§ 1.706-1T - Taxable years of certain partnerships (temporary).

(a) Taxable year determined by reference to the partners—(1) In general. If for any taxable year a partnership's taxable year cannot be determined by reference to the taxable year of its partners owning a majority interest in partnership profits and capital (as described in section 706(b)(1)(B)(i)) or by reference to the taxable year of all its principal partners (as described in section 706(b)(1)(B)(ii)), then the partnership must determine its taxable year under section 706(b)(1)(B)(iii). Under section 706(b)(1)(B)(iii), the taxable year of the partnership, except as provided in paragraph (b) of this section, shall be the taxable year that results in the least aggregate deferral of income to the partners (as determined under paragraph (a)(2) of this section). See § 1.706-3T(a) for special rules which provide that certain tax-exempt partners are disregarded.

(2) Taxable year that results in the least aggregate deferral of income. The taxable year that results in the least aggregate deferral of income will be the taxable year of one or more of the partners in the partnership which will result in the least aggregate deferral of income to the partners. The aggregate deferral for a particular year is equal to the sum of the products determined by multiplying the month(s) of deferral for each partner that would be generated by that year and each partner's interest in partnership profits for that year. The partner's taxable year that produces the lowest sum when compared to the other partner's taxable years is the taxable year that results in the least aggregate deferral of income to the partners. If the calculation results in more than one taxable year qualifying as the taxable year with the least aggregate deferral, thepartnership may select any one of those taxable years as its taxable year. However, if one of the qualifying taxable years is also the partnership's existing taxable year, the partnership must maintain its existing taxable year. The determination of the taxable year that results in the least aggregate deferral of income shall generally be made as of the beginning of the partnership's current taxable year. The district director, however, may determine that the first day of the current taxable year is not the appropriate testing day and require the use of some other day or period that will more accurately reflect the ownership of the partnership and thereby the actual aggregate deferral to the partners where the partners engage in a transaction that has as its principal purpose the avoidance of the principles of this section. Thus, for example the preceding sentence would apply where there is a transfer of an interest in the partnership that results in a temporary transfer of that interest principally for purposes of qualifying for a specific taxable year under the principles of this section. For purposes of this section, deferral to each partner is measured in terms of months from the end of the partnership's taxable year forward to the end of the partner's taxable year.

(3) Determination of the taxable year of a partner or partnership that uses a 52-53 week taxable year. For purposes of the calculation described in paragraph (a)(2) of this section, the taxable year of a partner or partnership that uses a 52-53 week taxable year shall be the same year determined under the rules of section 441(f) and the regulations thereunder with respect to the inclusion of income by the partner or partnership.

(4) Special de minimis rule. If the taxable year that results in the least aggregate deferral produces an aggregate deferral that is less than .5 when compared to the aggregate deferral of the current taxable year, the partnership's current taxable year shall be treated as the taxable year with the least aggregate deferral. Thus, the partnership will not be permitted to change its taxable year. However, this de minimis rule will not apply to the first taxable period beginning after December 31, 1986.

(b) Business purpose. A partnership may have a taxable year other than the year described in paragraph (a) of this section if it establishes, to the satisfaction of the Commissioner of Internal Revenue, a business purpose for such taxable year in accordance with and under the procedures established in § 1.442-1(b)(1). For purposes of this paragraph (b), any deferral of income to partners shall not be treated as a business purpose.

(c) Procedural requirements and effective date—(1) In general. The change in accounting period required by paragraph (a) of this section shall be treated as initiated by the partnership and made with the consent of the Commissioner. To effect the change, a partnership must show that the requirements of this section are satisfied in a statement setting forth the computations required to establish the taxable year that results in the least aggregate deferral of income to the partners under paragraph (a) of this section. The partnership must attach the statement to the income tax return for the short period involved in the changes and must indicate the following at the top of page 1 of the return: “FILED UNDER § 1.706-1T.”

(2) Effective date—(i) In general. Except as provided in paragraph (c)(2)(ii) of this section, the rules of this section are effective for partnership taxable years beginning after December 31, 1986.

(ii) Special rule for first taxable year beginning after December 31, 1986. A partnership otherwise required to change its accounting period for its first taxable year beginning after December 31, 1986 to a year resulting in the least aggregate deferral of income to its partners under paragraph (a) of this section, may, at its option, delay the application of the rules of that paragraph until its first taxable year beginning after December 31, 1987. In such a case, the partnership must conform its first taxable year beginning after December 31, 1986 to the calendar year and must apply the rules of paragraph (a) of this section to its first taxable year beginning after December 31, 1987. See § 1.702-3T(a)(1) regarding the availability of a 4-year spread provision with respect to a partnership required to change its taxable year for its first taxable year beginning after December 31, 1986.

(iii) Special eligibility for 4-year spread; years beginning after December 31, 1987. Notwithstanding the provisions of § 1.702-3T(a)(1) limiting the availability of the 4-year spread provisions to a partnership's first taxable year beginning after December 31, 1986, if—

(A) A partnership is required under section 706(b)(1)(B)(iii) and paragraph (a) of this section to change to a taxable year that results in the least aggregate deferral of income to the partners for a partnership's first taxable year beginning after December 31, 1987,

(B) The partnership did exercise its option, as provided in paragraph (c)(2)(ii) of this section, to delay the application of the rules of paragraph (a) of this section until the partnership's first taxable year beginning after December 31, 1987, and

(C) The partnership would have been required to change its accounting period under section 706(b)(1)(B)(iii) and paragraph (a) of this section for its first taxable year beginning after December 31, 1986, if paragraph (a) of this section had been applicable to such taxable year, the partners in the partnership will be eligible to utilize the 4-year spread provision provided in § 1.702-3T (subject to the other requirements of that section) with respect to the partnership's change in accounting period required under section 706(b)(1)(B)(iii) and paragraph (a) of this section for the partnership's first taxable year beginning after December 31, 1987.

(d) Examples. The principles of this section may be illustrated by the following examples:

Example 1.

Partnership P is on a fiscal year ending June 30. Partner A reports income on the fiscal year ending June 30 and Partner B reports income on the fiscal year ending July 31. A and B each have a 50 percent interest in partnership profits. For its taxable year beginning July 1, 1987, the partnership will be required to retain its taxable year since the fiscal year ending June 30 results in the least aggregate deferral of income to the partners. This determination is made as follows:

Test 6/30Year EndInterest in Partnership ProfitsMonths of Deferral for 6/30 Year EndInterest x DeferralPartner A6/30.500Partner B7/31.51.5Aggregate deferral.5Test 7/31Year EndInterest in Partnership ProfitsMonths of Deferral for 7/31 Year EndInterest x DeferralPartner A6/30.5115.5Partner B7/31.500Aggregate deferral5.5 Example 2.

The facts are the same as in Example 1 except that A reports income on the calendar year and B reports on the fiscal year ending November 30. For the partnership's taxable year beginning July 1, 1987, the partnership is required to change its taxable year to a fiscal year ending November 30 because such year results in the least aggregate deferral of income to the partners. This determination is made as follows:

Test 12/31Year EndInterest in Partnership ProfitsMonths of Deferral for 12/31 Year EndInterest x DeferralPartner A12/31.500Partner B11/30.5115.5Aggregate deferral5.5Test 11/30Year EndInterest in Partnership ProfitsMonths of Deferral for 11/30 Year EndInterest x DeferralPartner A12/31.51.5Partner B11/30.500Aggregate deferral.5 Example 3.

The facts are the same as in Example 2 except that B reports income on the fiscal year ending June 30. For the partnership's taxable year beginning July 1, 1987, each partner's taxable year will result in identical aggregate deferral of income. If the partnership's current taxable year was neither a fiscal year ending June 30 nor the calendar year, the partnership would select either the fiscal year ending June 30 or the calendar year as its taxable year. However, since the partnership's current taxable year ends June 30, it must retain its current taxable year.

Test 12/31Year EndInterest in Partnership ProfitsMonths of Deferral for 12/31 Year EndInterest x DeferralPartner A12/31.500Partner B6/30.563.0Aggregate deferral3.0Test 6/30Year EndInterest in Partnership ProfitsMonths of Deferral for 6/30 Year EndInterest x DeferralPartner A12/31.563.0Partner B6/30.500Aggregate deferral3.0 Example 4.

The facts are the same as in Example 1 except that on December 31, 1987, partner A sells a 4 percent interest in the partnership to Partner C, who reports income on the fiscal year ending June 30, and a 40 percent interest in the partnership to Partner D, who also reports income on the fiscal year ending June 30. The taxable year beginning July 1, 1987, is unaffected by the sale. However, for the taxable year beginning July 31, 1988, the partnership must determine the taxable year resulting in the least aggregate deferral as of July 1, 1988. In this case, the partnership will be required to retain its taxable year since the fiscal year ending June 30 continues to be the taxable year that results in the least aggregate deferral of income to the partners.

Example 5.

The facts are the same as in Example 4 except that Partner D reports income on the fiscal year ending April 30. As in Example 4, the taxable year during which the sale took place is unaffected by the shifts in interests. However, for its taxable year beginning July 1, 1988, the partnership will be required to change its taxable year to the fiscal year ending April 30. This determination is made as follows:

Test 7/31Year EndInterest in Partnership ProfitsMonths of Deferral for 7/31 Year EndInterest x Deferral.Partner A6/30.0611.66Partner B7/31.500Partner C6/30.0411.44Partner D4/30.493.60Aggregate deferral4.70Test 6/30Year EndInterest in Partnership ProfitsMonths of Deferral for 6/30 Year EndInterest x Deferral.Partner A6/30.0600Partner B7/31.51.5Partner C6/30.0400Partner D4/30.4104.0Aggregate deferral4.5Test 4/30Year EndInterest in Partnership ProfitsMonths of Deferral for 4/30 Year EndInterest x Deferral.Partner A6/30.062.12Partner B7/31.531.50Partner C6/30.042.08Partner D4/30.400Aggregate deferral1.70§ 1.706-1T(a)(4) Test:Current taxable year (June 30)4.5Less: Taxable year producing the least aggregate deferral (April 30)1.7Additional aggregate deferral (greater than .5)2.8 Example 6.

Partnership P has two partners, A who reports income on the fiscal year ending March 31, and B who reports income on the fiscal year ending July 31. A and B share profits equally. P has determined its taxable year under § 1.706-1T(a)(2) to be the fiscal year ending March 31 as follows:

Test 3/31Year EndInterest in Partnership ProfitsDeferral for 3/31 Year EndInterest x Deferral.Partner A3/31.500Partner B7/31.542Aggregate deferral2Test 7/31Year EndInterest in Partnership ProfitsDeferral for 7/31 Year EndInterest x Deferral.Partner A3/31.584Partner B7/31.500Aggregate deferral4

In May 1988, Partner A sells a 45 percent interest in the partnership to C, who reports income on the fiscal year ending April 30. For the taxable period beginning April 1, 1989, the fiscal year ending April 30 is the taxable year that produces the least aggregate deferral of income to the partners. However, under paragraph (a)(4) of this section the partnership is required to retain its fiscal year ending March 31. This determination is made as follows:

Test 3/31Year EndInterest in Partnership ProfitsDeferral for 3/31 Year EndInterest x Deferral.Partner A3/31.0500Partner B7/31.542.0Partner C4/30.451.45Aggregate deferral2.45Test 7/31Year EndInterest in Partnership ProfitsDeferral for 7/31 year endInterest DeferralPartner A3/31.058.40Partner B7/31.500Partner C4/30.4594.05Aggregate deferral4.45Test 4/30Year EndInterest in Partnership ProfitsDeferral for 4/30 year endInterest DeferralPartner A3/31.0511.55Partner B7/31.531.50Partner C4/30.4500Aggregate deferral2.05§ 1.706-1T(a)(4) Test:Current taxable year (3/31)2.45Less: Taxable year producing the least aggregate deferral (4/30).2.05Additional aggregate deferral (less than .5).40