Publication 541 |
2000 Tax Year |
Tax Year
Taxable income is figured on the basis of a tax year. A "tax year"
is the accounting period used for keeping records and reporting income
and expenses.
Partnership.
A partnership determines its tax year as if it were a taxpayer.
However, there are limits on the year it can choose. In general, a
partnership must use its required tax year. Exceptions to this rule
are discussed under Exceptions to Required Tax Year, later.
Partners.
Partners can change their tax year only if they receive permission
from the IRS. This also applies to corporate partners, who are usually
allowed to change their accounting periods without prior approval if
they meet certain conditions.
Closing of tax year.
Generally, the partnership's tax year is not closed because of the
sale, exchange, or liquidation of a partner's interest, the death of a
partner, or the entry of a new partner. However, if a partner sells,
exchanges, or liquidates his or her entire interest, or a partner
dies, the partnership's tax year is closed for that partner. See
Distributive share in year of disposition under
Partner's Income or Loss, later.
Required Tax Year
A partnership generally must conform its tax year to its partners'
tax years. The rules for determining the required tax year are as
follows.
- Majority interest tax year. If one or more
partners having the same tax year own an interest in partnership
profits and capital of more than 50% (a majority interest), the
partnership must use the tax year of those partners.
Testing day. The partnership determines if there is a
majority interest tax year on the testing day, which is usually the
first day of the partnership's current tax year.
Change in tax year. If a partnership's majority interest
tax year changes, it will not be required to change to another tax
year for 2 years following the year of change.
- Principal partner. If there is no majority
interest tax year, the partnership must use the tax year of all its
principal partners. A principal partner is one who has a 5% or more
interest in the profits or capital of the partnership.
- Least aggregate deferral of income. If there is
no majority interest tax year and the principal partners do not have
the same tax year, the partnership generally must use a tax year that
results in the least aggregate deferral of income to the
partners.
Least aggregate deferral of income.
The tax year that results in the least aggregate deferral of income
is determined as follows.
- Figure the number of months of deferral for each partner
using one partner's tax year. Count the months from the end of that
tax year forward to the end of each other partner's tax year.
- Multiply each partner's months of deferral figured in step
(1) by that partner's interest in the partnership profits for the year
used in step (1).
- Add the results in step (2) to get the total deferral for
the tax year used in step (1).
- Repeat steps (1) through (3) for each partner's tax year
that is different from the other partners' years.
The partner's tax year that results in the lowest number in step
(3) is the tax year that must be used by the partnership. If more than
one year qualifies as the tax year that has the least aggregate
deferral of income, the partnership can choose any year that
qualifies. However, if one of the years that qualifies is the
partnership's existing tax year, the partnership must retain that tax
year.
Example.
Rose and Irene each have a 50% interest in a partnership that uses
a fiscal year ending June 30. Rose uses a calendar year while Irene
has a fiscal year ending November 30. The partnership must change its
tax year to a fiscal year ending November 30 because this results in
the least aggregate deferral of income to the partners. This was
determined as shown in the following table.
Year End 12/31: |
Year End |
Profits Interest |
Months of Deferral |
Interest x Deferral |
Rose |
12/31 |
0.5 |
-0- |
-0- |
Irene |
11/30 |
0.5 |
11 |
5.5 |
Total Deferral |
5.5 |
Year End 11/30: |
Year End |
Profits Interest |
Months of Deferral |
Interest x Deferral |
Rose |
12/31 |
0.5 |
1 |
0.5 |
Irene |
11/30 |
0.5 |
-0- |
-0- |
Total Deferral |
0.5 |
Special de minimis rule.
If the tax year that results in the least aggregate deferral
produces an aggregate deferral that is less than 0.5 when compared to
the aggregate deferral of the current tax year, the partnership's
current tax year is treated as the tax year with the least aggregate
deferral.
Procedures.
Generally, determination of the partnership's required tax year is
made at the beginning of the partnership's current tax year. However,
the IRS can require the partnership to use another day or period that
will more accurately reflect the ownership of the partnership.
The change to a required tax year is treated as initiated by the
partnership with the consent of the IRS. No formal application for a
change in tax year is needed.
Notifying IRS.
Any partnership that changes to a required tax year must notify the
IRS by writing at the top of the first page of its tax return for its
first required tax year, "FILED UNDER SECTION 806 OF THE TAX REFORM
ACT OF 1986."
Short period return.
When a partnership changes its tax year, a short period return must
be filed. The short period return covers the months between the end of
the partnership's prior tax year and the beginning of its new tax
year.
If a partnership changes to the tax year resulting in the least
aggregate deferral of income, a statement must be attached to the
short period return showing the computations used to determine that
tax year. The short period return must indicate at the top of page 1,
"FILED UNDER SECTION 1.706-1T."
Exceptions to Required
Tax Year
There are two exceptions to the required tax year rule.
Business purpose tax year.
If a partnership establishes an acceptable business purpose for
having a tax year different from its required tax year, the different
tax year can be used. The deferral of income to the partners is not
considered a business purpose.
See Business Purpose Tax Year in Publication 538
for
more information.
Section 444 election.
Partnerships can elect under section 444 of the Internal Revenue
Code to use a tax year different from both the required tax year and
any business purpose tax year. Certain restrictions apply to this
election. In addition, the electing partnership may be required to
make a payment representing the value of the extra tax deferral to the
partners.
See Section 444 Election in Publication 538
for more
information.
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