IRS Revenue Procedure
2002-37

 Code Secs. 442, 706, 898, 1502



<<FULL TEXT>>

26 CFR 601.204: Changes in accounting periods and in methods of
accounting.
(Also Part I, sections 442, 706, 898, 1502; 1.442-1, 1.706-1, 1.1502-76.)


REV. PROC. 2002-37

CONTENTS

SECTION 1. PURPOSE SECTION

2. BACKGROUND
.01 Taxable Year Defined
(1) In general
(2) Annual accounting period
(3) Required taxable year
.02 Change in Taxable Year
(1) In general
(2) Annualization of short period return
(3) No retroactive change in annual accounting period
.03 Approval of a Change

SECTION 3. SIGNIFICANT CHANGES

SECTION 4. SCOPE
.01 Applicability
(1) In general
(2) Certain 52-53-week taxable years
(3) Natural business year
(4) Section 898 election
.02 Inapplicability
(1) Prior change
(2) Interest in a pass-through entity
(3) Shareholder of certain FSCs or IC-DISCs
(4) FSC or an IC-DISC
(5) S corporation
(6) Electing S corporation
(7) PSC
(8) CFC or FPHC
(9) Tax-exempt organization
(10) Possessions corporation
(11) Cooperative association
(12) Corporation with a required taxable year
.03 Nonautomatic Changes
.04 Examples

SECTION 5. DEFINITIONS
.01 Corporation
.02 Pass-through Entity
.03 Required Taxable Year
.04 Permitted Taxable Year
.05 Ownership Taxable Year
.06 Natural Business Year
(1) Prior three years gross receipts
(2) Natural business year
(3) Special rules
.07 First Effective Year
.08 Short Period

SECTION 6. TERMS AND CONDITIONS OF CHANGE
.01 In General
.02 Short Period Tax Return
.03 Subsequent Year Tax Returns
.04 Record Keeping/Book Conformity
.05 Changes in Natural Business Year
.06 Changes in Ownership Taxable Year
.07 52-53-week Taxable Years
.08 Creation of Net Operating Loss or Capital Loss
.09 Creation of General Business Credits
.10 Concurrent Change for Related Entities

SECTION 7. GENERAL APPLICATION PROCEDURES
.01 Approval
.02 Filing Requirements
(1) Where to file
(2) When to file
(3) Label
(4) Signature requirements
(5) No user fee
(6) Additional information
(7) Consolidated application

SECTION 8. REVIEW OF APPLICATION
.01 Service Center Review
.02 Review of Director

SECTION 9. EFFECTIVE DATE AND TRANSITION RULE
.01 Effective Date
.02 Transition Rule

SECTION 10. EFFECT ON OTHER DOCUMENTS

SECTION 11. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION


SECTION 1. PURPOSE

This revenue procedure provides the exclusive procedures for certain
corporations to obtain automatic approval to change their annual
accounting period under section 442 of the Internal Revenue Code and
section 1.442-1(b) of the Income Tax Regulations. This revenue procedure
modifies, amplifies, and supersedes Rev. Proc. 2000-11, 2000-3 C.B. 309. A
corporation complying with all the applicable provisions of this revenue
procedure will be deemed to have established a business purpose and
obtained the approval of the Commissioner of the Internal Revenue Service
to change its annual accounting period under section 442 and the
regulations thereunder.


SECTION 2. BACKGROUND

.01 TAXABLE YEAR DEFINED.

(1) IN GENERAL. Section 441(b) and section 1.441-1(b)(1) provide that
the term "taxable year" generally means the taxpayer's annual accounting
period, if it is a calendar or fiscal year, or, if applicable, the
taxpayer's required taxable year.

(2) ANNUAL ACCOUNTING PERIOD. Section 441(c) and section 1.441-1(b)(3)
provide that the term "annual accounting period" means the annual period
(calendar year or fiscal year) on the basis of which the taxpayer
regularly computes its income in keeping its books.

(3) REQUIRED TAXABLE YEAR. Section 1.441-1(b)(2) provides that certain
taxpayers must use the particular taxable year that is required under the
Code and the regulations thereunder. See section 1.441-1(b)(2) for
examples of taxpayers, including certain corporations, with required
taxable years.


.02 CHANGE IN TAXABLE YEAR.

(1) IN GENERAL. Section 1.442-1(a)(1) generally provides that a
taxpayer that wants to change its annual accounting period and use a new
taxable year must obtain the approval of the Commissioner.

(2) ANNUALIZATION OF SHORT PERIOD RETURN. Section 443(b) and section
1.443-1(b)(1)(i) generally provide that if a return is made for a short
period resulting from a change of an annual accounting period, the taxable
income for the short period must be placed on an annual basis by
multiplying the income by 12 and dividing the result by the number of
months in the short period. Unless section 443(b)(2) and section
1.443-1(b)(2) apply, the tax for the short period generally is the same
part of the tax computed on an annual basis as the number of months in the
short period is of 12 months. But see, for example, sections 1.852-3(e),
1.857-2(a)(4), and 1.1502-76 for exceptions to this general rule for a
regulated investment company (RIC), a real estate investment trust (REIT),
and a subsidiary corporation ceasing to be a member of a consolidated
group, respectively.

(3) NO RETROACTIVE CHANGE IN ANNUAL ACCOUNTING PERIOD. Unless
specifically authorized by the Commissioner, a taxpayer may not request,
or otherwise make, a retroactive change in annual accounting period,
regardless of whether the change is to a required taxable year.


.03 APPROVAL OF A CHANGE. Section 1.442-1(b) provides, in part, that in
order to secure the approval of the Commissioner to change an annual
accounting period, a taxpayer must file an application, generally on Form
1128, Application to Adopt, Change, or Retain a Tax Year, with the
Commissioner within such time and in such manner as is provided in
administrative procedures published by the Commissioner. In general, a
change in annual accounting period will be approved where the taxpayer
establishes a business purpose for the requested annual accounting period
and agrees to the Commissioner's prescribed terms, conditions, and
adjustments for effecting the change.


SECTION 3. SIGNIFICANT CHANGES

Significant changes to Rev. Proc. 2000-11 made by this revenue
procedure include:

.01 Section 4.01(1) of this revenue procedure provides that this
revenue procedure is the exclusive procedure for corporations within its
scope to change their annual accounting period;

.02 Section 4.01(2) of this revenue procedure waives only certain scope
restrictions for changes to (or from) a 52-53-week taxable year that
references the same calendar month;

.03 Section 4.01(3) of this revenue procedure provides that a
corporation that wants to change to or retain a natural business year that
satisfies the 25-percent gross receipts test described in section 5.05 of
this revenue procedure, or to a 52-53-week taxable year ending with
reference to such taxable year, may do so under this revenue procedure
notwithstanding certain of the limitations imposed under section 4.02;

.04 Section 4.02(1) of this revenue procedure reduces the period of
time required between a prior accounting period change and a change
effected under this revenue procedure from 6 calendar years to 48 months;

.05 Section 4.02(1) of this revenue procedure also adds to the list of
accounting period changes that will not be considered prior changes for
purposes of the 48-month rule: (a) a change to comply with section
1.1502-75, (b) any prior change made by a corporation whose majority
shareholder has changed its taxable year within the last 12 months if the
corporation wants to change to that shareholder's taxable year in order to
file consolidated financial statements, and (c) a change to a required
taxable year or an ownership taxable year;

.06 Section 4.02(2) of this revenue procedure adds to the list of
corporations with certain pass-through interests that are ineligible to
use this revenue procedure certain shareholders of a closely-held REIT;

.07 Section 4.02(2) of this revenue procedure also incorporates into
this list of potentially prohibited pass-through interests an interest in
a controlled foreign corporation (CFC), foreign personal holding company
(FPHC), or passive foreign investment company (PFIC) and, as a result,
allows an exception for de minimis interests in these entities;

.08 Section 4.02(2)(b) of this revenue procedure provides that, in
certain cases in which a partnership is owned 50-percent by each of two
partners, the corporate partner's interest in the partnership will be
disregarded;

.09 Section 4.02(8) of this revenue procedure provides an exception to
the scope restrictions for a CFC or FPHC that wants to change to its
required taxable year;

.10 Section 4.02(12) of this revenue procedure adds to the list of
corporations ineligible to use this revenue procedure a corporation not
otherwise described in this revenue procedure that has a required taxable
year, unless that corporation is changing to its required taxable year;

.11 Section 6.04 of this revenue procedure now provides certain
exceptions to the record keeping/book conformity rule; and

.12 Section 6.08 of this revenue procedure adds a term and condition to
prevent the carryback of capital losses generated in the short period.


SECTION 4. SCOPE

.01 APPLICABILITY.

(1) IN GENERAL. Except as provided in section 4.02, this revenue
procedure, which is the exclusive procedure for corporations within its
scope, applies to a corporation requesting automatic approval to change
its annual accounting period.

(2) CERTAIN 52-53-WEEK TAXABLE YEARS. This revenue procedure applies to
a corporation (including a member of a consolidated group) that wants to
change to (or from) a 52-53-week taxable year, subject to the provisions
of section 4.02 of this revenue procedure. However, notwithstanding
sections 4.02(1), (2), (3), (6), (8), and (11) of this revenue procedure,
this revenue procedure applies to a corporation (including a member of a
consolidated group) that wants to change from a 52-53-week taxable year
that references a particular month to a non-52-53-week taxable year that
ends on the last day of that month, and vice versa.

(3) NATURAL BUSINESS YEAR. Notwithstanding sections 4.02(2) and (3) of
this revenue procedure, this revenue procedure applies to a corporation
that wants to change to a natural business year that satisfies the
25-percent gross receipts test described in section 5.

(4) SECTION 898 ELECTION. Notwithstanding section 4.02 of this revenue
procedure, this revenue procedure applies to a CFC (as defined in section
957) that wants to revoke its one-month deferral election under section
898(c)(1)(B) and change its taxable year to the majority U.S. shareholder
year (as defined in section 898(c)(1)(C)).


.02 INAPPLICABILITY. This revenue procedure does not apply to the
following corporations:

(1) PRIOR CHANGE. A corporation that has changed its annual accounting
period at any time within the most recent 48-month period ending with the
last month of the requested taxable year. For this purpose, the following
changes will not be considered a change in annual accounting period:

(a) a prior change in accounting period by a corporation in order to
comply with the common taxable year requirement of either section
1.1502-75(d)(3)(v) or 1.1502-76(a)(1). See section 1.442-1(d);

(b) a prior change in accounting period by a corporation either
acquired within the last 12 months, or whose majority shareholder changed
its taxable year within the last 12 months, if that corporation currently
wants to change to the taxable year of its majority shareholder with which
it does not file consolidated tax returns in order to file consolidated
financial statements. For purposes of this section 4.02(1)(b), "majority
shareholder" means ownership that satisfies the test of section
1504(a)(2), substituting "more than 50 percent" for "at least 80 percent;"

(c) a prior change from a 52-53-week taxable year that references a
particular month to a non-52-53-week taxable year that ends on the last
day of that month, and vice versa; or

(d) a prior change in accounting period to a required taxable year or
an ownership taxable year.


(2) INTEREST IN A PASS-THROUGH ENTITY. A corporation that has an
interest in a pass-through entity as of the end of the short period.
However, an interest in a pass-through entity will be disregarded for this
purpose if any of the following conditions are met:

(a) the pass-through entity would be required under the Code or
regulations to change its taxable year to the new taxable year of the
corporation (or, if applicable in the case of a CFC or FPHC, to a taxable
year that begins one month-earlier than the new taxable year of the
corporation). See section 6.10 of this revenue procedure for a special
term and condition related to this exception;

(b) the pass-through entity is a partnership that is owned 50-percent
by each of two partners and the corporation and the partnership both want
to change to the taxable year of the other 50-percent partner. See section
6.10 of this revenue procedure for a special term and condition related to
this exception;

(c) the new taxable year of the corporation would result in no change
in or less deferral (as described in section 1.706-1(b)(3)) from the
pass-through entity than the present taxable year of the corporation. If
the pass-through entity is a partnership, CFC, or FPHC, the corporation
should compare the existing deferral period (between the pass-through
entity's and the corporation's current taxable years) with the new
deferral period (between the new required taxable year of the pass-through
entity and the corporation's new taxable year). See section 4.04 of this
revenue procedure for an example of this rule; or

(d) for pass-through entities not qualifying for the exceptions in
either section 4.02(2)(a) or (b) of this revenue procedure, the
pass-through entity in which the corporation has an interest has been in
existence for at least 3 taxable years and the interest is de minimis. For
this purpose, an interest in a pass-through entity is de minimis only if:

(i) for each of the prior 3 taxable years of the corporation, the
amount of income (including ordinary income or loss, capital gains or
losses, rents, royalties, interest, dividends and deduction equivalents of
credits) from such pass-through entity is less than or equal to (A) 5
percent of the corporation's gross receipts (or, in the case of a member
of a consolidated group, the consolidated group's gross receipts) for
those taxable years, and (B) $500,000; and

(ii) the amount of income from all such pass-through entities in the
aggregate is less than or equal to the amounts described in (A) and (B)
above. See section 4.04 of this revenue procedure for an example of this
rule;


(3) SHAREHOLDER OF CERTAIN FSCs OR IC-DISCs. A corporation that is a
shareholder of a foreign sales corporation (FSC) or interest charge
domestic international sales corporation (IC-DISC), as of the end of the
short period. However, an interest in a FSC or IC-DISC is disregarded if
either of the following conditions is met:

(a) the FSC or IC-DISC in which the corporation is the principal
shareholder (i.e., the shareholder with the highest percentage of voting
power as defined in section 441(h)) would be required to change its
taxable year pursuant to sections 1.921-1T(b)(4) and (b)(6) to the new
taxable year of the corporation. See section 6.10 of this revenue
procedure for a special term and condition related to this exception; or

(b) the new taxable year of the corporation would result in no change
in or less deferral of income (as determined under the principles of
section 1.706-1(a)(3)) from the FSC or IC-DISC than the present taxable
year of the corporation;


(4) FSC OR AN IC-DISC. A corporation that is a FSC or an IC-DISC. See
section 1.921-1T(b)(4) for rules regarding automatic changes of the annual
accounting period of a FSC or IC-DISC to the taxable year of its principal
shareholder;

(5) S CORPORATION. A corporation that is an S corporation (as defined
in section 1361). See Rev. Proc. 2002-38, 2002-22 I.R.B. 1037, for
procedures to follow for certain automatic changes in the annual
accounting period of an S corporation;

(6) ELECTING S CORPORATION. A corporation that attempts to make an S
corporation election for the taxable year immediately following the short
period, unless the change is to a permitted taxable year;

(7) PSC. A corporation that is a personal service corporation (PSC) (as
defined in section 441(i)). See Rev. Proc. 2002-38 for procedures to
follow for certain automatic changes in the annual accounting period of a
PSC;

(8) CFC OR FPHC. A corporation that is a CFC (as defined in section
957), including a CFC that is also a PFIC (as defined in section 1297(a)),
or a FPHC (as defined in section 552), unless the CFC or FPHC either does
not have a required taxable year under final regulations under section
898, or is changing to its required taxable year or to a 52-53-week
taxable year that references its required taxable year;

(9) TAX-EXEMPT ORGANIZATION. A corporation that is a tax-exempt
organization, other than an organization exempt from federal income tax
under sections 521, 526, 527, or 528. See Rev. Proc. 85-58, 1985-2 C.B.
740, for procedures to follow in changing an annual accounting period of a
tax-exempt organization that is not within the scope of this revenue
procedure;

(10) POSSESSIONS CORPORATION. A corporation that has in effect an
election under section 936;

(11) COOPERATIVE ASSOCIATION. A corporation that is a cooperative
association (within the meaning of section 1381(a)) with a loss in the
short period required to effect the change of annual accounting period,
unless the patrons of the cooperative association are substantially the
same in the year before the change of annual accounting period, in the
short period required to effect the change, and in the year following the
change. For purposes of this subsection, "substantially the same" means
that ownership of more than 90 percent of the cooperative association's
stock is owned by the same members; or

(12) CORPORATION WITH A REQUIRED TAXABLE YEAR. A corporation that is
not described in sections 4.02(1) through (11) of this revenue procedure
that has a required taxable year (e.g., a REIT, or a qualified settlement
fund or designated settlement fund as defined in section 1.468B), unless
the corporation is changing to its required taxable year.


.03 NONAUTOMATIC CHANGES. Corporations that are unable to obtain
automatic approval for a change in accounting period under this revenue
procedure, the applicable regulations, or any other revenue procedure must
secure prior approval from the Commissioner for a change in an accounting
period pursuant to section 442 and the regulations thereunder. See Rev.
Proc. 2002-39, 2002-22 I.R.B. 1046.

.04 EXAMPLES.

(1) Example 1.

(i) Corporations V, W, X, Y, and Z hold equal 20 percent interests in
the capital and profits of partnership ABC. V and W are calendar year
taxpayers. X and Y have taxable years ending June 30, and Z has a taxable
year ending September 30. ABC does not have a business purpose for a
particular taxable year, and thus, pursuant to section 1.706-1, ABC is
required to use a taxable year ending June 30 because that taxable year
results in the least aggregate deferral of income to its partners. Z
currently has a 3-month deferral period (the number of months from the end
of ABC's taxable year to the end of Z's taxable year). Z wants to change
its taxable year to a calendar year.

(ii) If Z changes its taxable year to a calendar year, ABC would be
required to change its taxable year under section 706 to its majority
interest taxable year, which is the calendar year. As a result of Z's new
taxable year and ABC's new taxable year, Z's deferral period would be
eliminated. Because Z's new taxable year would reduce Z's deferral, Z may
disregard its interest in ABC under section 4.02(2)(c) of this revenue
procedure.


(2) Example 2.

(i) Corporation X, a calendar year taxpayer, wants to change its
taxable year to a year ending June 30. X has interests in five
partnerships, ABC, DEF, GHI, JKL, and MNO. All of the partnerships have
been in existence for over three taxable years. X's interests in each of
ABC and DEF is greater than 50 percent. X's interest in GHI, JKL, and MNO
is 15 percent, 10 percent, and 5 percent, respectively. GHI uses the
majority interest taxable year ending May 31 and JKL and MNO each use
their respective majority interest taxable year ending December 31. X's
distributive share of income/(loss) from JKL for the prior three taxable
years is $300,000, $(100,000), and $200,000, respectively, and from MNO is
$300,000, $200,000, and $100,000, respectively. X's gross receipts for
each of those same taxable years was $15,000,000.

<<END RULING>>


(ii) X's interests in its pass-through entities will be disregarded
only if each pass-through entity satisfies one of the exceptions
enumerated under section 4.02(2) of this revenue procedure. In the instant
case, X's interests in ABC and DEF each meet the exception in section
4.02(2)(a) because X is the majority interest partner in each partnership.
X's interest in GHI meets the exception in section 4.02(2)(c) because X's
new taxable year would result in less deferral than its old taxable year
(the deferral between May 31 and June 30 of 1 month as compared to the
deferral between May 31 and December 31 of 7 months). Because X is not the
majority interest partner in JKL and MNO and because its new taxable year
would not result in less deferral from these partnerships, X's interests
in JKL and MNO may be disregarded only if they satisfy the de minimis
exception in section 4.02(2)(d). Although the income from JKL and MNO for
each of the prior three taxable years is less than 5 percent of X's gross
receipts and $500,000, the income for year 1 from JKL and MNO, in the
aggregate ($300,000 and $300,000), exceeds the $500,000 amount specified
in section 4.02(2)(d)(ii). Consequently, JKL and MNO fail to satisfy the
de minimis exception in section 4.02(2)(d). Because X's interests in all
of its pass-through entities will not be disregarded, X is not within the
scope of this revenue procedure.


SECTION 5. DEFINITIONS

The following definitions apply solely for the purpose of this revenue
procedure:

.01 CORPORATION. The term "corporation" includes associations,
joint-stock companies, and insurance companies, as provided in section
7701(a)(3), and includes each member of a consolidated group. However, the
common parent of a consolidated group may change the group's annual
accounting period under this revenue procedure if every member of the
consolidated group meets all the requirements and complies with all the
conditions of this revenue procedure.

.02 PASS-THROUGH ENTITY. The term "pass-through entity" means a
partnership; a trust; an estate; a common trust fund (as defined in
section 584); a CFC (as defined in section 957), but only to the extent
the corporation is a U.S. shareholder (as defined in section 951(b)); an
FPHC (as defined in section 552), but only to the extent the corporation
is a U.S. shareholder (as defined in section 551(a)); a PFIC, but only if
the corporation has elected to treat such PFIC as a qualified electing
fund (as defined in section 1295); and a closely-held REIT (as defined in
section 6655(e)(5)(B)), but only to the extent the corporation is
described in section 6655(e)(5)(A).

.03 REQUIRED TAXABLE YEAR. The required taxable year is the particular
taxable year that certain taxpayers are required to use under the Code and
the regulations thereunder. See section 1.441-1(b)(2) for examples of
taxpayers, including certain corporations, with required taxable years.

.04 PERMITTED TAXABLE YEAR. A "permitted taxable year" of an electing S
corporation is the required taxable year; a taxable year elected under
section 444; a natural business year that satisfies the 25-percent gross
receipts test described in section 5.06 of this revenue procedure; the
ownership taxable year; or a 52-53-week taxable year that references the
required taxable year, taxable year elected under section 444, natural
business year, or ownership taxable year.

.05 OWNERSHIP TAXABLE YEAR. An "ownership taxable year" of an electing
S corporation is the taxable year (if any) that, as of the first day of
the first effective year, constitutes the taxable year of one or more
shareholders (including any shareholder that concurrently changes to such
taxable year) holding more than 50-percent of the corporation's issued and
outstanding shares of stock. For this purpose, under principles similar to
section 1.706-3T for determining the taxable year of a partnership, a
shareholder that is tax-exempt under section 501(a) is disregarded if such
shareholder is not subject to tax on any income attributable to the
electing S corporation. Tax-exempt shareholders are not disregarded,
however, if the electing S corporation is wholly-owned by such tax-exempt
entities. A shareholder in an electing S corporation that wants to
concurrently change its taxable year must follow the instructions
generally applicable to taxpayers changing their taxable years contained
in section 1.442-1(b), Rev. Proc. 2002-39, or any other applicable
administrative procedure published by the Commissioner.

.06 NATURAL BUSINESS YEAR. A corporation establishes a "natural
business year" under this revenue procedure by satisfying the following
"25-percent gross receipts test:"

(1) PRIOR THREE YEARS GROSS RECEIPTS.

(a) Gross receipts from sales and services for the most recent 12-month
period that ends with the last month of the requested annual accounting
period are totaled and then divided into the amount of gross receipts from
sales and services for the last 2 months of this 12-month period.

(b) The same computation as in (1)(a) above is made for the two
preceding 12-month periods ending with the last month of the requested
annual accounting period.


(2) NATURAL BUSINESS YEAR.

(a) Except as provided in (b) below, if each of the three results
described in (1) equals or exceeds 25 percent, then the requested annual
accounting period is deemed to be the taxpayer's natural business year.

(b) The taxpayer must determine whether any annual accounting period
other than the requested annual accounting period also meets the
25-percent gross receipts test described in (2)(a). If one or more other
annual accounting periods produce higher averages of the three percentages
(rounded to 1/100 of a percent) described in (1) than the requested annual
accounting period, then the requested annual accounting period will not
qualify as the taxpayer's natural business year.


(3) SPECIAL RULES. (a) To apply the 25-percent gross receipts test for
any particular year, the taxpayer must compute its gross receipts under
the method of accounting used to prepare its federal income tax returns
for such taxable year.

(b) Regardless of the taxpayer's method of accounting, the taxpayer's
share of income from a pass-through entity generally must be reported as
gross receipts in the month that the pass-through entity's taxable year
ends.

(c) If a taxpayer has a predecessor organization and is continuing the
same business as its predecessor, the taxpayer must use the gross receipts
of its predecessor for purposes of computing the 25-percent gross receipts
test.

(d) If the taxpayer (including any predecessor organization) does not
have a 47-month period of gross receipts (36-month period for requested
taxable year plus additional 11-month period for comparing requested
taxable year with other potential taxable years), then it cannot establish
a natural business year under this revenue procedure.

(e) If the requested taxable year is a 52-53-week taxable year, the
calendar month ending nearest to the last day of the 52-53-week taxable
year is treated as the last month of the requested taxable year for
purposes of computing the 25-percent gross receipts test.


.07 FIRST EFFECTIVE YEAR. The first effective year is the first taxable
year for which a change in annual accounting period is effective, e.g.,
the short period required to effect the change. Thus, in the case of a
change, the first effective year is the short period required to effect
the change. The first effective year is also the first taxable year for
complying with all the terms and conditions set forth in this revenue
procedure necessary to effect the change in annual accounting period.

.08 SHORT PERIOD. A corporation's short period is the period beginning
with the day following the close of the old taxable year and ending with
the day preceding the first day of the new taxable year.


SECTION 6. TERMS AND CONDITIONS OF CHANGE

.01 IN GENERAL. A change in annual accounting period filed under this
revenue procedure must be made pursuant to the terms and conditions
provided in this revenue procedure.

.02 SHORT PERIOD TAX RETURN. The corporation must file a federal income
tax return for the short period required to effect a change in annual
accounting period by the due date of that return, including extensions
pursuant to section 1.443-1(a). The corporation's taxable income for the
short period must be annualized and the tax must be computed in accordance
with the provisions of section 443(b) and section 1.443-1(b). However, for
changes to (or from) a 52-53-week taxable year referencing the same month
as the current (or requested) taxable year, see special rules in section
1.441-2.

.03 SUBSEQUENT YEAR TAX RETURNS. Returns for subsequent taxable years
generally must be made on the basis of a full 12 months (or on a
52-53-week basis) ending on the last day of the requested taxable year,
unless the corporation secures the approval of the Commissioner to change
that taxable year.

.04 RECORD KEEPING/BOOK CONFORMITY. The books of the corporation must
be closed as of the last day of the first effective year. Thereafter, the
corporation must compute its income and keep its books and records
(including financial statements and reports to creditors) on the basis of
the requested taxable year, except that this requirement shall not apply
(1) to books and records maintained solely for foreign law purposes (e.g.,
foreign tax reporting purposes), or (2) if the requested taxable year is
the corporation's required taxable year.

.05 CHANGES IN NATURAL BUSINESS YEAR. If an electing S corporation
changes to a natural business year that satisfies the 25-percent gross
receipts test under this revenue procedure and that annual accounting
period no longer qualifies as a natural business year, the taxpayer is
using an impermissible annual accounting period and should change to a
permitted taxable year or any other taxable year for which the taxpayer
establishes a business purpose to the satisfaction of the Commissioner.
Certain S corporations may qualify for automatic approval to change their
annual accounting period under Rev. Proc. 2002-38. Other taxpayers must
request approval under Rev. Proc. 2002-39.

.06 CHANGES IN OWNERSHIP TAXABLE YEAR. An electing S corporation that
changes to an ownership taxable year under this revenue procedure must
change to a permitted taxable year or any other taxable year for which the
taxpayer establishes a business purpose to the satisfaction of the
Commissioner, or request approval to retain its current taxable year, if,
as of the first day of any taxable year, its ownership taxable year
changes. Certain S corporations may qualify for automatic approval to
change or retain their annual accounting period under Rev. Proc. 2002-38.
Other taxpayers must request approval under Rev. Proc. 2002-39.

.07 52-53-WEEK TAXABLE YEARS. If applicable, the corporation must
comply with section 1.441-2(e) (relating to the timing of taking items
into account in those cases where the taxable year of a pass-through
entity ends with reference to the same calendar month as one or more of
its owners).

.08 CREATION OF NET OPERATING LOSS OR CAPITAL LOSS. If the corporation
generates a net operating loss (NOL) or capital loss (CL) in the short
period required to effect a change in annual accounting period, the
corporation may not carry the NOL or CL back, but must carry it over in
accordance with the provisions of sections 172 and 1212, respectively,
beginning with the first taxable year after the short period. However, the
short period NOL or CL is carried back or carried over in accordance with
sections 172 or 1212, respectively, if it is either: (a) $50,000 or less,
or (b) results from a short period of 9 months or longer and is less than
the NOL or CL for a full 12-month period beginning with the first day of
the short period.

.09 CREATION OF GENERAL BUSINESS CREDITS. If there is an unused general
business credit or any other unused credit generated in the short period,
the corporation must carry that unused credit forward. An unused credit
from the short period may not be carried back.

.10 CONCURRENT CHANGE FOR RELATED ENTITIES. If a corporation's interest
in a pass-through entity, FSC, or IC-DISC (related entity) is disregarded
pursuant to section 4.02(2)(a), 4.02(2)(b), or 4.02(3)(a) of this revenue
procedure because the related entity is required to change its taxable
year to the corporation's new taxable year (or, if applicable in the case
of a CFC or FPHC, to a taxable year beginning one month earlier than the
corporation's new taxable year), the related entity must change its
taxable year concurrently with the corporation's change in taxable year,
either under Rev. Proc. 2002-38, Rev. Proc. 2002-39, or this revenue
procedure, whichever is applicable. This related party change is required
notwithstanding the testing date provisions in sections 706(b)(4)(A)(ii),
898(c)(1)(C)(ii), section 1.921-1T(b)(6), and the special provision in
section 706(b)(4)(B).


SECTION 7. GENERAL APPLICATION PROCEDURES

.01 APPROVAL. Approval is hereby granted to any corporation within the
scope of this revenue procedure to change its annual accounting period,
provided the corporation complies with all the applicable provisions of
this revenue procedure. Approval is granted beginning with the first
effective year. A corporation granted approval under this revenue
procedure to change its annual accounting period is deemed to have
established a business purpose for the change to the satisfaction of the
Commissioner.

.02 FILING REQUIREMENTS.

(1) WHERE TO FILE. Any corporation (including the common parent of a
consolidated group) that wants to change its annual accounting period
pursuant to the provisions of this revenue procedure must complete and
file a Form 1128 with the Director, Internal Revenue Service Center,
Attention: ENTITY CONTROL, where the corporation files its federal income
tax return. No copies of Form 1128 are required to be sent to the national
office. The corporation also must attach a copy of the Form 1128 to the
federal income tax return filed for the short period required to effect
the change. Any corporation completing and filing a Form 1128 on behalf of
a CFC or FPHC must file the Form 1128 where the corporation files its
federal income tax return.

(2) WHEN TO FILE. A Form 1128 filed pursuant to this revenue procedure
will be considered timely filed for purposes of section 1.442-1(b)(1) only
if it is filed on or before the due date (including extensions) for filing
the federal income tax return for the short period required to effect such
change.

(3) LABEL. In order to assist in the processing of the change in annual
accounting period, reference to this revenue procedure must be made a part
of the Form 1128 by either typing or legibly printing the following
statement at the top of page 1 of the Form 1128: "FILED UNDER REV. PROC.
2002-37." For a CFC that is revoking a section 898(c)(1)(B) election under
section 4.01(4) of this revenue procedure, the label at the top of page 1
of the Form 1128 should read "REVOCATION OF section 898(c)(1)(B) ELECTION
FILED UNDER REV. PROC. 2002-37."
(4) SIGNATURE REQUIREMENTS. The Form 1128 must be signed on behalf of
the corporation requesting the change of annual accounting period by an
individual with authority to bind the corporation in such matters. If the
corporation is a member of a consolidated group, the Form 1128 must be
signed by a duly authorized officer of the common parent. If an agent is
authorized to represent the corporation before the Service, to receive the
original or a copy of correspondence concerning the application, or to
perform any other act(s) regarding the application on behalf of the
corporation, a power of attorney reflecting such authorization(s) should
be attached to the application. A corporation's representative without a
power of attorney to represent the corporation will not be given any
information about the application.

(5) NO USER FEE. A user fee is not required for an application filed
under this revenue procedure and, except as provided in section 8.01 of
this revenue procedure, the receipt of an application filed under this
revenue procedure may not be acknowledged.

(6) ADDITIONAL INFORMATION. In the case of a corporation changing to a
natural business year that satisfies the 25-percent gross receipts test
described in section 5.06 of this revenue procedure, the corporation must
supply the gross receipts for the most recent 47 months for itself (or any
predecessor) in compliance with the instructions to Form 1128.

(7) CONSOLIDATED APPLICATION. A common parent must file a single
application to change the annual accounting period of its consolidated
group, even if one or more of the subsidiaries of the group are requesting
to use a 52-53-week taxable year that ends with reference to the common
parent's requested taxable year or the subsidiaries are requesting to use
a taxable year consisting of 12 calendar months that coincides with the
reference month of the common parent's requested 52-53-week taxable year.
See section 1.1502-76(a)(1) (common parent must attach a statement to its
tax return as required by Rev. Proc. 89-56, 1989-2 C.B. 643, and comply
with Rev. Rul. 72-184, 1972-1 C.B. 289). On the Form 1128 filed on behalf
of a common parent and its subsidiaries, the common parent corporation
must clearly indicate which corporations in the consolidated group (if
any) are requesting a 52-53-week taxable year, and which (if any) are
requesting a taxable year consisting of 12 calendar months. In addition,
the common parent must answer all relevant questions on the Form 1128 for
each member of the consolidated group.


SECTION 8. REVIEW OF APPLICATION

.01 SERVICE CENTER REVIEW. A Service Center may deny a change of annual
accounting period under this revenue procedure only if (a) the Form 1128
is not filed timely, or (b) the corporation fails to meet the scope or any
term and condition of this revenue procedure. If the change is denied, the
Service Center will return the Form 1128 with an explanation for the
denial.

.02 REVIEW OF DIRECTOR. The appropriate director may ascertain if the
change in annual accounting period was made in compliance with all the
applicable provisions of this revenue procedure. Corporations changing
their annual accounting period pursuant to this revenue procedure without
complying with all the provisions (including the terms and conditions) of
this revenue procedure ordinarily will be deemed to have initiated the
change in annual accounting period without the approval of the
Commissioner. Upon examination, a corporation that has initiated an
unauthorized change of annual accounting period may be denied the change.
For example, the corporation may be required to recompute its taxable
income or loss in accordance with its former (or required, if applicable)
taxable year.


SECTION 9. EFFECTIVE DATE AND TRANSITION RULE

.01 EFFECTIVE DATE. This revenue procedure generally is effective for
all changes in annual accounting periods for which the first effective
year ends on or after May 10, 2002. However, if the time period for filing
Form 1128 with respect to a taxable year set forth in section 7.02(2) of
this revenue procedure has not yet expired, a corporation within the scope
of this revenue procedure may elect early application of the revenue
procedure by providing the notification set forth in section 7.02(3) on
the top of page 1 of Form 1128 and by satisfying the other procedural
requirements of section 7.

.02 TRANSITION RULE. If a corporation within the scope of this revenue
procedure filed an application with the national office and the
application is pending with the national office on May 10, 2002, the
corporation may obtain approval under this revenue procedure. However, the
national office will process the application in accordance with the
authority under which it was filed, unless by the later of June 25, 2002,
or the issuance of the letter ruling granting or denying approval for the
change, the corporation notifies the national office that it wants to use
this revenue procedure. If the corporation timely notifies the national
office that it wants to use this revenue procedure, the national office
will require the corporation to make appropriate modifications to the
application to comply with the applicable provisions of this revenue
procedure. In addition, any user fee that was submitted with the
application will be refunded to the corporation.


SECTION 10. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2000-11 is modified, amplified, and superseded.


SECTION 11. PAPERWORK REDUCTION ACT

The collections of information contained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1786. An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless the
collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are found in
sections 7 and 10. The information in section 7 is required in order to
determine whether the taxpayer properly obtained automatic approval to
change its annual accounting period. The information in section 10 is
required in order to allow a corporation to apply the provisions of this
revenue procedure to a pending application. The likely respondents are
corporations.

The estimated total annual reporting burden for the requirements
contained in section 7 of this revenue procedure is reflected in the
burden estimates for Form 1128. The estimated total annual reporting
burden for the requirement contained in section 10 of this revenue
procedure is 50 hours: the estimated annual burden per respondent is 30
minutes; the estimated number of respondents is 100; and the estimated
frequency of response is once.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.


DRAFTING INFORMATION

The principal authors of this revenue procedure are Roy A. Hirschhorn
and Martin Scully, Jr. of the Office of Assistant Chief Counsel (Income
Tax and Accounting). For further information regarding this revenue
procedure, contact Mr. Hirschhorn or Mr. Scully at (202) 622-4960 (not a
toll-free call).

<<END RULING>>


 

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