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TITLE 26-INTERNAL REVENUE CODE (2) Partner'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, a business purpose therefor. (3) Principal partner For the purpose of this subsection, a princi- pal 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 para- graph (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) Partner who retires or sells interest in partner- ship (A) Disposition of entire interest The taxable year of a partnership shall close- (i) with respect to a partner who sells or exchanges his entire interest in a partner- ship, and (ii) with respect to a partner whose in- terest is liquidated, except that the tax- able year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership's taxable year. Such partner's distributive share of items described in section 702(a) for such year shall be determined, under regulations pre- scribed by the Secretary for the period ending with such sale, exchange, or liquida- tion. (B) Disposition of less than entire interest The taxable year of a partnership shall not close (other than at the end of a part- nership'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), 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. (Aug. 16, 1954, ch. 736, 68A Stat. 242; Oct. 4, 1976, Pub. L. 94-455, title II, § 213(c)(1), title XIX, § 1906(b)(13)(A), 90 Stat. 1547, 1834.) AMENDMENTs 1976-Subsec. (b)(1), (2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(2). Pub. L. 94-455, §§213(c)(1), 1906(b)(13)(A), substituted "or with respect to a part- ner 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" following "Secretary" in par. (A). EFFEcTIvE DATE OF 1976 AMENDMENT Amendment of subsec. (c)(2)(B) 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. SECTION REFEuRD TO IN OTHER SECTIONS This section is referred to in sections 704, 761, 6110 of this title. § 707. Transactions between partner and partnership (a) Partner not acting in capacity as partner If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this sec- tion, be considered as occurring between the partnership and one who is not a partner. (b) Certain sales or exchanges of property with re- spect to controlled partnerships (1) Losses disallowed No deduction shall be allowed in respect of losses from sales or exchanges of property (other than an interest in the partnership), directly or indirectly, between- (A) a partnership and a partner owning, directly or indirectly, more than 50 percent of the capital interest, or the profits inter- est, in such partnership, or (B) two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests. In the case of a subsequent sale or exchange by a transferee described in this paragraph, section 267(d) shall be applicable as if the loss were disallowed under section 267(a)(1). (2) Gains treated as ordinary income In the case of a sale or exchange, directly or indirectly, of property, which in the hands of the transferee, is property other than a cap- ital asset as defined in section 1221- (A) between a partnership and a partner owning, directly or indirectly, more than 80 percent of the capital interest, or profits in- terest, in such partnership, or (B) between two partnerships in which the same persons own, directly or indirectly, more than 80 percent of the capital interest or profits interests, any gain recognized shall be considered as or- dinary income. (3) Ownership of a capital or profits interest For purposes of paragraphs (1) and (2) of this subsection, the ownership of a capital or profits interest in a partnership shall be de- termined in accordance with the rules for constructive ownership of stock provided in section 267(c) other than paragraph (3) of such section. (c) Guaranteed payments To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263, for pur- Page 46