Title 26 — Internal Revenue CodeRelease 119-73
§706 Taxable years of partner and partnership
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter K— - Partners and Partnerships › Part PART I— - DETERMINATION OF TAX LIABILITY › § 706
Summary
Partners must use the partnership’s tax year when figuring the partnership items that affect their own taxable income. A partnership’s tax year is set like any taxpayer’s year. Usually the partnership must use the year that a group of partners holding more than 50 percent of the profits and capital share (on certain testing days) use. If there is no such “majority” year, the partnership must use the year of all its principal partners. If there is still none, the partnership uses the calendar year unless the IRS allows a different period. The partnership can use a different year only if it proves a real business reason to the IRS (just shifting income to partners is not a valid reason). A partner cannot switch to a different year than the partnership unless the partner proves a business reason. A “principal partner” is anyone with 5 percent or more of profits or capital. If the partnership changes its year because of the majority rule, it generally does not have to change again for the next 2 taxable years. A partnership’s tax year does not end just because a partner dies, a new partner joins, a partner’s interest is partly sold, or a partner’s interest is reduced. The year does end for a partner only when that partner’s entire interest in the partnership ends. When partners’ interests change during the year, the partners’ shares of income, loss, deductions, and credits must be figured by a method that reflects the changing interests. For cash-basis items like interest, taxes, and payments for services or use of property, the item is divided by day and then split among partners based on their interests at the end of each day. Amounts covering time before the year are put on the first day, and amounts after the year are put on the last day; amounts assigned to the first day are allocated among those who were partners during the period, and amounts given to people who were not partners on that first day must be capitalized and treated under the rules of section 755. When applying the rules about which tax year a partnership must use, ignore the rule about closing the year for a partner whose entire interest ends.
Full Legal Text
Title 26, §706
Internal Revenue Code — Source: USLM XML via OLRC
(a)In computing the taxable income of a partner for a taxable year, the inclusions required by section 702 and section 707(c) with respect 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 taxable year of the partner.
(b)(1)(A)The taxable year of a partnership shall be determined as though the partnership were a taxpayer.
(B)Except as provided in subparagraph (C), a partnership shall not have a taxable year other than—
(i)the majority interest taxable year (as defined in paragraph (4)),
(ii)if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or
(iii)if there is no taxable year described in clause (i) or (ii), the calendar year unless the Secretary by regulations prescribes another period.
(C)A partnership may have a taxable year not described in subparagraph (B) if it establishes, to the satisfaction of the Secretary, a business purpose therefor. For purposes of this subparagraph, any deferral of income to partners shall not be treated as a business purpose.
(2)A partner may not change to a taxable year other than that of a partnership in which he is a principal partner unless he establishes, to the satisfaction of the Secretary, a business purpose therefor.
(3)For the purpose of this subsection, a principal partner is a partner having an interest of 5 percent or more in partnership profits or capital.
(4)(A)For purposes of paragraph (1)(B)(i)—
(i)The term “majority interest taxable year” means the taxable year (if any) which, on each testing day, constituted the taxable year of 1 or more partners having (on such day) an aggregate interest in partnership profits and capital of more than 50 percent.
(ii)The testing days shall be—
(I)the 1st day of the partnership taxable year (determined without regard to clause (i)), or
(II)the days during such representative period as the Secretary may prescribe.
(B)Except as provided in regulations necessary to prevent the avoidance of this section, if, by reason of paragraph (1)(B)(i), the taxable year of a partnership is changed, such partnership shall not be required to change to another taxable year for either of the 2 taxable years following the year of change.
(5)Except as provided in regulations, for purposes of determining the taxable year to which a partnership is required to change by reason of this subsection, changes in taxable years of other persons required by this subsection, section 441(i), section 584(i), section 644, or section 1378(a) shall be taken into account.
(c)(1)Except in the case of a termination of a partnership and except as provided in paragraph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner’s interest in the partnership, or the sale or exchange of a partner’s interest in the partnership.
(2)(A)The taxable year of a partnership shall close with respect to a partner whose entire interest in the partnership terminates (whether by reason of death, liquidation, or otherwise).
(B)The taxable year of a partnership shall not close (other than at the end of a partnership’s taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift, or otherwise).
(d)(1)Except as provided in paragraphs (2) and (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 the Secretary by regulations which takes into account the varying interests of the partners in the partnership during such taxable year.
(2)(A)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 provided in regulations) each partner’s distributive 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 attributable, and
(ii)by allocating the portion assigned to any such day among the partners in proportion to their interests in the partnership at the close of such day.
(B)For purposes of this paragraph, the term “allocable cash basis item” means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting:
(i)Interest.
(ii)Taxes.
(iii)Payments for services or for the use of property.
(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 this paragraph is appropriate to avoid significant misstatements of the income of the partners.
(C)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 subparagraph (A)(i) to the first day of the taxable year, or
(ii)any period after the close of the taxable year, such portion shall be assigned under subparagraph (A)(i) to the last day of the taxable year.
(D)If any portion of a deductible cash basis item is assigned under subparagraph (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 attributable in accordance with their varying interests in the partnership during such period, and
(ii)any amount allocated under clause (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 provided for in section 755.
(3)If—
(A)during any taxable year of the partnership there is a change in any partner’s interest in the partnership (hereinafter in this paragraph referred to as the “upper tier partnership”), and
(B)such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the “lower tier partnership”),
(4)For purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2018—Subsec. (b)(5). Pub. L. 115–141 substituted “section 584(i)” for “section 584(h)”. 1997—Subsec. (b)(5). Pub. L. 105–34, § 507(b)(2), substituted “section 644” for “section 645”. Subsec. (c)(2). Pub. L. 105–34, § 1246(b), substituted “Treatment of dispositions” for “Partner who retires or sells interest in partnership” as heading. Subsec. (c)(2)(A). Pub. L. 105–34, § 1246(a), amended heading and text of subpar. (A) generally. Prior to amendment, text read as follows: “The taxable year of a partnership shall close— “(i) with respect to a partner who sells or exchanges his entire interest in a partnership, and “(ii) with respect to a partner whose interest is liquidated, except that the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership’s taxable year.” 1988—Subsec. (b)(1)(B)(i). Pub. L. 100–647, § 1008(e)(1)(A), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: “the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent,”. Subsec. (b)(1)(B)(iii). Pub. L. 100–647, § 1008(e)(2), substituted “unless the Secretary by
Regulations
prescribes another period” for “or such other period as the Secretary may prescribe in
Regulations
”. Subsec. (b)(4). Pub. L. 100–647, § 1008(e)(1)(B), substituted “Majority interest taxable year; limitation on required changes” for “Application of majority interest rule” in heading and amended text generally. Prior to amendment, text read as follows: “Clause (i) of paragraph (1)(B) shall not apply to any taxable year of a partnership unless the period which constitutes the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent has been the same for— “(A) the 3-taxable year period of such partner or partners ending on or before the beginning of such taxable year of the partnership, or “(B) if the partnership has not been in existence during all of such 3-taxable year period, the taxable years of such partner or partners ending with or within the period of existence. This paragraph shall apply without regard to whether the same partners or interests are taken into account in determining the 50 percent interest during any period.” Subsec. (b)(5). Pub. L. 100–647, § 1008(e)(3), added par. (5). 1986—Subsec. (b). Pub. L. 99–514, § 806(a)(3), struck out “Adoption of” before “taxable year” in heading. Subsec. (b)(1). Pub. L. 99–514, § 806(a)(1), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “The taxable year of a partnership shall be determined as though the partnership were a taxpayer. A partnership may not change to, or adopt, a taxable year other than that of all its principal partners unless it establishes, to the satisfaction of the Secretary, a business purpose therefor.” Subsec. (b)(4). Pub. L. 99–514, § 806(a)(2), added par. (4). Subsec. (d)(2)(A)(i). Pub. L. 99–514, § 1805(a)(1)(A), substituted “such item” for “each such item”. Subsec. (d)(2)(B). Pub. L. 99–514, § 1805(a)(1)(B), in introductory provisions, struck out “which are described in paragraph (1) and” after “the following items”. Subsec. (d)(2)(C)(i). Pub. L. 99–514, § 1805(a)(2), substituted “the first day of the taxable year” for “the first day of such taxable year”. 1984—Subsec. (c)(2)(A). Pub. L. 98–369, § 72(b)(1), struck out last sentence providing that such partner’s distributive share of item described in section 702(a) for such year shall be determined, under
Regulations
prescribed by the Secretary, for the period ending with such sale, exchange, or liquidation. Subsec. (c)(2)(B). Pub. L. 98–369, § 72(b)(2), struck out “, but such partner’s distributive share of items described in section 702(a) shall be determined by taking into account his varying interests in the partnership during the taxable year” after “otherwise)”. Subsec. (d). Pub. L. 98–369, § 72(a), added subsec. (d). 1976—Subsec. (b)(1), (2). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”. Subsec. (c)(2). Pub. L. 94–455, §§ 213(c)(1), 1906(b)(13)(A), substituted “or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift, or otherwise)” for “or with respect to a partner whose interest is reduced”, in par. (B), and struck out “or his delegate” after “Secretary” in par. (A).
Statutory Notes and Related Subsidiaries
Effective Date
of 1997 AmendmentAmendment by section 507(b)(2) of Pub. L. 105–34 applicable to sales or exchanges after Aug. 5, 1997, see section 507(c)(2) of Pub. L. 105–34, set out as a note under section 644 of this title. Pub. L. 105–34, title XII, § 1246(c), Aug. 5, 1997, 111 Stat. 1030, provided that: “The
Amendments
made by this section [amending this section] shall apply to partnership taxable years beginning after December 31, 1997.”
Effective Date
of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date
of 1986 AmendmentAmendment by section 806(a) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with special provisions applicable to taxpayers who are required to change their accounting periods, see section 806(e) of Pub. L. 99–514, set out as a note under section 1378 of this title. Amendment by section 1805(a) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.
Effective Date
of 1984 Amendment Pub. L. 98–369, div. A, title I, § 72(c), July 18, 1984, 98 Stat. 591, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The
Amendments
made by this section [amending this section] shall apply— “(1) in the case of items described in section 706(d)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by subsection (a)), to amounts attributable to periods after
March 31, 1984, and “(2) in the case of items described in section 706(d)(3) of such Code (as added by subsection (a)), to amounts paid or accrued by the other partnership after
March 31, 1984.”
Effective Date
of 1976 AmendmentAmendment by section 213(c)(1) of Pub. L. 94–455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f) of Pub. L. 94–455, set out as an
Effective Date
note under section 709 of this title.
Construction
of section 806 of Pub. L. 99–514Nothing in section 806 of Pub. L. 99–514 or in any legislative history relating thereto to be construed as requiring the Secretary of the Treasury or his delegate to permit an automatic change of a taxable year, see section 1008(e)(9) of Pub. L. 100–647, set out as a note under section 1378 of this title. Plan
Amendments
Not Required Until January 1, 1989For provisions directing that if any
Amendments
made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 706
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73