TAX 9863 Lecture Notes - Lecture 35: Telecommunications Policy Of The United States, Deferral, Calender

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14 Feb 2020
On January 1, 2018, Acme Corp. (a C corporation with a January 31 fiscal year), Moe, Larry,
and Curly (calendar-year taxpayers) form a limited liability company (taxed as a
partnership) to operate a service business in which Moe, Larry, and Curly actively
a. Based solely on the above facts, what is the LLC’s taxable year if Acme Corp. is a
97% partner and Moe, Larry, and Curly each have a 1% interest? What if they are
all equal partners? What if they are all equal partners and Curly has a June 30
fiscal year?
If Acme Corp is the 97% partner and Moe, Larry and Curly each have a 1%
interest then Section 706(b)(1)(B) First Tier is the rule that applies. It states if
one or more partners with the same taxable year own in the aggregate more
than 50% interest in profits and capital, then the partnership must adopt
that taxable year (referred to in the statute as the “majority interest taxable
year”. In this case they would follow Acme Corp.’s taxable year since it is the
97% partner.
If they are all equal partners, then the taxable year would be that of Moe, Larry,
and Curly because they have the same taxable year and own 75% interest
which is the majority interest (referred to in First Tier). Therefore, the
taxable year would be the calender year (December 31).
If Curly has a June 30th year end, we no longer have a majority group with a common
taxable year end. The most that we have is 50% attributable to the interests held
by Moe and Larry. However, the definition of majority interest taxable year
requires interests in excess of 50%.
Accordingly, the next test is to determine whether all principal partners (partners
holding 5% or greater interests in profits or capital) have the same taxable year
end. If so, we use that year end. That is not the case. All four partners are
principle partners and they do not all have the same taxable year end.
Having failed the first two tests, we must use the least aggregate deferral method
to determine the appropriate taxable year end.
Testing under the least aggregate deferral method would be as follows:
Assuming the adoption of Acme Corp.’s 1/31 fiscal year end
Taxable Year
Profits Interest
Months of
Interest X
Acme Corp
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