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specific rules in later portions of section 706(d) aimed at
curbing the retroactive allocation of deductions to late-entering
partners through the use of the cash method of reporting, see
sec. 706(d)(2), or through the use of tiered partnerships, see
sec. 706(d)(3). The conference report accompanying DEFRA
explains as follows:
The Tax Reform Act of 1976 amended the partnership
provisions to preclude a partner who acquires his
interest late in the taxable year from taking into
account partnership items incurred prior to his entry
into the partnership (“retroactive allocations” of
partnership losses). The 1976 Act provided that when
partners’ interests change during the taxable year,
each partner’s share of various items of partnership
income, gain, loss, deduction, and credit is to be
determined by taking into account each partner’s
varying interest in the partnership during the taxable
year.
Some taxpayers argue that the 1976 Act rule may be
avoided in the case of tiered partnership arrangements
on the theory that losses sustained by the lower-tier
partnerships are allocable to the day in the upper-tier
partnership’s taxable year on which the lower-tier
partnership’s taxable year closes. Similarly,
partnerships using the cash receipts and disbursements
method of accounting have avoided the retroactive
allocation rules by deferring actual payment of accrued
deductions until near the end of the partnership’s
taxable year. [H. Conf. Rept. 98-861, at 855 (1984),
1984-3 C.B. (Vol. 2) 1, 109; emphasis added.]
The origins of section 706(d)(1) reveal that it was not
intended to articulate an additional “change of interest”
triggering event which would require the application of special
rules to determine a partner’s distributive share for the
partnership taxable year in which the change occurred. Rather,
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