Regarding the july 1 to june 30 fiscal year the

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South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
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Chapter 11 / Exercise 5
South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
Raabe/Young/Nellen/Hoffman
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Regarding the July 1 to June 30 fiscal year, the desired tax deferral has little chance of success. Under § 706(b), the partnership must use the calendar year unless Harry and Sally can convince the IRS that a business purposesexists for a tax year other than the calendar year. Nothing in the fact pattern indicates a valid business purpose exists for a fiscal year. The partnership may also elect to use a tax year other than the required tax year if the deferral period is three months or less (e.g., September, October or November year-end), and if the partnership agrees to deposit tax on the deferred income at a specified tax rate. This election cannot be used in this situation to obtain a July 1 to June 30 fiscal year.
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South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
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Chapter 11 / Exercise 5
South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
Raabe/Young/Nellen/Hoffman
Expert Verified
104. The MOG Partnership reports ordinary income of $60,000, long-term capital gain of $12,000, and tax-exempt income of $12,000. The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income. Their allocation of ordinary income will be reduced accordingly, and Olivia will be allocated a proportionately greater share of ordinary income. (In other words, each partner will receive allocations totaling 1/3 of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket.a.Describe the elements that must be included in a partnership agreement in order for an allocation to have "economic effect."b.Discuss whether or not the MOG allocation would be permitted and provide your reasoning.a.For partnership allocations to meet the “economic effect” tests under the § 704(b) Regulations, a partnership agreement should provide that(1) capital accounts will be maintained, (2) liquidating proceeds will be distributed according to capital account balances, and (3) any partner with a deficit capital account balance will contribute cash to the partnership to eliminate the deficit.b.The MOG allocation will not be permitted. Though the partnership agreement may meet the “economic effect” tests under § 704, the allocation does not produce pre-tax economic consequences to Molly and George (i.e., the allocation does not meet the “substantial” requirement). Therefore, the allocations are not effective for tax purposes as they have no function other than the reduction of the partners’ combined tax liability.105. On a corporate Form 1120, Schedule M-1 (or M-3) is used to reconcile book and tax income, and ScheduleM-2 reconciles retained earnings to the amounts shown on Schedule L. How are these reconciliations accomplished on a partnership return? What additional information must be provided? A partnership is not a taxpaying entity and does not report taxable income, per se. On Form 1065, the Analysis of Income (Loss) schedule (page 5) accumulates the partnership’s equivalent of taxable income based on the various income and deductions reported on the partnership’s Schedule K (page 4). This taxable income

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