# 1.702-3T 4-Year spread (temporary).
(a) *Applicability.* This section applies to a partner in a partnership if—
(1) The partnership is required by section 806 of the Tax Reform Act of 1986 (the 1986 Act), Pub. L. 99-514, 100 Stat. 2362, to change its taxable year for the first taxable year beginning after December 31, 1986 (partnership's year of change); and
(2) As a result of such change in taxable year, items from more than one taxable year of the partnership would, but for the provisions of this section, be included in the taxable year of the partner with or within which the partnership's year of change ends.
(b) *Partner's treatment of items from the partnership's year of change*—(1) *In general.* Except as provided in paragraph (c) of this section, if a partner's share of “income items” exceeds the partner's share of “expense items,” the partner's share of each and every income and expense item shall be taken into account ratably (and retain its character) over the partner's first 4 taxable years beginning with the partner's taxable year with or within which the partnership's year of change ends.
(2) *Definitions*—(i) *Income items.* For purposes of this section, the term *income items* means the sum of—
(A) The partner's distributive share of taxable income (exclusive of separately stated items) from the partnership's year of change,
(B) The partner's distributive share of all separately stated income or gain items from the partnership's year of change, and
(C) Any amount includible in the partner's income under section 707(c) on account of payments during the partnership's year of change.
(ii) *Expense items.* For purposes of this section, the term *expense items* means the sum of—
(A) The partner's distributive share of taxable loss (exclusive of separately stated items) from the partnership's year of change, and
(B) The partner's distributive share of all separately stated items of loss or deduction from the partnership's year of change.
(c) *Electing out of 4-year spread.* A partner may elect out of the rules of paragraph (b) of this section by meeting the requirements of § 301.9100-7T of this chapter (temporary regulations relating to elections under the Tax Reform Act of 1986).
(d) *Special rules for a partner that is a partnership or S corporation*—(1) *In general.* Except as provided in paragraph (d)(2) of this section, a partner that is a partnership or S corporation may, if otherwise eligible, use the 4-year spread (with respect to partnership interests owned by the partner) described in this section.
(2) *Certain partners prohibited from using 4-year spread*—(i) *In general.* Except as provided in paragraph (d)(2)(ii) of this section, a partner that is a partnership or S corporation may not use the 4-year spread (with respect to partnership interests owned by the partner) if such partner is also changing its taxable year pursuant to section 806 of the 1986 Act.
(ii) *Exception.* If a partner's year of change does not include any income or expense items with respect to the partnership's year of change, such partner may, if otherwise eligible, use the 4-year spread (with respect to such partnership interest) described in this section even though the partner is a partnership or S corporation. See examples 13 and 14 in paragraph (h) of this section.
(e) *Basis of partner's interest.* The basis of a partner's interest in a partnership shall be determined as if the partner elected not to spread the partnership items over 4 years, regardless of whether such election was in fact made. Thus, for example, if a partner is eligible for the 4-year spread and does not elect out of the 4-year spread pursuant to paragraph (c) of this section, the partner's basis in the partnership interest will be increased in the first year of the 4-year spread period by an amount equal to the excess of the income items over the expense items. However, the partner's basis will not be increased again, with respect to the unamortized income and expense items, as they are amortized over the 4-year spread period.
(f) *Effect on other provisions of the Code.* Except as provided in paragraph (e) of this section, determinations with respect to a partner, for purposes of other provisions of the Code, must be made with regard to the manner in which partnership items are taken into account under the rules of this section. Thus, for example, a partner who does not elect out of the 4-year spread must take into account, for purposes of determining net earnings from self-employment under section 1402(a) for a taxable year, only the ratable portion of partnership items for that taxable year.
(g) *Treatment of dispositions*—(1) *In general.* If a partnership interest is disposed of before the last taxable year in the 4-year spread period, unamortized income and expense items that are attributable to the interest disposed of and that would be taken into account by the partner for subsequent taxable years in the 4-year spread period shall be taken into account by the partner as determined under paragraph (g)(2) of this section. For purposes of this section, the term *disposed of* means any transfer, including (but not limited to) transfers by sale, exchange, gift, and by reason of death.
(2) *Year unamortized items taken into account*—(i) *In general.* If, at the end of a partner's taxable year, the fraction determined under paragraph (g)(2)(ii) of this section is—
(A) Greater than
2/3, the partner must continue to take the unamortized income and expense items into account ratably over the 4-year spread period;
(B) Greater than
1/3 but less than or equal to
2/3, the partner must, in addition to its ratable amortization, take into account in such year 50 percent of the income and expense items that would otherwise be unamortized at the end of such year (however, this paragraph (g)(2)(i)(B) is only applied once with respect to a partner's interest in a particular partnership); or
(C) Less than or equal to
1/3, the partner must take into account the entire balance of unamortized income and expense items in such year.
(ii) *Determination of fraction.* For purposes of paragraph (g)(2)(i) of this section, the numerator of the fraction is the partner's proportionate interest in the partnership at the end of the partner's taxable year and the denominator is the partner's proportionate interest in the partnership as of the last day of the partnership's year of change.
(h) *Examples.* The provisions of this section may be illustrated by the following examples.
[T.D. 8167, 52 FR 48530, Dec. 23, 1987, as amended by T.D. 8435, 57 FR 43896, Sept. 23, 1992]