242
INTERNAL REVENUE CODE OF 1954
SEC. 705. DETERMINATION OF BASIS OF PARTNER'S INTEREST. (a) GENERAL RULE. — The adjusted basis of a partner's interest in
a partnership shall, except as provided in subsection (b), be the basis of such interest determined under section 722 (relating to contributions to a partnership) or section 742 (relating to transfers of partnership interests)— (1) increased by the sum of his distributive share for the taxable year and prior taxable years of— (A) taxable income of the partnership as determined under section 703(a), (B) income of the partnership exempt from tax under this title, and (C) the excess of the deductions for depletion over the basis of the property subject to depletion; and (2) decreased (but not below zero) by distributions by the partnership as provided in section 733 and by the sum of his distributive share for the taxable year and prior taxable years of— (A) losses of the partnership, and (B) expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account. (b) ALTERNATIVE RULE. — The Secretary or his delegate shall prescribe by regulations the circumstances under which the adjusted basis of a partner's interest in a partnership may be determined by reference to his proportionate share of the adjusted basis of partnership property upon a termination of the partnership. SEC. 706. TAXABLE YEARS OF PARTNER AND PARTNERSHIP. (a)
Y E A R IN W H I C H PARTNERSHIP INCOME IS I N C L U D I B L E. — I n
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) ADOPTION OF TAXABLE Y E A R. — (1) PARTNERSHIP'S TAXABLE YEAR.—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 or his delegate, a business purpose therefor. (2) P A R T N E R ' S TAXABLE YEAR.—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 or his delegate, a business purpose therefor. (3) PRINCIPAL PARTNER.—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. (c) CLOSING OF PARTNERSHIP YEAR.^—• (1) GENERAL RULE.—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 §705
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