Treasury Finalizes Regulations On The Varying Interests Rule Under Section 706

On August 3, 2015, the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations under Section 706(d), providing rules for determining the partners' distributive shares of partnership items when a partner's interest varies during the taxable year. Concurrently, Treasury and the IRS issued proposed regulations addressing allocations of certain cash basis items and allocations when interest shifts occur in a tiered partnership structure.

Background

Under Section 706(d) of the Internal Revenue Code (Code), subject to certain exceptions, if a partner's interest in a partnership changes during the year, each partner's distributive share of partnership items for such year must be determined pursuant to any method prescribed by Treasury in regulations that take into account the varying interests of the partners in the partnership during such year. This varying interests rule generally was intended to prevent a partner