Straddle tax years
Corporations with tax years that straddled year end 2017 got instructions on how to calculate their 2018 US taxes. An issue arises because the corporate tax rate fell from 35% to 21% on January 1, 2018.
The IRS said in a notice in mid-April that such a corporation should calculate its taxes using the 35% rate for the entire straddle year and then the 21% rate for the entire straddle year and then apportioning the tax at the different rates based on the number of days in calendar year 2017 versus 2018.
The notice is Notice 2018-38.
It does not expressly address what happens where the corporation is a partner in a partnership. Partnerships allocate their income to the partners. The entire income for the year is allocated on the last day of the partnership tax year.
Thus, if the partnership uses a November 30 year, all of the income through November 30 would have shown up on November 30, 2017. If the partnership uses a January 31 year, all of the income for the year would have been allocated to partners on January 31, 2018.
If the partnership had sold an asset, triggering a large gain, on November 30, under the notice, the gain would have been taxed to a partner whose tax year straddles the end of 2017 partly at a 35% rate and partly at a 21% rate. It seems like the same principle should apply where income is allocated to the partner by the partnership on a single day during the straddle year.