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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. [Emphasis added.]
The language used in the prior version of section 706(c)(2)
reveals that it served two distinct but complementary functions.
First, former section 706(c)(2) identified certain events
(triggering events) which required the partnership either to
close its taxable year with respect to a partner or to determine
a partner’s distributive share by taking into account the change
in the partner’s interest which had occurred over the course of
the partnership taxable year. Second, former section 706(c)(2)
addressed the manner in which a partner’s distributive share was
to be determined as a result of the occurrence of a triggering
event.
DEFRA amended section 706(c)(2) by severing its two
functions and moving the second over to newly enacted section
706(d). In particular, the provisions of former section
706(c)(2) emphasized above were stricken and consolidated to form
the general rule set out in section 706(d)(1).13 The purpose
behind this consolidation was to facilitate the addition of
13 Subsec. (d) was added to sec. 706 by sec. 72(a) of the
Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat.
494, 589. The deletions from sec. 706(c)(2) were mandated by
DEFRA sec. 72(b), captioned “Conforming Amendments.”
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