Qualifying a year-end under the natural business year rules.

• Author: Ellentuck, Albert B.

Facts

Alfred Brown Co. (ABC) is a general partnership with 10 partners, all reporting income on a calendar-year basis. The partnership has been reporting on a fiscal year ending September 30 since it was formed in 1980. ABC should be on a calendar-year basis, but would like to keep its existing tax year and has asked its tax adviser for assistance. He has analyzed ABC's monthly receipts for recent years and determined a seasonal pattern of operations, as shown in the table.

Issue

Can the partnership retain its tax year ending September 30?

Analysis

A partnership cannot have a tax year other than the tax year of the partners with a majority interest in partnership profits and capital unless it established a business purpose for such a fiscal year.

Companies are allowed to use a tax year that meets the requirements of a mechanical test previously prescribed by the IRS. Under this natural business year test, the gross receipts of the partnership for the two months prior to the desired tax year-end must be equal to at least 25% of the gross receipts for the entire 12-month period then ending. Further, the partnership's gross receipts for the two preceding 12-month periods must also pass this test.

As shown in the table, ABC cannot retain its year ending September 30, since gross receipts for August and September are not at least 25% of gross receipts for the 12 months ending September 30. (Note: Under certain circumstances, Sec. 444 provides for an election that allows certain partnerships to use a tax year other than a required year despite the inability to meet this 25% natural business year test.) However, the gross receipts for the two months ending Mar. 31, 1993 were 28% of the gross receipts for the 12 months then ending. Similarly, the February and March gross receipts for the two...