Question

Problem 16-28 (LO. 1)

Red, White, and Blue are unrelated corporations engaged in real estate development. The three corporations formed a joint venture (treated as a partnership) to develop a tract of land.

a. Complete the statement below that outlines the tax year the joint venture must adopt under the following ownership interests. Assume that the venture does not have a natural business year.

Tax Year Ending Interest in Joint Venture Red March 31 60% Blue June 30 20% White October 31 20%

The will apply in determining the partnership's tax year. Therefore, the partnership will use the same tax year as .

b.   The following data is provided regarding ownership interests.

Tax Year Ending Interest in Joint Venture Red October 31 30% Blue January 31 30% White September 30 40%

Complete the tables below to determine the tax year the joint venture must adopt using the least aggregate deferral method.

Carry the product answers out to one decimal place. Enter the product as a decimal (for example, 5.6). If an amount is zero, enter 0.

Test for Fiscal Year Ending October 31 Partner Year-End Date Profit % Months of Deferral Product Red 10/31 30 Blue 1/31 30 White 9/30 40 Aggregate deferral months

Test for Fiscal Year Ending January 31 Partner Year-End Date Profit % Months of Deferral Product Red 10/31 30 Blue 1/31 30 White 9/30 40 Aggregate deferral months

Test for Fiscal Year Ending September 30 Partner Year-End Date Profit % Months of Deferral Product Red 10/31 30 Blue 1/31 30 White 9/30 40 Aggregate deferral months

Therefore, the fiscal year-end date for the partnership is: .

Answer 1

a. The tax year for a joint venture when the members of the joint venture have different tax years would be determined by uaing the Majority partner's rule, which would be the tax year followed by the member having the majority stake(more than 50%) in the joint venture.

According to the question it is clear that Red Corporation has got the highest of the stake in the joint venture being 60% compared to Blue and White, whose shares are 20% and 20% respectively.

Therefore,applying the Majority partner's rule, the tax year for the partnership shall be determined and hence the tax year shall be the same of Red Corporation, which is March 31.

b. Determination of tax year using Least Aggregate Deferral of Income :

• Under this method, firstly partner's tax year should be selected and the deferred months of all the partners from the selected tax year date shall be calculated
• The product of the profit and deferred months has to be calculated and aggregatedTthe same has to be repeated considering the tax year of all partners respectively
• The tax year that gives the least aggregate shall be the Tax year

Least aggregate method

Test for Fiscal Year Ending October 31 Partner Year-End Date Profit % Months of Deferral Product Red 10/31 30 0 0 Blue 1/31 30 3 0.9 White 9/30 40 11 4.4 Aggregate deferral months 5.3

Test for Fiscal Year Ending January 31 Partner Year-End Date Profit % Months of Deferral Product Red 10/31 30 9 2.7 Blue 1/31 30 0 0 White 9/30 40 8 3.2 Aggregate deferral months 5.9

Test for Fiscal Year Ending September 30 Partner Year-End Date Profit % Months of Deferral Product Red 10/31 30 1 0.3 Blue 1/31 30 4 1.2 White 9/30 40 0 0 Aggregate deferral months 1.5

The least of the aggregate deferral months shall be selected. In the above case, the least aggregate is 1.5 which is 30 September.

Therefore, the fiscal year-end date for the partnership is 30 September.