REPUBLICAN WALKER PROPOSES HEALTH TAX CREDITS BY AGE, NOT INCOME

Republican presidential contender Scott Walker on Tuesday unveiled his healthcare plan: repeal Obamacare and replace it with age-based tax credits that Americans could use to offset the cost of purchasing their own coverage.
Under his plan, the Wisconsin governor said he would give up to $3,000 directly to taxpayers to buy health insurance. The amount would range from $3,000 in credits for those aged 50 to 64 and scale down to $900 for those age 17 and under, and go to those without health insurance from their jobs.

Walker also backed longstanding Republican health proposals to allow consumers to purchase insurance out-of-state, loosen restrictions on health savings accounts and reform medical malpractice lawsuits.

“This gives them a way to get an affordable healthcare plan,” he said in a speech in Minnesota, highlighting the plan’s tax credits.

Republicans have long vowed to repeal President Barack Obama’s signature 2010 healthcare law, commonly known as Obamacare. While most of the 17 Republican presidential candidates have echoed that pledge, few have offered detailed alternatives.

Under the law, consumers who do not get health insurance from their employer or government programs such as Medicare and Medicaid can buy it under federal or state-run insurance exchanges. Those who qualify receive a subsidy to offset the costs.

Walker criticized that system and the role of the Internal Revenue Service in overseeing the subsidies.

“Unlike ObamaCare policies that give subsidies to insurance companies, these tax credits belong to consumers,” Walker wrote in his plan, released on his website.

He said consumers should be able to buy health insurance across state lines, although it was not immediately clear where consumers would buy it or what would happen to the current exchanges.

Additionally, Walker called for overhauling Medicaid, the federal-state health insurance program for the poor, through block grants and other changes.

U.S. Senator Marco Rubio of Florida, another contender to be the Republican presidential nominee in the November 2016 election, also has called for healthcare changes. In an opinion piece in Politico late on Monday, he reiterated his promise to seek tax credits for Americans who buy their own health insurance but offered few new details.

Another candidate, Louisiana Governor Bobby Jindal, who laid out his healthcare policy ideas last year, criticized Walker’s plan. He said Walker was accepting the premise of Obamacare and “merely quibbling over the details.”

DON’T FALL FOR NEW TAX SCAM TRICKS BY IRS POSERS

Though the tax season is over, tax scammers work year-round. The IRS advises you to stay alert to protect yourself against new ways criminals pose as the IRS to trick you out of your money or personal information. These scams first tried to sting older Americans, newly arrived immigrants and those who speak English as a second language. The crooks have expanded their net, and now try to swindle virtually anyone. Here are several tips from the IRS to help you avoid being a victim of these scams:

  • Scams use scare tactics.  These aggressive and sophisticated scams try to scare people into making a false tax payment that ends up with the criminal. Many phone scams use threats to try to intimidate you so you will pay them your money. They often threaten arrest or deportation, or that they will revoke your license if you don’t pay. They may also leave “urgent” callback requests, sometimes through “robo-calls,” via phone or email. The emails will often contain a fake IRS document with a phone number or an email address for you to reply.
  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legit. They may use online resources to get your name, address and other details about your life to make the call sound official.
  • Scams use phishing email and regular mail.  Scammers copy official IRS letterhead to use in email or regular mail they send to victims. In another new variation, schemers provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. All in an attempt to make the scheme look official.
  • Scams cost victims over $20 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 600,000 contacts since October 2013. TIGTA is also aware of nearly 4,000 victims who have collectively reported over $20 million in financial losses as a result of tax scams.

The real IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
  • Demand that you pay taxes and not allow you to question or appeal the amount that you owe.
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.
  • Ask for credit or debit card numbers over the phone.
  • Threaten to bring in police or other agencies to arrest you for not paying.

If you don’t owe taxes or have no reason to think that you do:

  • Do not provide any information to the caller. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.
  • You should also report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe taxes:

  • Call the IRS at 800-829-1040. IRS workers can help you if you do owe taxes.

Stay alert to scams that use the IRS as a lure. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

RECENTLY-ENACTED LAW CONTAINS TAX RETURN FILING DUE DATES CHANGES

On July 31, 2015, President Obama signed into law P.L. 114-41, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.” Although this new law was primarily designed as a 3-month stopgap extension of the Highway Trust Fund and related measures, it includes a number of important tax provisions, including revised due dates for partnership and C corporation returns and revised extended due dates for some returns. This letter provides an overview of these provisions, which may have an impact on you, your family, or your business.

Revised Due Dates for Partnership and C Corporation Returns

Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by Mar. 15 of the following year. The partnership return is due on the 15th day of the fourth month after the end of the partnership’s tax year. Thus, partnerships using a calendar year must file their returns by Apr. 15 of the following year. Since the due date of the partnership return is the same date as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.

Under the new law, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after Dec. 31, 2015:

  • Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by Mar. 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same. By having most partnership returns due one month before individual returns are due, taxpayers and practitioners will generally not have to extend, or scurry around at the last minute to file, the returns of individuals who are partners in partnerships.   Form 1120S Instructions    Form 1065 Instructions
  • C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by Apr. 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month.  Form 1120 Instructions

Keep in mind that these important changes to the filing deadlines generally won’t go into effect until the 2016 returns have to be filed. Under a special rule for C corporations with fiscal years ending on June 30, the change is deferred for ten years — it won’t apply until tax years beginning after Dec. 31, 2025.

Revised Extended Due Dates for Various Returns

Taxpayers who can’t file a tax form on time can ask the IRS for an extension to file the form. Effective for tax returns for tax years beginning after Dec. 31, 2015, the new law directs the IRS to modify its regulations to provide for a longer extension to file a number of forms, including the following:

  • Form 1065 (U.S. Return of Partnership Income) will have a maximum extension of six-months (currently, a 5-month extension applies). The extension will end on Sept. 15 for calendar year taxpayers.
  • Form 1041 (U.S. Income Tax Return for Estates and Trusts) will have a maximum extension of five and a half months (currently, a 5-month extension applies). The extension will end on Sept. 30 for calendar year taxpayers.
  • The Form 5500 series (Annual Return/Report of Employee Benefit Plan) will have a maximum automatic extension of three and a half months (under currently law, a 2½ month period applies). The extension will end on Nov. 15 for calendar year filers.

FinCEN Report Due Date Revised

Taxpayers with a financial interest in or signature authority over certain foreign financial accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Currently, this form must be filed by June 30 of the year immediately following the calendar year being reported, and no extensions are allowed.   FinCEN Form 114 Instructions

Under the new law, for returns for tax years beginning after Dec. 31, 2015, the due date of FinCEN Report 114 will be Apr. 15 with a maximum extension for a 6-month period ending on Oct. 15. The IRS may also waive the penalty for failure to timely request an extension for filing the Report, for any taxpayer required to file FinCEN Form 114 for the first time.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call at 760-237-4000 or e-mail at andy@farkascpa.com.

EXCHANGE OF RIGHTS TO MANUFACTURE AND/OR DISTRIBUTE PRODUCTS WAS LIKE-KIND EXCHANGE

In a private letter ruling, IRS has held that a taxpayer’s exchange of certain manufacturing and/or distribution rights with respect to a given group of products, for other manufacturing and/or distribution rights with respect to that same group of products, was a like-kind exchange with no recognition of gain or loss.

Background. Code Sec. 1031(a)(1) provides generally that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of a like kind which is to be held either for productive use in a trade or business or for investment.

Reg. § 1.1031(a)-1(b) provides that, as used in Code Sec. 1031(a), the words “like kind” have reference to the nature or character of the property and not to its grade or quality, and that an exchange of one kind or class of property for a different kind or class is not a like-kind exchange.

Reg. § 1.1031(a)-2(c)(1) provides that an exchange of intangible personal property qualifies for nonrecognition of gain or loss under Code Sec. 1031 only if the exchanged intangible properties are of a like kind. No like classes are provided for intangible properties. Whether intangible personal property is of a like kind to other intangible personal property generally depends on (i) the nature or character of the rights involved (e.g., a patent or a copyright) and (ii) the nature or character of the underlying property to which the intangible personal property relates.

Facts. Taxpayer entered into two types of agreements: the Single Activity Agreements and the Dual Activity Agreements.

Under the Single Activity Agreements, Taxpayer has rights to distribute BB, a group of Products of various different brand names, appearances, ingredients, packaging, manufacturing processes, and marketing strategies, within Territory 1 or Territory 2.

Under the Dual Activity Agreements, Taxpayer has rights to manufacture and distribute AA, a group of Products of various different brand names, appearances, ingredients, packaging, and marketing strategies, that are different from BB. Products are nondepreciable tangible personal property. The Dual Activity Agreements grant Taxpayer the right to manufacture and distribute AA within Territory 1 or Territory 2.

The length of the term, the renewable periods, and the geographical territories covered for the rights vary among the agreements within the Dual Activity Agreements and the Single Activity Agreements. In addition, the conditions imposed in connection with the manufacturing and distribution rights such as marketing, quality control, and inventory maintenance also vary among the agreements.

Another party, Exchanger, entered into two types of agreements: the Replacement Dual Activity Agreements and the Replacement Single Activity Agreements. These agreements have the same set of counter parties as Taxpayer’s agreements. The Replacement Single Activity Agreements grant Exchanger the right to distribute BB within Territory 3, Territory 4, or Territory 5. The Replacement Dual Activity Agreements grant Exchanger the right to manufacture and distribute AA within Territory 3, Territory 4, or Territory 5. The length of the term, the renewable periods, and the geographical territories covered for the rights vary among the agreements within the Replacement Dual Activity Agreements and the Replacement Single Activity Agreements. In addition, the obligations imposed in connection with the distribution rights such as marketing, quality control, and inventory maintenance also vary among the agreements.

For economic and historical reasons, manufacturers of AA have long acted as distributors of AA. The inclusion of both business activities in the Dual Activity Agreements and Replacement Dual Activity Agreements reflects the underlying economics and longstanding historical relationship between the two. Manufacturing and distribution of AA is frequently best performed by a single entity as part of an integrated business process.

Taxpayer enters into two exchanges with Exchanger. In the first exchange, Taxpayer will simultaneously exchange its Single Activity Agreements with Exchanger’s Replacement Single Activity Agreements. In the second exchange, Taxpayer will simultaneously exchange its Dual Activity Agreements for Exchanger’s Replacement Dual Activity Agreements.

The rights under the Dual Activity Agreements and the Single Activity Agreements are held by Taxpayer for productive use in a trade or business. The rights under the Replacement Dual Activity Agreements and the Replacement Single Activity Agreements will be held by Taxpayer for productive use in a trade or business. The proportionate values of the manufacturing and distribution rights are roughly similar across both the Dual Activity Agreements and the Replacement Dual Activity Agreements.

Both of the exchanges were exchanges of like-kind property. IRS determined that both of the exchanges are exchanges of like-kind property only.

The Agreements are intangible property that grant rights related to the manufacturing and/or distribution of BB or AA. Because, in both exchanges, Taxpayer and Exchanger will simultaneously exchange the Agreements, the only issue is whether the exchanged Agreements are of a like kind. That determination depends on (i) the nature or character of the rights involved and (ii) the nature or character of the underlying property to which the agreements relate. (Reg. § 1.1031(a)-2(c)(1))

The exchanged Single Activity Agreements. The Single Activity Agreements and the Replacement Single Activity Agreements are both in the nature of BB distribution agreements. Distribution of BB is a single business activity. The terms of the agreements are substantially similar, and any difference among them is a difference in grade or quality.

Accordingly, the nature or character of the Single Activity Agreements and the Replacement Single Activity Agreements are of a like kind.

The second requirement for the Agreements to be of a like kind is that the underlying property subject to the Single Activity Agreements and Replacement Single Activity Agreements must itself be of a like kind. The underlying property to which the intangible rights relate is BB, a group of Products that are distributed in a largely similar manner. BB includes Products with different brand names, appearances, ingredients, packaging, manufacturing processes, and marketing strategies. Nevertheless, all of BB are distributed in a substantially similar manner to a largely common set of customers who resell them to end customers who, in turn, use each of the Products of BB for a substantially similar purpose. Any differences among BB that are relevant to distribution are differences in grade or quality, and not differences in nature or character.

Accordingly, the underlying property subject to the Single Activity Agreements and the Replacement Single Activity Agreements is of a like kind.

The exchanged Dual Activity Agreements. The Dual Activity Agreements and the Replacement Dual Activity Agreements are both in the nature of AA manufacturing and distribution agreements. Manufacturing and distribution are two distinct business activities and the rights to each would not, absent some close connection between these activities, be of a like kind.

IRS, however, noted the economic and historic connections between manufacturing and distributing AA. In addition, manufacturing rights and distribution rights granted under the agreements can only be exercised in conjunction with each other under the agreements. The proportionate values of the manufacturing rights and the distribution rights are roughly the same across all of the Dual Activity Agreements and Replacement Dual Activity Agreements. Accordingly, while manufacturing and distribution are business activities of a different nature or character, the close economic and unique historical connection between the manufacturing and the distribution of AA demands that they be treated as two aspects of a single business activity where the rights to manufacturing and distribution are contained within the same integrated agreement.

The terms of the agreements are substantially similar in granting rights to manufacture and distribute AA. Each agreement grants rights related to a single business activity, the integrated manufacturing and distribution of AA. The differences in the length of the term, renewable periods, geographical territories covered, quality control provisions, marketing activity obligations, etc. vary among the Dual Activity Agreements and the Replacement Dual Activity Agreements. These differences, however, are insubstantial, relating as they do to the grade or quality of the rights rather than to their nature or character.

Consequently, the nature or character of the manufacturing and distribution rights in the Dual Activity Agreements and Replacement Dual Activity Agreements are of a like kind.

The second requirement for the agreements to be of a like kind is that the underlying property subject to the Dual Activity Agreements and the Replacement Dual Activity Agreements must itself be of a like kind. The underlying property to which the intangible rights to manufacture and distribute relate is AA, a group of Products that share substantially similar manufacturing and distribution processes. AA includes Products with different brand names, appearances, ingredients, packaging, and marketing strategies. Nevertheless, all of AA are manufactured using a substantially similar process in facilities of a common design, and they are distributed in a substantially similar manner to a largely common set of customers who resell them to end customers who, in turn, use each of the Products of AA for a substantially similar purpose. Any differences among AA that are relevant to manufacturing or distribution are differences in grade or quality, and not differences in nature or character.

Accordingly, under the second prong of the test in § 1.1031(a)-2(c), the underlying property to which the tangible rights granted by the Dual Activity Agreements and the Replacement Dual Activity Agreements relate is of a like kind.

FINAL REGS ISSUED ON PARTNERSHIP VARYING INTERESTS RULE

IRS has issued final regs on 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 tax year. The final regs also modify the existing regs on the required tax year of a partnership.

For proposed regs issued contemporaneously with the final regs on the interaction of the allocable cash basis item rules and the tiered partnership rules with the rules for determining a partner’s distributive share when a partner’s interest varies.

Background on partners’ distributive shares. A partner separately takes into account his distributive share of partnership items of income, gain, loss, deduction, or credit. (Code Sec. 702(a)) Each partner reports his distributive share of the partnership income, deductions and other items (including guaranteed salary and interest payments) for a partnership tax year on his return for his tax year within or with which the partnership tax year ends. (Code Sec. 706(a))

Under Code Sec. 706(d), subject to exceptions, if there is a change in a partner’s interest in the partnership during the partnership’s tax year, each partner’s distributive share of any partnership item of income, gain, loss, deduction or credit for such tax year is determined by using any method prescribed by regs which takes into account the varying interests of the partners in the partnership during the year (varying interests rule). Code Sec. 706(d) was added by the Deficit Reduction Act of ’84 (P.L. 98-369) to clarify that the varying interests rule applies to the disposition of a partner’s entire interest in the partnership as well as the disposition of less than a partner’s entire interest, and to authorize IRS to prescribe methods for determining a partner’s distributive share of partnership items when there is a change in the partners’ interests during the partnership’s tax year. The existing regs have not been revised to reflect these ’84 Act changes.

Under a change made by the Taxpayer Relief Act of ’97 (P.L. 105-34), the tax year of the partnership closes with respect to a partner whose entire interest in the partnership terminates by reason of death. (Code Sec. 706(c)(2)(A)) However, the existing regs do not reflect this ’97 Act change.

In 2009, IRS issued proposed regs 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 regs.

Final regs. The final regs finalize the varying interest rules contained in the 2009 proposed regs and include modifications to the proposed regs. Reg. § 1.706-4 provides rules for determining the partners’ distributive shares of partnership items when a partner’s interest in a partnership varies during the tax year as a result of the disposition of a partial or entire interest in a partnership (as described in Reg. § 1.706-1(c)(2) and Reg. § 1.706-1(c)(3)), or with respect to a partner whose interest in a partnership is reduced (as described in Reg. § 1.706-1(c)(3)), including by the entry of a new partner (collectively, a “variation”). The final regs further provide that, in all cases, all partnership items for each tax year must be allocated among the partners, and no items may be duplicated, regardless of the particular provision of Code Sec. 706 which applies, and regardless of the method or convention adopted by the partnership.

The final regs contains two exceptions for allocations that would otherwise be subject to the rules of Reg. § 1.706-4: one exception applies to certain partnerships with contemporaneous partners, and the other exception applies to certain service partnerships. The final regs expand the scope of the former exception as provided in the 2009 proposed regs to include allocations of items attributable solely to a particular segment (see below) of a partnership’s year among partners who are partners of the partnership for that entire segment. Under the contemporaneous partners exception, the general rule with respect to the varying interests of a partner won’t preclude changes in the allocations of the distributive share of items among contemporaneous partners for the entire partnership tax year (or among contemporaneous partners for a segment if the item is entirely attributable to a segment), if: (1) any variation in a partner’s interest isn’t 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 (2) the allocations resulting from the modification satisfy Code Sec. 704(b) and its regs. (Reg. § 1.706-4(b)(1))

The final regs apply the service partnership safe harbor exception to any partnership (rather than to service partnership as narrowly defined in the 2009 regs) for which capital isn’t a material income-producing factor. For any tax year in which there is a change in any partner’s interest in a partnership for which capital isn’t a material income-producing factor, the partnership and such partner may choose to determine the partner’s distributive share of partnership income, gain, loss, deduction, and credit using any reasonable method to account for the varying interests of the partners in the partnership during the tax year provided that the allocations satisfy Code Sec. 704(b). (Reg. § 1.706-4(b)(2))

Interim closing and proration. Under the final regs, a partnership takes into account any variation in the partners’ interests in the partnership during the tax year in determining the distributive share of partnership items under Code Sec. 702(a) by using either the interim closing method or the proration method. The regs allow a partnership to use different methods for different variations within the partnership’s tax year. However, the regs provide that IRS may place restrictions on the ability of a partnership to use different methods during the same tax year in guidance published in the Internal Revenue Bulletin. (Reg. § 1.706-4(a)(3)(iii))

A partnership may, by agreement of the partners, perform regular interim closings of its books on a monthly or semi-monthly basis, regardless of whether any variation occurs. The final regs 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 partnership uses the interim closing method.

Any partnership using the interim closing method (but not partnerships using the proration method) may use a monthly convention to account for partners’ varying interests. Under the monthly convention, in the case of a variation occurring on the first through the 15th day of a calendar month, the variation is deemed to occur 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 at the end of the last day of that calendar month. The final regs provide that the selection of the convention must be made by agreement of the partners. In the absence of an agreement to use a convention, the partnership will be deemed to have chosen the calendar day convention.

Partnerships using the proration method must use a calendar day convention. Partnerships using the interim closing method have the option of using a semi-monthly or monthly convention in addition to the calendar day convention.

Because the final regs allow partnerships to use both the proration and interim closing methods during a tax year, the final regs provide that the partnership and all of its partners must use the same convention for all variations for which the partnership chooses to use the interim closing method.

The final regs provide that all variations within a tax year are deemed to occur no earlier than the first day of the partnership’s tax year, and no later than the close of the final day of the partnership’s tax year. Thus, under the semi-monthly or monthly convention, a variation occurring on January 1st through January 15th for a calendar year partnership will be deemed to occur at the beginning of the day on January 1. The conventions aren’t applicable to a sale or exchange of an interest in the partnership that causes a termination of the partnership under Code Sec. 708(b)(1)(B); instead, such a sale or exchange will be considered to occur when it actually occurred.

The final regs provide that in the case of a partner who becomes a partner during the partnership’s tax year as a result of a variation, and ceases to be a partner as a result of another variation, and under the application 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 instead 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 tax year during which the partner actually owned an interest. (Reg. § 1.706-4(c)(2)(ii))

Extraordinary items. The final regs, as the 2009 proposed regs did, provide special rules for the allocation of extraordinary items listed in Reg. § 1.706-4(e)(2) (e.g., items from the disposition or abandonment of certain items, from assets disposed of in an applicable asset disposition, from an accounting method change initiated after a variation occurs, etc.). The final regs provide that the extraordinary item rules apply to partnerships using the interim closing method. Thus, the final regs require the allocation of extraordinary items as an exception to (1) the proration method, which would otherwise ratably allocate the extraordinary items across the segment, and (2) the conventions, which might otherwise inappropriately shift extraordinary items between a transferor and transferee. 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 partnership tax year (for example, the limitation for Code Sec. 179 expenses).

Under the final regs, extraordinary items must generally 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, the allocation of extraordinary items will generally be the same regardless of the partnership’s selected method or convention. 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 transferor will not be allocated a portion of the extraordinary item, regardless of when the transfer is deemed to occur under the partnership’s convention.

Publicly traded partnerships. The final regs provide that a publicly traded partnership (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. A PTP using a monthly convention generally may consistently treat all variations occurring during 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. (Reg. § 1.706-4(c)(2)(iii)) Because PTPs are also allowed to use the semi-monthly and monthly conventions with respect to variations for which the PTP uses the proration method, the final regs provide that PTPs must use the same convention for all variations during the tax year. 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 exception in Reg. § 1.706-4(c)(2)(ii) does not apply to PTPs with respect to holders of publicly traded units (as described in Reg. § 1.7704-1(b) or Reg. § 1.7704-1(c)(1))

Segments and proration periods. Under the final regs, segments are specific periods of the partnership’s tax 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 proration method. The partnership must divide 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.

The first segment begins with the beginning of the tax year of the partnership and ends at the time of the first interim closing of the partnership’s books. Any additional segment begins immediately after the closing of the prior segment and ends at the time of the next interim closing. However, the last segment of the partnership’s tax year ends no later than the close of the last day of the partnership’s tax year. If there are no interim closings, the partnership has one segment, which corresponds to its entire tax year. (Reg. § 1.706-4(a)(3)(vi))

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 partnership 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 proration method. However, each proration period 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. (Reg. § 1.706-4(a)(3)(iii))

The final regs continue to provide that each segment is generally treated as a separate distributive share period. For purposes of determining allocations to segments, any special limitation or requirement relating to the timing or amount of income, gain, loss, deduction, or credit applicable to the entire partnership tax year will be applied based on the partnership’s satisfaction of the limitation or requirements as of the end of the partnership’s tax year. For example, the expenses related to the election to expense a Code Sec. 179 asset must first be calculated (and limited if applicable) based on the partnership’s full tax 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 aren’t treated as separate tax years for purposes of Code Sec. 461(h) and Code Sec. 404(a)(5). Other provisions of the Code providing a convention for making a particular determination still apply; thus, conventions under Code Sec. 168 would apply first to determine when the property is placed in service or when the property is disposed of, and Code Sec. 706 would apply second to determine who was a partner during that segment.