Determining and analyzing the partnership tax year of least aggregate deferral.

• Author: Ellentuck, Albert B.

Facts: After being rescued from a desert island, a group of former castaways are forming a production company, GI Screen Partners, to make a television series about their adventures. The three partners in the joint venture will be Howell Enterprises (a corporation with a June 30 year-end), Gilligan Co. (an S corporation with a calendar year-end) and Island Tours, Inc. (a corporation with a February 28 year-end). Proposed ownership of the joint venture is as follows:

Partner Year-end Interest in profits Howell Enterprises June 30 35% Gilligan Co. December 31 25% Island Tours, Inc. February 28 40% Issue: What is the required year-end for GI Screen Partners? What alternatives do the partners have if they do not wish to adopt the required year-end?

Analysis

The general rule is that a partnership must adopt the year-end of its majority partners (Sec. 706(b)(1) (B) (i)). As no partner or group of partners owning more than 50% in partnership capital and profits has the same yearend, GI Screen Partners cannot determine a year-end based on the general rule. Under Sec. 706(b) (1) (B) (ii), the partnership must then adopt the tax year-end of all of its principal partners. A principal partner is one with a 50%-or-more interest in profits or capital. Because all of the principal partners in GI Screen Partners have different yearends, the partnership cannot determine its required year-end under this method either. After failing to determine a required year-end under either of these two provisions, Temp, Regs. Sec. 1.706-IT(a)(1) provides that the partnership must adopt the tax year of least aggregate deferral.

The tax year of least aggregate deferral is the year-end that generates the least total amount of deferral to all the partners. It can be the year-end of any partner. For test purposes, the number of months of deferral are counted from the partnership test year-end through each partner's year-end. GI Screen Partner's tax year of least aggregate deferral can be determined as follows:

1. Test of June 30 year-end Months of Interest in Test Partner deferral profits amount Howell 0 35% 0 Gilligan 6 25% 1.5 Island Tours 8 40% 3.2 Aggregate deferral 4.7 2. Test of December 31 year-end Months of Interest in Test Partner deferral profits amount Howell 6 35% 2.1 Gilligan 0 25% 0 Island Tours 2 40% 0.8 Aggregate deferral 2.9 3. Test of February 28 year-end Months of Interest in Test Partner deferral profits amount Howell 4 35% 1.4 Gilligan 10 25% 2.5 Island...