Impact of Section 706 Tax Allocation Rules on Hedge Funds

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January 2017


The Internal Revenue Service and the Treasury Department issued Final Regulations under Section 706 of the Internal Revenue Code (the “Final Regulations”) providing rules that determine a partner's distributive share of partnership tax items when a partner's interest in the partnership varies during the tax year (the “varying interest rules”). The regulations are generally effective for tax years beginning after August 3, 2015,and thus are applicable in 2016 for all calendar year partnerships.


  • Since the Final Regulations generally apply to partnership tax years that begin on or after August 3, 2015, most calendar-year partnerships must apply these rules to their 2016 tax years and beyond.
  • Funds should review current allocation method to determine whether the current allocation method is acceptable under the new rule.
  • If the method chosen is not the interim closing method, determine whether there is an agreement by partners.
  • If the partners have not agreed or documented their agreement of an alternative method, funds should consider consulting with counsel to determine what next steps should be taken.
  • Methods and conventions used should be placed in the fund’s books and records by the extended due date of the partnership tax return.

Contact us

Kara Friedenberg

Partner, Asset Management Tax, PwC US

Todd McArthur

Principal, M&A Tax, PwC US

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