTP prorates the $9,000 deduction
equally over its entire taxable year, and allocates it
according to its partners' interests on each day. Be-
cause A was a partner in UTP for 213 days, and D
was a partner in UTP for 152 days, UTP allocates the
$9,000 deduction $3,000 to each of B and C,
$1,750.68 to A, and $1,249.32 to D.

Example 3. Assume the same facts as Example 2,
except that UTP uses the interim closing method
rather than the proration method. UTP qualifies as a
de minimis upper-tier partnership under paragraph
(b) of this section, and therefore UTP is not required
to apply the rules of paragraph (a) of this section.
Instead, UTP may apply the rules of § 1.706-4 to
the $9,000 ordinary deduction. UTP's distributive
share of LTP items is considered to have been real-
ized or sustained by UTP at the same time and in the
same manner as such items were realized or sus-
tained by LTP. Accordingly, even if UTP decides to
apply the rules of § 1.706-4, UTP's application of
the interim closing method of § 1.706-4 to the
$9,000 deduction results in UTP allocating to each of
A, B, and C $3,000 of the deduction, and not allo-
cating any portion of the deduction to D. UTP would
reach the same result if it had instead chosen to apply
the rules of paragraph (a) of this section.

(d) Effective/applicability date. This
section applies to partnership taxable
years beginning on or after the date of
publication of the Treasury decision
adopting these rules as a final regulation
in the Federal Register.

§ 1.706-3(b) and (c) [Redesignated as
§ 1.706-6(a) and (b)]

Par 6. As proposed to be added May
24, 2005 (70 FR 29675), redesignate
§ 1.706-3(b) and (c) as § 1.706-6(a)
and (b).

Par. 7. Section 1.706-4 is amended by:
a. Adding a new sentence to the end of
paragraph (b)(2),

b. Revising paragraph (e)(1),

c. Redesignating paragraphs (e)(2)(ix),
(x), and (xi) as paragraphs (e)(2)(xi), (xii),
and (xiii) respectively,

d. Adding new paragraphs (e)(2)(ix)
and (e)(2)(x),

e. Adding a new sentence to the end of
paragraph (e)(3),

f. Revising paragraph (e)(4) Example
3, and

g. Revising the first sentence of para-
graph (f).

The additions and revisions read as fol-
lows:

§ 1.706-4 Determination of distributive
share when a partner's interest varies.

* * * * *

(b) * * *

(2) * * * However, this paragraph
(b)(2) does not apply to any deduction for
the transfer of an interest in the partner-
ship in connection with the performance
of services. Instead, such deduction must

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be allocated under the extraordinary item
rules of paragraphs (e)(1) and (2) of this
section.

* * * * *

(e) * * (1) General principles. Extraor-
dinary items may not be prorated. The
partnership must allocate extraordinary
items among the partners in proportion to
their interests in the partnership item at
the time of day on which the extraordinary
item occurred, regardless of the method
(interim closing or proration method) and
convention (daily, semi-monthly, or
monthly) otherwise used by the partner-
ship. These rules require the allocation of
extraordinary items as an exception to the
proration method, which would otherwise
ratably allocate the extraordinary items
across the segment, and the conventions,
which could otherwise inappropriately
shift extraordinary items between a trans-
feror and transferee. However, publicly
traded partnerships (as defined in section
7704(b)) that are treated as partnerships
may, but are not required to, apply their
selected convention in determining who
held publicly traded units (as described in
§ 1.7704-1(b) or § 1.7704-1(c)(1)) at the
time of the occurrence of any extraordi-
nary item except extraordinary items de-
scribed in paragraph (e)(2)(ix) of this sec-
tion. Publicly traded partnerships that
choose to treat items described in para-
graph (e)(2)(ix) of this section as extraor-
dinary items must allocate those items
among the partners in proportion to their
interests in those items at the time of day
on which the items are deemed to have
occurred according to the special timing
rules for those items in paragraph
(e)(2)(ix) of this section, regardless of the
method and convention otherwise used by
the partnership. Extraordinary items con-
tinue to be subject to any special limita-
tion or requirement relating to the timing
or amount of income, gain, loss, deduc-
tion, or credit applicable to the entire part-
nership taxable year (for example, the lim-
itation for section 179 expenses).

(2) * * *

(ix) For publicly traded partnerships
(as defined in section 7704(b)), any item
of income that is an amount subject to
withholding as defined in § 1.1441-2(a)
(excluding amounts effectively connected
with the conduct of a trade or business
within the United States) or a withhold-

able payment under § 1.1473-1(a) occur-
ring during a taxable year if the partners
agree (within the meaning of paragraph
(e) of this section) to consistently treat all
such items as extraordinary items for that
taxable year. If the partners so agree, then
for purposes of section 706 such items
shall be treated as occurring at the next
time as of which the recipients of a distri-
bution by the partnership are determined,
or, to the extent such income items arise
between the final time during the taxable
year as of which the recipients of a distri-
bution by the partnership are determined
and the end of the taxable year, such items
shall be treated as occurring at the final
time during the taxable year as of which
the recipients of a distribution by the part-
nership are determined. This paragraph
(e)(2)(ix) does not apply unless the part-
nership has a regular practice of making at
least four distributions (other than de mi-
nimis distributions) to its partners during
each taxable year.

(x) Any deduction for the transfer of an
interest in the partnership in connection
with the performance of services. Such an
extraordinary item is treated as occurring
immediately before the transfer or vesting
of the partnership interest that results in
compensation income for the person who
performs the services, but in no case shall
the item be treated as occurring prior to
the beginning of the partnership's taxable
year.

* * * * *

(3) * * * However, this paragraph
(e)(3) does not apply to any deduction for
the transfer of an interest in the partner-
ship in connection with the performance
of services. Instead, such deduction must
be allocated under the extraordinary item
rules of paragraphs (e)(1) and (2) of this
section.

(4) * * *

Example 3. (i) Assume the same facts as in
Example 2, except that PRS is a publicly traded
partnership (within the meaning of section 7704(b)),
A held a publicly traded unit (as described in
§ 1.7704-1(b) or § 1.7704-1(c)(1)) in PRS, and the
extraordinary item recognized at 3:15 p.m. on De-
cember 7, 2015 is not described in paragraph
(e)(2)(ix) of this section. Under PRS's monthly con-
vention, the December 12 variation is deemed to
have occurred for purposes of this section at the end
of the day on November 30, 2015. Pursuant to para-
graph (e)(1) of this section, a publicly traded part-
nership (as defined in section 7704(b)) may choose
to respect its conventions in determining who held

its publicly traded units (as described in § 1.7704-
1(b) or § 1.7704-1(c)(1)) at the time of the occur-
rence of an extraordinary item, except for extraordi-
nary items described in paragraph (e)(2)(ix) of this
section. Therefore, PRS may choose to treat A as not
having been a partner in PRS for purposes of this
paragraph (e) at the time the extraordinary item
arose, and thus PRS may choose not to allocate A
any share of the extraordinary item.

(ii) Assume the same facts as in paragraph (i) of
this Example 3, except that on November 5, 2015,
PRS recognizes an item of income that is an amount
subject to withholding as defined in § 1.1441-2(a)
(and that is not effectively connected with the con-
duct of a trade or business within the United States).
PRS has a regular practice of making quarterly dis-
tributions to its partners each taxable year. PRS
determines that the recipients of its fourth-quarter
distribution will be interest holders of record at the
close of business on December 15, 2015. The part-
ners of PRS agree (within the meaning of paragraph
(f) of this section) to consistently treat all such items
during the taxable year as extraordinary items. Pur-
suant to paragraph (e)(2)(ix) of this section, the item
of income that arose on November 5 is treated as an
extraordinary item occurring at the next time as of
which the recipients of a distribution by the partner-
ship are determined (unless that time occurs in a
different taxable year). Because December 15 occurs
before the end of PRS's taxable year, the item of
income is treated as occurring at the close of busi-
ness on December 15, and must be allocated accord-
ing to PRS's partners' interests at that time, deter-
mined without regard to PRS's applicable
convention. Therefore, A will not be allocated any
share of the item because A disposed of its entire
interest in PRS before the close of business on De-
cember 15.

(iii) Assume the same facts as in paragraph (ii) of
this Example 3, except that PRS determines that the
recipients of its fourth-quarter distribution will be
interest holders of record at the close of business on
January 15, 2016, and PRS determines that the re-
cipients of its third-quarter distribution will be inter-
est holders of record at the close of business on
October 21, 2015. Therefore, the last time during
2015 as of which the recipients of a distribution by
PRS are determined is at the close of business on
October 21, 2015. Pursuant to paragraph (e)(2)(ix) of
this section, because the item of income subject to
withholding as defined in § 1.1441-2(a) which arises
on November 5 arises between the final time during
the taxable year as of which the recipients of a
distribution are determined and the end of the tax-
able year, such item shall be treated as occurring at
the final time during the taxable year as of which the
recipients of a distribution by the partnership are
determined. Therefore, the item of income subject to
withholding as defined in § 1.1441-2(a) which arises
on November 5, 2015 is treated as occurring at the
close of business on October 21, 2015, and must be
allocated according to PRS's partners' interests at
that time.

(f) Agreement of the partners. For pur-
poses of paragraphs (a)(3)(iii) (relating to
selection of the proration method), (c)(3)
(relating to selection of the semi-monthly
or monthly convention), (d)(1) (relating to

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performance of regular semi-monthly or
monthly interim closings), (e)(2)(ix) (re-
lating to a publicly traded partnership's
treatment of all amounts subject to with-
holding as defined in § 1.1441-2(a) that
are not effectively connected with the
conduct of a trade or business within the
United States or withholdable payments
under § 1.1473-1(a) as extraordinary
items), and (e)(2)(xi) (relating to selection
of additional extraordinary items) of this
section, the term agreement of the partners

means either an agreement of all the part-
ners to select the method, convention, or
extraordinary item in a dated, written
statement maintained with the partner-
ship's books and records, including, for
example, a selection that is included in the
partnership agreement, or a selection of
the method, convention, or extraordinary
item made by a person authorized to make
that selection, including under a grant of
general authority provided for by either
state law or in the partnership agreement,

if that person's selection is in a dated,
written statement maintained with the
partnership's books and records.

Karen M. Schiller,
Acting Deputy Commissioner
for Services and Enforcement.

(Filed by the Office of the Federal Register on July 31, 2015,
8:45 a.m., and published in the issue of the Federal Register
for August 3, 2015, 80 F.R. 18817)

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# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

# Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

B.T.A .- Board of Tax Appeals.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletins 2015-27 through 2015-33

### Announcements:

2015-17, 2015-28 I.R.B. 67
2015-18, 2015-33 I.R.B. 198
2015-19, 2015-32 I.R.B. 157

### Notices:

2015-43, 2015-29 I.R.B. 73
2015-46, 2015-28 I.R.B. 64

2015-47, 2015-30 I.R.B. 76
2015-48, 2015-30 I.R.B. 77

2015-49, 2015-30 I.R.B. 79

2015-50, 2015-30 I.R.B. 81
2015-51, 2015-31 I.R.B. 133

2015-53, 2015-33 I.R.B. 190

Proposed Regulations:

REG-109370-10, 2015-33 I.R.B. 198
REG-115452-14, 2015-32 I.R.B. 158

REG-138526-14, 2015-28 I.R.B. 67

REG-102648-15, 2015-31 I.R.B. 134

REG-102837-15, 2015-27 I.R.B. 43

### Revenue Procedures:

2015-34, 2015-27 I.R.B. 4
2015-36, 2015-27 I.R.B. 20
2015-39, 2015-33 I.R.B. 195

### Revenue Rulings:

2015-15, 2015-27 I.R.B. 1
2015-16, 2015-31 I.R.B. 130

### Treasury Decisions:

9723, 2015-31 I.R.B. 84

9726, 2015-31 I.R.B. 98
9727, 2015-32 I.R.B. 154

9728, 2015-33 I.R.B. 169

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

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### Finding List of Current Actions on Previously Published Items1

Bulletins 2015-27 through 2015-33

Notices:

2014-4
Modified by
Notice 2015-51, 2015-31 I.R.B. 133

#### Revenue Procedures:

2011-49
Modified by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2011-49
Superseded by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2015-14
Modified by
Rev. Proc. 2015-39, 2015-33 I.R.B. 195

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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NW, IR-6230 Washington, DC 20224.