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Let's now apply these concepts to Sunchaser Shakery.

Nicholas and Emily formed a calendar-year partnership, Sunchaser Shakery,

on April 1st.

The following were incurred before commencing business operations on

September 1st.

Legal fees of $1,200, legal notices required by law of $1,500.

Commissions for sale of partnership interest of $8,100 and

state filing fees of $500.

Now we want to know,

what amount of organizational cost is deductible in the current year?

So recall that we can amortize organizational expenses over 180 months

beginning in the month with which the partnership begins business.

If organizational costs, however,

are less than $50,000, then the first $5,000 is immediately deductible.

In other words, we do not have to amortize it.

Organizational expenses, again, just as a reminder, include those that are incident

to the creation of the partnership, and chargeable to the capital account.

So when we consider the expenses here to look at which ones would qualify,

we have legal fees of $1200, the notices required by law of $1500,

and then the state filing fees, Of 500.

So the commissions for

sale of partnership interests, those are syndication costs, all right?

That's for marketing partnership interests, and those must be capitalized,

but not amortized.

So we have $3200 of organizational expenses.

And because these are less than $5,000, which is just the statutory limit,

we can immediately expense all of these with no amortization.

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So in other words, we can deduct the full amount of the $3,200.

We do not have to amortize them over 180 months because we

did not have more than $50,000 worth of total expenses.

Sunchaser Shakery partnership operates on a fiscal year ending March 31.

Partner 1 reports income on a fiscal year ending March 31st,

while Partner 2 reports income on a fiscal year ending September 30th.

Both partners have a 50% interest in partnership profits.

If Sunchaser does not elect a tax year under section 444, and does not establish

a business purpose for a different period, what tax year must it use?

So recall that we have three rules that we examine to determine the required taxable

year for a partnership.

There is the majority partners rule, which basically says look at all

the partners that have a more than 50% ownership interest and

see whether they all used the same year.

Here we have partner 1 and we have partner 2, each of which is 50/50.

And they use different years,

so the majority partners rule is not applicable to our situation.

So that rules out, so we move to the next one, which is the principle partners rule.

And that rule says look at partners who have at least a 5%

ownership interest to see if they use the same tax year.

And here again we have two principle partners, because we have two partners

that own more than 5%, but again they do not use the same year.

So this rule does not help us either.

So at that point we go to the last one which is the least aggregate

deferral rule.

And that's the one where we're interested in the aggregate deferral,

the amount of time that it would take for taxes to be submitted to the government.

In other words, how long is the income recognition and

subsequent tax payments deferred?

And here, we're interested in aggregate deferral, which is the sum of the products

of deferral in each partner, and in each partner's interest in partnership profits.

It's kind of confusing, so the easiest way to do it is to set up a little table.

And it's sort of a contingency table where we look at,

what if the partnership tax year were March 31st?

And what if it was September 30th?

And these are our two options because that's what our two partners

currently use.

So then we'll look at it for each partner.

So Partner 1 is currently a March 31 partner, and

Oartner 2 is a September 30th partner.

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And so we'll just kind of ask ourselves,

what is the situation in each of the four cells of this little table?

So let's assume that the partnership tax year ends in March 31st, first.

And then, in that case, Partner 1 is a March 31 year end partner, so

how many months of deferral would we have?

Well, we'd have 0, because Partner 1 uses March 31, and we're currently assuming

that the partnership would have a March 31 year end, so there's no deferral.

And this partner is a 50% partner, all right?

We would then add that to the situation for Partner 2.

So again, assuming that the partnership has a March 31 year end, and

Partner 2 has a September 30th year end, what would be the deferral?

All right well, we would have six months of deferral, from March to September.

That's how long it would take for the income to be reported on that

partner's tax return as it passes through, and they're a 50% partner.

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So once we factor all this together the sum of the two,

the total aggregate deferral across these two partners,

we see that when weighted, it's about three months on average.

All right, now let's fill out the rest of the table assuming that the partnership

has a year end of September 30th.

So if it has a year end of September 30th and Partner 1 is using a March 31 year

end, we have from September to March where income would be deferred.

So in other words, a six month period, and it's a 50% partner.

And if the partnership has a September 30th year end but

Partner 2 is a September 30th year end partner, as before,

we have a 0 deferral because they match, 50% partner.

And so again, we see that there are a weighted average deferral here,

aggregate deferral of three months.

So basically, we end up with two applicable years,

both of which have the same amount of deferral.

And so because one of the qualifying tax years is the current tax year end of

the partnership, March 31, then basically,

the partnership is required to maintain its current tax year.

However, if one of these numbers was different,

we would go with the one that was the least amount, and

that's the purpose of the rule, the least aggregate deferral.

So again, our answer here is,

there's no change allowed to be made by the partnership, because they're currently

using a tax year that results in the least amount of deferral possible.

The only other possible option would be September 30th, but

it's the same amount of deferral, so the code prevents them from making any switch.