Tax year of all principal partners (i.e., all partners with a 5% or greater profit or capital
interest have the same year-end).
Year determined under the least aggregate deferral method (Figure 10.2 and
Example 20 in text).
29. If partners are dissatisfied with required year-end, they may petition IRS for permission
to use another tax year if they meet either of the following requirements.
Establish to the satisfaction of the IRS that a business purpose exists for
selecting an alternate tax year; usually selecting a natural business year-end.
A natural year end occurs when 25% or more of the gross receipts occur
in the last two months of a 12-month period for three consecutive years.
If the partnership satisfies this test, it can adopt the last month of this 12-
month period as its fiscal year.
If the partnership cannot meet this test, it may be very difficult to establish
a business purpose that satisfies the IRS.
Elect a year-end that provides no more than a three month deferral under § 444.
Existing partnerships may also elect under § 444. This election is
automatic, that is, if the partnership meets the requirements, the IRS will
not disallow the year-end.
Under this election, the partnership must maintain a tax deposit
account based on the deferred portion of partnership income. The deposit
is based on the highest individual tax rate, plus 1% (36% total), so the
cost of this election may be prohibitive.
Did you know?
Rev. Proc. 2006-46, 2006-2 CB 859, provides some administrative rules on the taxable year
issue. Among the rules affecting the “required” taxable year are the following:
Partnerships may elect or change their taxable year-ends to a “required” taxable year
without obtaining IRS approval.
A partnership using a taxable year that corresponds to its “required” taxable year generally
must obtain the approval of the IRS to retain the taxable year if its “required” taxable year
changes because of a change in ownership.
A partnership desiring a natural business year is affected by the following rules:
A partnership can automatically adopt a natural business year that satisfies the 25%