Temp. Reg. explains change of partnership taxable year

Article Abstract:

The Tax Reform Act of 1986 has restricted the choice of a taxable year by partnerships after 1986. The IRS has issued Temporary Regulations explaining these restrictions. Under the Tax Reform Act, a business must use the calendar year as its taxable year unless it can show a business reason for using a non-calendar year, or unless the business uses: the taxable year of a partner who has a 50 percent or more interest in the business, the taxable year of all the principals, or the taxable year that results in the least aggregate deferral of income to the partners. Under the Revenue Act of 1987, a partnership, S corporation, or personal service corporation may elect to retain as its tax year the last tax year beginning in 1986. In some cases, a partnership can delay changing its taxable year until its first taxable year ending after 1987.

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Family partnerships may reduce tax liability if interests are validly transferred

Article Abstract:

Taxpayers who want to reduce liability by dividing income among certain family members through a family partnership are subject to increased scrutiny by the Internal Revenue Service and the Tax Courts. The Supreme Court has held that each partner must provide vital service to the original capital for a valid family partnership to be recognized. All facts are considered, including: conduct of parties in executing a partnership's provisions; relationship of the parties; parties' abilities and capital contributions. Tax planners must organize a family partnership along the same lines as any other partnership, thus guaranteeing similar partner rights for family members, in order to avoid having the partnership invalidated due to the ability of certain family members to control other family members.

Cases, United States. Supreme Court

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Split into several partnerships not taxable

Article Abstract:

A letter ruling by the IRS has held that transfers of the assets of a partnership to multiple partnerships in which the members of the new partnerships have an interest of more than half of the capital and profits of the original partnership qualifies the partnerships as continuations of the original partnership. In the case ruled on by the IRS, there was no net change in the liabilities of the contributing partners, hence there was no distribution of money from the partnership and there was no recognizable gain on the contributions of the partners. Partnerships divided into two or more entities qualify as a continuation of the original partnership if the members had an interest in the original partnership in excess of 50%.

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