ACCTG 5310-CH 14-Research Problem 2

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Accounting

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Apr 3, 2024

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Research Problem 2: Barney Chang and Aldrin, Inc., a domestic C corporation, have decided to form BA LLC. The new entity will produce a product that Barney recently developed and patented. Barney and Aldrin each will own a 50% capital and profits interest in the LLC. Barney is a calendar year taxpayer, and Aldrin is taxed using a June 30 fiscal year-end. BA does not have a “natural business year” and elects to be taxed as a partnership. a. Determine the taxable year of the LLC under the Code and Regulations. b. Two years after formation of BA, Barney sells half of his interest (25%) to Aldrin. Can BA retain the taxable year determined in part (a)? Why or why not? ANS: a. As both partners possess an equal share of capital and profits in the LLC, utilizing the majority partner's tax year is not feasible. Moreover, given that both Barney and Aldrin hold principal roles, their tax years differ—one being a calendar year taxpayer and the other adopting a fiscal year. Consequently, adhering to the general rules, we must determine the partnership's tax year based on the least aggregate deferral rule. Despite both partners having an identical aggregate number of deferral months, an alternative tax year is available through the election of a 52 to 53-week taxable year concluding in the same week as the required taxable year. b. Following Barney's sale of half his interest to Aldrin, Inc., retaining the taxable year determined in part (a) may not be viable. This stems from the fact that one partner now owns over 50% of the capital and profits interest in the partnership. Consequently, Aldrin has the option to transition to a June 30 fiscal year as the taxable year.

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