While, under Regulations § 1.441-1(d), a partnership whose “required year” changes must switchto the new “required year,” Regulations § 1.706-1(b)(3)(iii) nevertheless provides a de minimis rulefor partnerships that use a year based on the least aggregate deferral rules. Under this de minimisrule, if “the [partnership] taxable year that results in the least aggregate deferral produces anaggregate deferral that is less than .5 when compared to the aggregate deferral of the current936937938939940940.1941942
2/14/2020Checkpoint | Document4/20taxable year, the partnership's current taxable year will be treated as the taxable year with theleast aggregate deferral,” and thus no change is permitted.¶ 9.04[b] Nonconforming Year Owing to Valid BusinessPurposeEstablishing a valid business purpose for a nonconforming taxable year is difficult. A number ofpossible justifications for a nonconforming year are specifically rejected by the legislative history of§ 706(b)(1)(C), including (1) the use of a particular year for regulatory or financial accountingpurposes; (2) the hiring patterns of a particular business; (3) the use of a particular year foradministrative purposes, such as to facilitate the admission or retirement of partners, promotion ofstaff, or compensation or retirement arrangements; and (4) the fact that business price lists, modelyears, or other items change on an annual basis consistent with such year.The Service has issued guidelines as to when it will rule that a partnership's business purpose issufficient to justify a change in the partnership's taxable year. The Service has ruled that, indetermining whether a partnership has established a sufficient business purpose to justify consentto use a nonconforming taxable year, both tax factors and nontax factors must be considered.Moreover, the ruling states that, where the use by a partnership of a nonconforming year results indeferral or distortion of income, the nontax factors must be “compelling.” The examples in theruling indicate that the Service is not likely to view many nontax factors as compelling.A partnership is also permitted to have a taxable year other than its required taxable year if it (1)elects to use an alternative year for accounting purposes under § 444 (discussed below), (2) electsto use a 52–53 week taxable year that ends with reference to its required taxable year or a taxableyear elected under § 444, or (3) establishes a business purpose for such taxable year and obtainsthe Service's approval under § 442.The requirements for establishing a business purpose and obtaining the Service's approval for analternative accounting year under § 442 are a little broader than those specified with respect to§ 706(b). In particular, permission will be granted for a nonconforming taxable year if 25 percent ormore of the taxpayer's gross receipts for the twelve-month period preceding the desired year-endare recognized in the last two months of such period, and this test has been met for each of thepreceding three twelve-month periods.