Question

. X, Y and Z form a partnership. X is a corporation with a 7/31 fiscal year, Y is a corporation with a 1/31 fiscal year, and Z is a calendar year and capital in the following alternative proportions:

A. 60% X, 20% Y, 20% Z

B. b. 50% X, 30% Y, 20% Z

C. Assume the XYX Partnership’s principal business activity is the preparation of tax returns. What taxable year might it prefer? Is that choice available to it?

Answer 1

Alternative - A

In this case the rule of majority partner will be applied. As such the tax year of X - corporation with 60% capital and profit share shall be taken as the partnership tax year.

Hence tax - year = 7/31 fiscal year

Alternative - B

In this case the rule of majority partner cannot be applied, since none of the partners had a share more than 50%. In such a case least aggregate of defferal of Income method is to be applied.

If X - Corporation is taken as tax year : -

There is no differal for X corporation, but Y corporation had 6 months differal ( i.e instead of 1/31 it will shift to 7/31) and for Z corporation 7 Months differal. ( i.e instead of 12/31 it will change to 7/31)

Aggregate is calculated as

Partner	differed months	share	product
X	0	0.5	0
Y	6	0.3	1.8
Z	7	0.2	1.4
	Aggregate of defferals		3.2

If Y - corporation 1/31 is taken as tax year of partnership.

Partner	differed months	share	product
X	6	0.5	3
Y	0	0.3	0
Z	1	0.2	0.2
	Aggregate of defferals		3.2

If Z - Corporation - calender year is taken as tax year of partnership

Partner	differed months	share	product
X	5	0.5	2.5
Y	11	0.3	3.3
Z	0	0.2	0
	Aggregate of defferals		5.8

According to least aggregate method, we have take the least of 3.20, 3.20 and 5.80. Hence tax year of the partnership can be either that of X - Corporation ( 7/31 ) or It can also choose ( 1/31). Only of these two choices is be selected as tax year of partership.

Alternative - C

Provisions contained in Sec 444 of Internal revenue code allows for use of business purpose tax year in the place of required tax year ( as seen in case - A and case - B above).