Final answer:
The sentence with correct formatting and punctuation for titles is the one where 'All You Need Is Love' is in quotation marks and 'Magical Mystery Tour' is in regular typeface, conforming to standard English grammar rules for song and album titles respectively.
Step-by-step explanation:
The correct sentence with titles formatted and punctuated correctly is:
One of my favorite songs by The Beatles is "All You Need Is Love," which was on their Magical Mystery Tour album.
In English grammar, song titles are placed within quotation marks, while album titles are either italicized or underlined. This formatting rule helps indicate that one is a smaller subset or part of the other, with songs being part of an album.