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IRS Revenue Procedure
2002-39
Code Secs. 441, 442, 444, 706, 1378, 1502
<<FULL TEXT>>
26 CFR 601.204: Changes in accounting periods and in
methods of
accounting.
(Also Part I, sections 441, 442, 444, 706, 1378, 1502;
1.441-1, 1.441-3,
1.442-1, 1.706-1, 1.1378-1, 1.1502-76.)
REV. PROC. 2002-39
CONTENTS
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
.01 Taxable Year Defined
(1) In general
(2) Annual accounting period
(3) Required taxable year
.02 Adoption of Taxable Year
.03 Change in Taxable Year
(1) In general
(2) Annualization of short period return
(3) No retroactive change in annual accounting period
.04 Retention of Taxable Year
.05 Approval of an Adoption, Change, or Retention
(1) In general
(2) Automatic approval
.06 Business Purpose
(1) In general
(2) Sufficient business purposes
(3) Insufficient business purposes
.07 Section 444 Elections
SECTION 3. SCOPE
.01 Applicability
.02 Inapplicability
(1) Automatic approval
(2) Under examination
(3) Before an area office
(4) Before a federal court
(5) Partnerships and S corporations
SECTION 4. DEFINITIONS
.01 Taxpayer
.02 Corporation
.03 Pass-through Entity
.04 Required Taxable Year
.05 Permitted Taxable Year
.06 First Effective Year
.07 Short Period
.08 Field Office, Area Office, Director
.09 Under Examination
(1) In general
(2) Partnerships and S corporations subject to TEFRA
.10 Issue Under Consideration
(1) During an examination
(2) Before an area office
(3) Before a federal court
SECTION 5. BUSINESS PURPOSE AND TERMS, CONDITIONS, AND
ADJUSTMENTS
.01 In General
(1) Approval of requests
(2) Exceptions
.02 Business Purpose
(1) Taxpayers that establish a business purpose
(2) Taxpayers that are deemed to have established a
business
purpose
.03 Natural Business Year
(1) Annual business cycle test
(2) Seasonal business test
(3) 25-percent gross receipts test
.04 General Terms and Conditions
(1) Short period tax return
(2) Subsequent year tax returns
(3) Record keeping/book conformity
(4) Changes in natural business year
(5) 52-53-week taxable years
(6) Creation of net operating loss or capital loss
(7) Creation of general business credits
(8) Concurrent change for related entities
.05 Additional Terms, Conditions, and Adjustments
(1) Substantial distortion
(2) Deferral of substantial pass-through income
(3) Special rule for certain pass-through entities
(4) Use of expiring NOLs, CLs, and credits
(5) Other terms, conditions, and adjustments
.06 Examples
SECTION 6. GENERAL APPLICATION PROCEDURES
.01 What to File
(1) Application
(2) Signature requirement
(3) Additional information regarding prior applications
(4) Additional information for section 5.03(1) and (2)
(5) Additional information for section 5.03(3)
(6) Additional information for section 5.04
(7) Additional information for section 5.05
.02 When to File
(1) In general
(2) Electing S corporations
.03 Where to File
(1) In general
(2) Electing S corporations
(3) Exempt organizations
.04 User Fee
.05 Consolidated Groups -- Separate Forms 1128 Not
Required
.06 Additional Procedures If Under Examination, Before
an Area Office,
or Before a Federal Court
(1) Certain taxpayers under examination
(2) Certain taxpayers before an area office
(3) Certain taxpayers before a federal court
SECTION 7. PROCESSING OF APPLICATION
.01 Service Discretion
.02 Applicability of Rev. Proc. 2002-1, Rev. Proc.
2002-4, and Any
Successor Revenue Procedures
.03 Incomplete Application -- 21 Day Rule
.04 Conference in the National Office
.05 Letter Ruling
.06 Effect of Noncompliance
.07 Effect on Other Offices of the Service
SECTION 8. EFFECT OF APPROVAL
.01 Audit Protection
(1) In general
(2) Exceptions
.02 Subsequently Required Changes
(1) In general
(2) Retroactive change or modification
SECTION 9. REVIEW BY DIRECTOR
.01 In General
.02 National Office Consideration
SECTION 10. EFFECTIVE DATE AND TRANSITION RULE
.01 In General
.02 Transition Rule for Pending Applications
SECTION 11. EFFECT ON OTHER DOCUMENTS
SECTION 12. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure provides the general procedures
under section
442 of the Internal Revenue Code and section 1.442-1(b)
of the Income Tax
Regulations for establishing a business purpose and
obtaining the approval
of the Commissioner of Internal Revenue to adopt,
change, or retain an
annual accounting period for federal income tax
purposes. This revenue
procedure also describes the terms, conditions, and
adjustments that the
Commissioner may deem necessary to effect the adoption,
change, or
retention.
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. For example, a
partnership, S
corporation, or personal service corporation (PSC) has a
required taxable
year that generally conforms to the taxable years of its
partners,
shareholders, or employee-owners pursuant to sections
706(b), 1378, and
441(i), respectively. Similarly, a specified foreign
corporation has a
required taxable year that generally represents the
taxable year of its
majority U.S. shareholder pursuant to section 898.
However, section
1.441-1(b)(2)(ii) describes exceptions under which
certain taxpayers may
use a taxable year other than their required taxable
year. For example, a
partnership, S corporation, electing S corporation, or
PSC may have a
taxable year other than its required taxable year if it
makes an election
under section 444, elects to use a 52-53-week taxable
year that references
its required taxable year or a taxable year elected
under section 444, or
establishes a business purpose and obtains approval
under section 442 for
that taxable year. See also sections 706(b), 1378, and
441(i).
.02 ADOPTION OF TAXABLE YEAR. Generally, a taxpayer may
adopt any
taxable year that satisfies section 441 and the
regulations thereunder
without the approval of the Commissioner. However, a
partnership, electing
S corporation, or PSC that wants to adopt a taxable year
other than its
required taxable year, a taxable year elected under
section 444, or a
52-53-week taxable year that references its required
taxable year or a
taxable year elected under section 444 must establish a
business purpose
and obtain approval under section 442. See section
1.441-1(c).
.03 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 approval of the Commissioner.
(2) ANNUALIZATION OF SHORT PERIOD RETURN. Section 443(b)
and section
1.443-1(b)(1)(i) 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 1.706-1(b)(8)(i)(B),
1.852-3(e),
1.857-2(a)(4), 1.1378-1(c)(2), and 1.1502-76 for
exceptions to this
general rule for a partnership, a regulated investment
company (RIC), a
real estate investment trust (REIT), an S corporation,
and a subsidiary
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.
.04 RETENTION OF TAXABLE YEAR. In certain cases, a
partnership, S
corporation, electing S corporation, or PSC will be
required to change its
taxable year unless it establishes a business purpose
and obtains the
approval of the Commissioner under section 442, or makes
an election under
section 444, to retain its current taxable year. See
section 1.441-1(d).
For example, a corporation using a June 30 fiscal year
that either becomes
a PSC or elects to be an S corporation, and as a result
is required to use
the calendar year, must obtain the approval of the
Commissioner to retain
its current fiscal year. Similarly, a partnership using
a taxable year
that corresponds to its required taxable year generally
must obtain the
approval of the Commissioner to retain that taxable year
if its required
taxable year changes as a result of a change in
ownership. But see section
706(b)(4)(B). However, a partnership that has previously
established a
business purpose to the satisfaction of the Commissioner
to use a
particular fiscal year is not required to obtain the
approval of the
Commissioner to retain such fiscal year if its required
taxable year
changes.
.05 APPROVAL OF AN ADOPTION, CHANGE, OR RETENTION.
(1) IN GENERAL. Section 1.442-1(b) provides that in
order to secure the
approval of the Commissioner to adopt, change, or retain
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, an
adoption, change, or retention 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 adoption,
change, or retention.
(2) AUTOMATIC APPROVAL. Under the Code and regulations,
certain
taxpayers are allowed to change their annual accounting
periods without
approval or with automatic approval (see, e.g., sections
444, 859(b), and
section 1.442-1(c) and (d)). In addition, the Service
has issued revenue
procedures that enable certain taxpayers to obtain
automatic approval to
adopt, change, or retain their annual accounting
periods. See, for
example, Rev. Proc. 2002-37, 2002-22 I.R.B. 1030 (or any
successor) for
corporations; Rev. Proc. 2002-38, 2002-22 I.R.B. 1037
(or any successor)
for partnerships, S corporations, electing S
corporations, and PSCs; and
Rev. Proc. 66-50, 1966-2 C.B. 1260 (or any successor)
for individuals.
.06 BUSINESS PURPOSE.
(1) IN GENERAL. Section 1.442-1(b) provides that in
determining whether
a taxpayer has established a business purpose and which
terms, conditions,
and adjustments will be required, consideration will be
given to all the
facts and circumstances relating to the adoption,
change, or retention,
including the tax consequences resulting therefrom. See
also H.R. Rep. No.
99-841, 99th Cong., 2d Sess., II-318, 1986-3 (Vol. 4)
C.B. 319.
(2) SUFFICIENT BUSINESS PURPOSES. Section 1.442-1(b)(2)
provides that
generally the requirement of a business purpose will be
satisfied, and
adjustments to neutralize any tax consequences will not
be required, if
the requested annual accounting period coincides with
the taxpayer's
required taxable year, ownership taxable year, or
natural business year. A
taxpayer generally is deemed to have established a
natural business year
if it satisfies the "25-percent gross receipts test."
See Rev. Proc.
83-25, 1983-1 C.B. 689, superseded by Rev. Proc. 87-32,
1987-2 C.B. 396,
superseded by Rev. Proc. 2002-38, 2002-22 I.R.B. 1037.
In Rev. Rul. 87-57,
1987-2 C.B. 117, the Service determined that a
partnership, S corporation,
or PSC established, to the satisfaction of the
Secretary, a business
purpose for adopting, retaining, or changing its taxable
year in the
following four situations:
(a) the taxpayer established that the taxable year
satisfied the
25-percent gross receipts test and resulted in less
deferral than its
other natural business year;
(b) the taxpayer would have established a natural
business year under
the 25-percent gross receipts test, except that a labor
strike closed the
taxpayer's business during a period that included its
normal peak season;
(c) the taxpayer, for the past 10 years, had a
three-month period of
insignificant gross receipts during which, due to
weather conditions, its
business was not operational; and
(d) the taxpayer, which previously used the cash
receipts and
disbursements method and changed to an accrual method,
would have
established a natural business year under the 25-percent
gross receipts
test if it had calculated its gross receipts under an
accrual method.
(3) INSUFFICIENT BUSINESS PURPOSES. Section 1.442-1(b)
provides that,
in the case of a partnership, S corporation, electing S
corporation, or
PSC, deferral of income to partners, shareholders, or
employee-owners will
not be treated as a business purpose for using a taxable
year other than
its required taxable year. In addition, the legislative
history to the Tax
Reform Act of 1986 provides that the following reasons
ordinarily will not
be sufficient for a partnership, S corporation, or PSC
to establish that
the business purpose requirement for a particular
taxable year has been
met:
(a) the use of a particular year for regulatory or
financial accounting
purposes;
(b) the hiring patterns of a particular business, e.g.,
the fact that a
firm typically hires staff during certain times of the
year;
(c) the use of a particular year for administrative
purposes, such as
the admission or retirement of partners or shareholders,
promotion of
staff, and compensation or retirement arrangements with
staff, partners,
or shareholders; and
(d) the fact that a particular business involves the use
of price
lists, model years, or other items that change on an
annual basis.
Although the above items are not themselves sufficient
to establish a
business purpose, they may be considered in connection
with other items by
the Commissioner in determining whether a taxpayer has a
business purpose
for a particular taxable year. H.R. Rep. No. 99-841,
99th Cong., 2d Sess.,
II-318, 1986-3 (Vol. 4) C.B. 319
.07 SECTION 444 ELECTIONS. A partnership, S corporation,
electing S
corporation, or PSC generally can elect under section
444 to use a taxable
year other than its required taxable year, but only if
the deferral period
of the taxable year elected is not longer than the
shorter of 3 months or
the deferral period of the taxable year being changed. A
partnership and
an S corporation with a section 444 election must make
required payments
under section 7519 that approximate the amount of the
deferral benefit and
a PSC with a section 444 election is subject to the
minimum distribution
requirements of section 280H. A taxpayer may
automatically adopt, change
to, or retain a taxable year permitted by section 444 by
filing a Form
8716, Election to Have a Taxable Year Other Than a
Required Taxable Year.
A taxpayer that wants to terminate its section 444
election must follow
the automatic procedures under section 1.444-1T(a)(5) to
change to its
required taxable year or establish a business purpose
for using a
different taxable year pursuant to section 442, the
regulations
thereunder, and Rev. Proc. 2002-38 or this revenue
procedure (whichever is
applicable).
SECTION 3. SCOPE
.01 APPLICABILITY. Except as provided in section 3.02 of
this revenue
procedure, this revenue procedure applies to any
taxpayer requesting the
Commissioner's approval to adopt, change, or retain an
annual accounting
period for federal income tax purposes.
.02 INAPPLICABILITY. This revenue procedure does not
apply to:
(1) AUTOMATIC APPROVAL. An adoption, change, or
retention of annual
accounting period that is permitted to be made pursuant
to a provision of
the Code or regulations or a published automatic
approval procedure.
Before submitting an application pursuant to this
revenue procedure,
taxpayers are encouraged to review the automatic
approval procedures
referenced in section 1.442-1 and the following revenue
procedures: Rev.
Proc. 2002-37 (for corporations); Rev. Proc. 2002-38
(for partnerships, S
corporations, electing S corporations, and PSCs); Rev.
Proc. 66-50, as
modified by Rev. Proc. 81-40, 1981-2 C.B. 604 (for
individuals); Rev.
Proc. 85-58, 1985-2 C.B. 740, and Rev. Proc. 76-10,
1976-1 C.B. 548, as
modified by Rev. Proc. 79-3, 1979-1 C.B. 483 (for exempt
organizations);
Rev. Proc. 87-27, 1987-1 C.B. 769 (for employee
retirement plans and
employee trusts); and Rev. Proc. 85-15, 1985-1 C.B. 516
(for changes to
comply with section 441(g)).
(2) UNDER EXAMINATION. A taxpayer with a required
taxable year that is
under examination, unless the taxpayer obtains the
consent of the
appropriate director as provided in section 6.06(1) of
this revenue
procedure.
(3) BEFORE AN AREA OFFICE. A taxpayer with a required
taxable year that
is before an area office with respect to any income tax
issue if its
annual accounting period is an issue under consideration
by the area
office.
(4) BEFORE A FEDERAL COURT. A taxpayer with a required
taxable year
that is before a federal court with respect to any
income tax issue if its
annual accounting period is an issue under consideration
by the federal
court.
(5) PARTNERSHIPS AND S CORPORATIONS. A partnership or S
corporation if,
on the date the entity would otherwise file its
application with the
Service Center, the entity's annual accounting period is
an issue under
consideration in the examination of a partner's or
shareholder's federal
income tax return or an issue under consideration by an
area office or by
a federal court with respect to a partner's or
shareholder's federal
income tax return.
SECTION 4. DEFINITIONS
.01 TAXPAYER. The term "taxpayer" has the same meaning
as the term
"person" as defined in section 7701(a)(1) (e.g., an
individual, trust,
estate, partnership, association, or corporation) rather
than the meaning
of the term "taxpayer" as defined in section 7701(a)(14)
(any person
subject to tax).
.02 CORPORATION. The term "corporation" 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.
.03 PASS-THROUGH ENTITY. For purposes of this revenue
procedure, the
term "pass-through entity" means a partnership; an S
corporation (as
defined in section 1361); an electing S corporation
(i.e., a corporation
attempting to make an S election for the first effective
year); a trust;
an estate; a common trust fund (as defined in section
584); a controlled
foreign corporation (CFC) (as defined in section 957),
but only to the
extent the taxpayer is a U.S. shareholder (as defined in
section 951(b));
a foreign personal holding company (FPHC) (as defined in
section 552), but
only to the extent the taxpayer is a U.S. shareholder
(as defined in
section 551(a)); a passive foreign investment company (PFIC),
but only to
the extent the taxpayer has elected to treat the PFIC as
a qualified
electing fund (as defined in section 1295); a
closely-held REIT (as
defined in section 6655(e)(5)(B)), but only if the
taxpayer is described
in section 6655(e)(5)(A)); or any other similar entity.
.04 REQUIRED TAXABLE YEAR. The "required taxable year"
is the
particular taxable year that certain taxpayers are
required to use under
the Code or regulations thereunder. For example, the
"required taxable
year" is the taxable year determined under section
706(b) in the case of a
partnership, section 1378 in the case of an S
corporation or an electing S
corporation, and section 441(i) in the case of a PSC,
without taking into
account any taxable year that is allowable by reason of
a section 444
election. See generally section 1.441-1(b)(2) (providing
examples of other
entities with required taxable years).
.05 PERMITTED TAXABLE YEAR. The term "permitted taxable
year" means the
required taxable year; a natural business year; the
ownership taxable
year; a taxable year elected under section 444; a
52-53-week taxable year
that references the required taxable year, natural
business year,
ownership taxable year, or taxable year elected under
section 444; or any
other taxable year for which the taxpayer establishes a
business purpose
to the satisfaction of the Commissioner.
.06 FIRST EFFECTIVE YEAR. The first effective year is
the first taxable
year for which an adoption, change, or retention in
annual accounting
period is effective. 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 the letter ruling
granting permission to
effect the adoption, change, or retention of the
taxpayer's annual
accounting period.
.07 SHORT PERIOD. In the case of a change in annual
accounting period,
a taxpayer'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.
.08 FIELD OFFICE, AREA OFFICE, DIRECTOR. The terms
"field office,"
"area office," and "director" have the same meaning as
those terms have in
Rev. Proc. 2002-1, 2002-1 I.R.B. 1 (or any successor).
.09 UNDER EXAMINATION.
(1) IN GENERAL.
(a) Except as provided in section 4.08(2) of this
revenue procedure, an
examination of a taxpayer with respect to a federal
income tax return
begins on the date the taxpayer is contacted in any
manner by a
representative of the Service for the purpose of
scheduling any type of
examination of the return. An examination ends:
(i) in a case in which the Service accepts the return as
filed, on the
date of the "no change" letter sent to the taxpayer;
(ii) in a fully agreed case, on the earliest of the date
the taxpayer
executes a waiver of restrictions on assessment or
acceptance of
overassessment (for example, a Form 870, 4549, or 4605),
the date the
taxpayer makes a payment of tax that equals or exceeds
the proposed
deficiency, or the date of the "closing" letter (for
example, Letter
891(IN) or 987(DO)) sent to the taxpayer; or
(iii) in an unagreed or a partially agreed case, on the
earliest of the
date the taxpayer (or its representative) is notified by
an appeals
officer that the case has been referred to an area
office from a field
office, the date the taxpayer files a petition in the
Tax Court, the date
on which the period for filing a petition with the Tax
Court expires, or
the date of the notice of claim disallowance.
(b) An examination does not end as a result of the early
referral of an
issue to an area office under the provisions of Rev.
Proc. 96-9, 1996-1
C.B. 575, or Rev. Proc. 99-28, 1999-2 C.B. 109.
(c) An examination resumes on the date the taxpayer (or
its
representative) is notified by an appeals officer (or
otherwise) that the
case has been referred to a field office for
reconsideration.
(2) PARTNERSHIPS AND S CORPORATIONS SUBJECT TO TEFRA.
For an entity
(including a limited liability company) treated as a
partnership or an S
corporation that is subject to the TEFRA unified audit
and litigation
provisions (note that an S corporation is not subject to
the TEFRA unified
audit and litigation provisions for taxable years
beginning after December
31, 1996, see Small Business Job Protection Act of 1996,
Pub. L. No.
104-188, section 1317(a), 110 Stat. 1755, 1787 (1996)),
an examination
begins on the date of the notice of the beginning of an
administrative
proceeding sent or personally delivered to the Tax
Matters Partner/Tax
Matters Person (TMP). An examination ends:
(a) in the case in which the Service accepts the
partnership or S
corporation return as filed, on the date of the "no
adjustments" letter or
the "no change" notice of the final administrative
adjustment sent to the
TMP;
(b) in a case in which no formal notice is given, on the
date on which
the period under section 6229 expires;
(c) in a fully agreed case, when all the partners or
shareholders
execute a Form 870-P, 870-L, 870-S, or any variation
thereof; or
(d) in an unagreed or a partially agreed case, on the
earliest of the
date the TMP (or its representative) is notified by an
appeals officer
that the case has been referred to an area office from a
field office, the
date the TMP (or a partner or shareholder) requests
judicial review, or
the date on which the period for requesting judicial
review expires.
<<END RULING>>
.10 ISSUE UNDER CONSIDERATION.
(1) DURING AN EXAMINATION. A taxpayer's annual
accounting period is an
issue under consideration for the taxable years under
examination if the
taxpayer receives written notification (for example, by
examination plan,
information document request (IDR), or notification of
proposed
adjustments or income tax examination changes) from the
examining
officer(s) specifically citing the taxpayer's annual
accounting period as
an issue under consideration. For example, a taxpayer's
annual accounting
period is an issue under consideration as a result of an
examination plan
that identifies the propriety of the taxpayer's annual
accounting period
as a matter to be examined. The question of whether the
taxpayer's annual
accounting period is an issue under consideration may be
referred to the
national office as a request for technical advice under
the provisions of
Rev. Proc. 2002-2, 2002-1 I.R.B. 82 (or any successor),
or, for exempt
organizations, Rev. Proc. 2002-5, 2002-1 I.R.B. 173 (or
any successor).
(2) BEFORE AN AREA OFFICE. A taxpayer's annual
accounting period is an
issue under consideration for the taxable years before
an area office if
the taxpayer's annual accounting period is included as
an item of
adjustment in the examination report referred to an area
office or is
specifically identified in writing to the taxpayer by an
area office.
(3) BEFORE A FEDERAL COURT. A taxpayer's annual
accounting period is an
issue under consideration for the taxable years before a
federal court if
the taxpayer's annual accounting period is an item
included in the
statutory notice of deficiency, the notice of claim
disallowance, the
notice of final administrative adjustment, the pleadings
(for example, the
petition, complaint, or answer) or amendments thereto,
or is specifically
identified in writing to the taxpayer by the government
counsel.
SECTION 5. BUSINESS PURPOSE AND TERMS, CONDITIONS, AND
ADJUSTMENTS
.01 IN GENERAL.
(1) APPROVAL OF REQUESTS. Except as provided in section
5.01(2) of this
revenue procedure, a request to adopt, change, or retain
an annual
accounting period ordinarily will be approved if the
taxpayer:
(a) establishes a business purpose (within the meaning
of section 5.02
of this revenue procedure) for the requested annual
accounting period; and
(b) agrees to the Commissioner's prescribed terms,
conditions, and
adjustments (as described in sections 5.04 and 5.05 of
this revenue
procedure) under which the adoption, change, or
retention will be
effected.
(2) EXCEPTIONS. Notwithstanding the general rule of
section 5.01(1)(a)
of this revenue procedure, a taxpayer with a required
taxable year (other
than a partnership, S corporation, electing S
corporation, or PSC) will
not be granted approval under this revenue procedure to
adopt, change, or
retain a taxable year other than its required taxable
year or, in
appropriate circumstances, a 52-53-week taxable year
that ends with
reference to its required taxable year. In addition, a
partnership, S
corporation, electing S corporation, or PSC will be
granted approval to
adopt, change, or retain an annual accounting period
only if it
establishes a business purpose under section 5.02(1) for
that annual
accounting period. Notwithstanding the general rule of
section 5.01(1)(b)
of this revenue procedure, the Service may determine
that, based on the
unique facts of a particular case and in the interest of
sound tax
administration, terms, conditions, and adjustments that
differ from those
provided in this revenue procedure are more appropriate
for an adoption,
change, or retention made under this revenue procedure.
.02 BUSINESS PURPOSE.
(1) TAXPAYERS THAT ESTABLISH A BUSINESS PURPOSE.
Taxpayers that
establish a business purpose for the requested annual
accounting period
under this section 5.02(1) ordinarily will be granted
approval to adopt,
change, or retain that annual accounting period under
this revenue
procedure subject only to the general terms and
conditions described in
section 5.04 of this revenue procedure.
(a) NATURAL BUSINESS YEAR. A taxpayer (including a
partnership, S
corporation, electing S corporation, or PSC) requesting
to adopt, change,
or retain an annual accounting period that is the
taxpayer's natural
business year (as described in section 5.03 of this
revenue procedure) has
established a business purpose to the satisfaction of
the Commissioner.
(b) FACTS AND CIRCUMSTANCES. A taxpayer (including a
partnership, S
corporation, electing S corporation, or PSC) may
establish a business
purpose for the requested taxable year based on all the
relevant facts and
circumstances. However, the Service anticipates that a
taxpayer will be
granted permission to adopt, change, or retain an annual
accounting period
under this facts and circumstances test only in rare and
unusual
circumstances. For this purpose, deferral of income to
owners will not be
treated as a business purpose. In addition,
administrative and convenience
business reasons such as those described in Rev. Rul.
87-57 and the
following will not be sufficient to establish a business
purpose under
this section:
(i) the use of a particular year for regulatory or
financial accounting
purposes;
(ii) the hiring patterns of a particular business, e.g.,
the fact that
a firm typically hires staff during certain times of the
year;
(iii) the use of a particular year for administrative
purposes, such as
the admission or retirement of partners or shareholders,
promotion of
staff, and compensation or retirement arrangements with
staff, partners,
or shareholders;
(iv) the fact that a particular business involves the
use of price
lists, model years, or other items that change on an
annual basis;
(v) the use of a particular year by related entities;
and
(vi) the use of a particular year by competitors.
(2) TAXPAYERS THAT ARE DEEMED TO HAVE ESTABLISHED A
BUSINESS PURPOSE. A
taxpayer other than a partnership, S corporation,
electing S corporation,
or PSC that does not establish a business purpose for
the requested annual
accounting period under section 5.02(1) of this revenue
procedure
generally will be deemed to have established a business
purpose if it
provides a non-tax reason for the requested annual
accounting period and
agrees to the additional terms, conditions, and
adjustments described in
section 5.05 of this revenue procedure, which are
intended to neutralize
the tax effects of any resulting substantial distortion
of income. For
this purpose, non-tax reasons for the requested annual
accounting period
may include administrative and convenience business
reasons such as those
described in section 5.02(1)(b) that Congress intended,
and the Service
has held, to be insufficient to satisfy the business
purpose requirement
for a partnership, S corporation, electing S
corporation, or PSC to adopt,
change to, or retain a taxable year other than its
required taxable year.
The Service anticipates that an individual taxpayer that
is not a sole
proprietor will be able to establish a non-tax reason
for a fiscal year
only in rare and unusual circumstances.
.03 NATURAL BUSINESS YEAR. A natural business year is
the annual
accounting period encompassing all related income and
expenses. The
natural business year of a taxpayer may be determined
under any of the
following tests (taking into account the principles of
Rev. Rul. 87-57):
(1) ANNUAL BUSINESS CYCLE TEST.
(a) IN GENERAL. If the taxpayer's gross receipts from
sales and
services for the short period and the three immediately
preceding taxable
years indicate that the taxpayer has a peak and a
non-peak period of
business, the taxpayer's natural business year is deemed
to end at, or
soon after, the close of the highest peak period of
business. A business
whose income is steady from month to month throughout
the year will not
satisfy this test. A taxpayer that has not been in
existence for a
sufficient period to provide gross receipts information
for the three
immediately preceding taxable years may provide
information other than
gross receipts to demonstrate a peak and non-peak period
of business, such
as a description of its business and/or reasonable
estimates of future
gross receipts.
(b) SAFE HARBOR. For purposes of section 5.03(1)(a) of
this revenue
procedure, 1 month will be deemed to be "soon after" the
close of the
highest peak period of business.
(c) EXAMPLE. A, a corporation, operates a retail
business. The highest
peak of A's annual business cycle occurs in December
each year. In
January, a significant amount of the merchandise that
was purchased by A's
customers in December is either returned or exchanged.
A's natural
business year is deemed to end at (December 31st), or
soon after (January
31st), the close of the highest peak period of business
in December.
Accordingly, under the provisions of this revenue
procedure, a request by
A for a taxable year ending either December 31st or
January 31st would be
granted, subject to the general terms and conditions of
section 5.04 of
this revenue procedure.
(2) SEASONAL BUSINESS TEST.
(a) IN GENERAL. If the taxpayer's gross receipts from
sales and
services for the short period and the three immediately
preceding taxable
years indicate that the taxpayer's business is
operational for only part
of the year (e.g., due to weather conditions) and, as a
result, the
taxpayer has insignificant gross receipts during the
period the business
is not operational, the taxpayer's natural business year
is deemed to end
at, or soon after, the operations end for the season. A
taxpayer that has
not been in existence for a sufficient period to provide
gross receipts
information for the three immediately preceding taxable
years may provide
information other than gross receipts to demonstrate
that it satisfies the
requirements of a seasonal business, such as a
description of its business
and/or reasonable estimates of future gross receipts.
(b) SAFE HARBOR. For purposes of section 5.03(2)(a) of
this revenue
procedure, an amount equal to less than 10 percent of
the taxpayer's total
gross receipts for the year will be deemed to be
"insignificant," and 1
month will be deemed to be "soon after" the close of
operations.
(c) EXAMPLE. B, a partnership, operates a ski resort
from November
through March of each year. During September and
October, and during
April, employees prepare the resort for the ski season,
and close it down
for the season, respectively. The resort earns less than
10 percent of its
annual gross receipts during the period of April through
October, when it
is closed to guests. B's natural business year is deemed
to end at (March
31st), or soon after (April 30th), the close of the
resort operations.
Accordingly, under the provisions of this revenue
procedure, a request by
B for a taxable year ending either March 31st or April
30th would be
granted, subject to the general terms and conditions of
section 5.04 of
this revenue procedure.
(3) 25-PERCENT GROSS RECEIPTS TEST. A natural business
year may be
established by any taxpayer other than a member of a
tiered structure (as
defined in section 444 and section 1.444-2T) using the
25-percent gross
receipts test. The 25-percent gross receipts test is
determined as
follows:
(a) PRIOR THREE YEARS' GROSS RECEIPTS.
(i) 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.
(ii) The same computation as in (a)(i) above is made for
the two
preceding 12-month periods ending with the last month of
the requested
annual accounting period.
(b) NATURAL BUSINESS YEAR.
(i) Except as provided in (b)(ii) below, if each of the
three results
described in (a) equals or exceeds 25 percent, the
requested annual
accounting period is deemed to be the taxpayer's natural
business year.
(ii) The taxpayer must determine whether any annual
accounting period
other than the requested annual accounting period also
meets the
25-percent gross receipts test of paragraph (b)(i). If
one or more annual
accounting periods produce higher averages of the three
percentages
(rounded to the 1/100 of a percent) described in (a)
than the requested
annual accounting period, then the requested annual
accounting period will
not qualify as the taxpayer's natural business year
under the 25-percent
gross receipts test.
(c) SPECIAL RULES.
(i) To apply the 25-percent gross receipts test for any
particular
taxable 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.
(ii) 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.
(iii) 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.
(iv) 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 using the 25-percent gross
receipts test.
(v) 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.
.04 GENERAL TERMS AND CONDITIONS. The following general
terms and
conditions apply to all taxpayers that obtain approval
under this revenue
procedure to adopt, change, or retain an annual
accounting period:
(1) SHORT PERIOD TAX RETURN. The taxpayer 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 taxpayer's taxable
income for the
short period generally 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. See also, for example,
sections
1.706-1(b)(8)(i)(B), 1.852-3(e), 1.857-2(a)(4),
1.1378-1(c)(2), and
1.1502-76 for exceptions to the annualization rule for a
partnership, RIC,
REIT, S corporation, and subsidiary corporation ceasing
to be a member of
a consolidated group, respectively.
(2) 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 taxpayer secures the approval of the
Commissioner to change its
requested taxable year.
(3) RECORD KEEPING/BOOK CONFORMITY. The books of the
taxpayer must be
closed as of the last day of the first effective year.
Thereafter, the
taxpayer 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
either the taxpayer's required taxable year or ownership
taxable year.
(4) CHANGES IN NATURAL BUSINESS YEAR. If a partnership,
S corporation,
electing S corporation, or PSC changes to or retains a
natural business
year under this revenue procedure and that annual
accounting period no
longer qualifies as a permitted taxable year, the
taxpayer is using an
impermissible annual accounting period and should change
to a permitted
taxable year. Certain partnerships, S corporations,
electing S
corporations, and PSCs may qualify for automatic
approval to change their
annual accounting period under Rev. Proc. 2002-38. Other
taxpayers must
request approval under this revenue procedure.
(5) 52-53-WEEK TAXABLE YEARS. If applicable, the
taxpayer 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 or
PSC ends with reference to the same calendar month as
one or more of its
partners or shareholders or employee-owners).
(6) CREATION OF NET OPERATING LOSS OR CAPITAL LOSS. If
the taxpayer
generates a net operating loss (NOL) or capital loss
(CL) in the short
period required to effect a change in annual accounting
period, the
taxpayer 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,
except as otherwise provided in the Code or regulations
(e.g., section
280H and the regulations thereunder in the case of a
PSC) 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.
(7) CREATION OF GENERAL BUSINESS CREDITS. If there is an
unused general
business credit or any other unused credit generated in
the short period,
the taxpayer must carry that unused credit forward. An
unused credit from
the short period may not be carried back.
(8) CONCURRENT CHANGE FOR RELATED ENTITIES. In
appropriate cases, if a
taxpayer owns a majority interest in a pass-through
entity, the entity
will be required to concurrently change its annual
accounting period as a
term and condition of the approval of the taxpayer's
request to change its
annual accounting period, 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). If this
condition applies,
the pass-through entity must comply with the appropriate
procedures to
obtain approval for the change. See, e.g., Rev. Proc.
2002-37 and Rev.
Proc. 2002-38.
.05 ADDITIONAL TERMS, CONDITIONS, AND ADJUSTMENTS. The
additional
terms, conditions, and adjustments described in this
section 5.05 apply to
taxpayers that obtain approval under this revenue
procedure to change an
annual accounting period and that establish a business
purpose under
section 5.02(2) of this revenue procedure. These
additional terms,
conditions, and adjustments are necessary to neutralize
the tax effects of
a substantial distortion of income that otherwise would
result from the
change, including: a deferral of a substantial portion
of the taxpayer's
income, or shifting of a substantial portion of
deductions, from one
taxable year to another; a similar deferral or shifting
in the case of any
other person, such as a beneficiary of an estate; the
creation of a short
period in which there is a substantial NOL, CL, or
credit (including a
general business credit), or the creation of a short
period in which there
is a substantial amount of income to offset an expiring
NOL, CL, or
credit.
(1) SUBSTANTIAL DISTORTION. Distortion of income will
not be considered
substantial, and no adjustments under this section 5.05
will be required
for such distortion, if the amount of the distortion is
less than both:
(i) five percent of the taxpayer's estimated gross
receipts for its
current taxable year (computed as if the taxpayer
remained on its existing
taxable year); and
(ii) $500,000.
(2) DEFERRAL OF SUBSTANTIAL PASS-THROUGH INCOME.
(a) IN GENERAL. An adjustment will be required under
this section
5.05(2) if the change creates a substantial distortion
of income as a
result of increasing the deferral of the taxpayer's
distributive share of
income from a pass-through entity between the taxable
year of the
pass-through entity and the taxpayer's taxable year. For
this purpose, if
the pass-through entity's taxable year is determined
based on the taxable
year of its owners, the taxpayer must compare the
existing deferral period
(i.e., between the pass-through entity's and the
taxpayer's current
taxable years) with the proposed deferral period (i.e.,
between the
taxable year of the pass-through entity that would be
required after the
requested change and the taxpayer's requested taxable
year) to determine
whether the deferral period is increased. If the
taxpayer indirectly owns
an interest in a pass-through entity through one or more
other
pass-through entities, the existing and proposed
deferral periods
generally must be determined by comparing the taxable
year of the
directly-owned pass-through entity with the taxpayer's
taxable year.
However, if the proposed change does not increase the
deferral period
between the taxable year of the directly-owned
pass-through entity and the
taxpayer's taxable year, the existing and proposed
deferral periods must
be determined by comparing the taxable year of the next
lower-tier
indirectly-owned pass-through entity with the taxpayer's
taxable year
until either: (1) an increase in the deferral period is
found or (2) the
next lower-tier entity either does not exist or is not a
pass-through
entity.
(b) COMPUTING DEFERRAL. The amount of deferral that
results from the
change is the taxpayer's allocable share of income from
each pass-through
entity described in (a), including ordinary income or
loss, capital gain
or loss, rents, royalties, interest, dividends, and the
deduction
equivalents of credits that accrue during the taxpayer's
first effective
year. In the case of a partnership, the taxpayer's share
of income also
includes guaranteed payments to the taxpayer that are
both deductible by
the partnership under its method of accounting during
the partnership's
first taxable year ending after the taxpayer's first
effective year and
attributable (on a ratable basis) to the taxpayer's
first effective year.
A taxpayer must aggregate the deferral of income from
each pass-through
entity described in (a). However, if the aggregate
deferral of income from
all pass-through entities described in (a) is negative
(i.e., an aggregate
loss), there is no deferral of income. For this purpose,
the taxpayer may
use reasonable estimates to determine the income that
accrues during the
first effective year. The Service may, on examination,
use any available
data, including information on previous years' Schedules
K-1, to verify
the reasonableness of the taxpayer's estimates.
(c) ADJUSTMENT. If the deferral of income computed in
section
5.05(2)(b) of this revenue procedure represents a
substantial distortion
of income (as defined in section 5.05(1)), the taxpayer
must include the
entire amount of the distortion (and not merely the
excess over the
amounts specified in section 5.05(1)) as ordinary income
for the first
effective year. The taxpayer also must report its
allocable share of
income from the pass-through entity in the taxable year
following the
first effective year in accordance with general tax
principles (e.g.,
section 706). The taxpayer must establish a suspense
account for the
amount included in ordinary income for the first
effective year and deduct
this amount ratably over the four taxable years
immediately succeeding the
first effective year. Notwithstanding the preceding
sentence, if all or a
portion of the suspense account is attributable to an
interest in a
pass-through entity that is subsequently disposed of,
any amount so
attributable that remains in the suspense account in the
year of the
disposition may be deducted in that year. In all cases,
the deduction
under this paragraph will be treated as an ordinary
deduction. The
adjustments described in this section do not affect the
taxpayer's basis
in the pass-through entity (such as basis in a
partnership determined
under section 705). See Examples 1, 2, and 3, section
5.06 of this revenue
procedure.
(3) SPECIAL RULE FOR CERTAIN PASS-THROUGH ENTITIES. An
adjustment
similar to that described in this paragraph 5.05(2) will
be required in
the case of a deferral of income or shifting of
deductions to another
taxpayer, such as a beneficiary of an estate.
(4) USE OF EXPIRING NOLs, CLs, AND CREDITS. An
adjustment will be
required under this section 5.05(4) if the change
creates a substantial
distortion of income as a result of the creation of
income in the short
period (or the shifting of foreign taxes paid or
accrued) to offset
expiring NOLs, CLs, or credits (including general
business credits). The
amount of distortion that results from a change is the
amount by which any
NOL, CL, and credit that is carried over to the first
effective year and
that expires in that year exceeds the NOL, CL, and
credit that could have
been used to offset income in the taxpayer's current
taxable year
(computed as if the taxpayer remained on its existing
taxable year). If
this distortion is substantial (as defined in section
5.05(1)), any NOL,
CL, or credit carried over to the first effective year
will be allowed to
offset income in the first effective year only to the
extent that such
NOL, CL, or credit could have been used to offset income
in the taxpayer's
current taxable year. See Example 4, section 5.06 of
this revenue
procedure.
(5) OTHER TERMS, CONDITIONS, AND ADJUSTMENTS. In
addition to the terms,
conditions, and adjustments described in this section
5.05, the Service
may impose any other term, condition, or adjustment that
it deems
appropriate under the circumstances.
.06 EXAMPLES. The following examples illustrate the
additional terms,
conditions, and adjustments that may be required under
section 5.05 of
this revenue procedure to obtain the Commissioner's
approval for a change
of an annual accounting period. In all examples, the
taxpayer is within
the scope of this revenue procedure, the taxpayer has
established a
business purpose under section 5.02(2) of this revenue
procedure, and any
distortion of income resulting from the change is
substantial.
EXAMPLE 1. P, a foreign corporation, maintains its books
and files its
foreign country tax returns on the basis of a taxable
year ending on May
31st. In 2001, P acquires all the stock of S, a domestic
corporation, that
maintains its books and files its tax returns on the
calendar year. S has
a minority interest in a partnership that uses the
calendar year. In order
to facilitate the filing of consolidated financial
statements for P and S,
S applies for approval to change its taxable year to a
taxable year ending
on May 31st beginning on May 31, 2002. The change will
create a
substantial distortion of income as a result of
increasing the deferral of
S's distributive share of income from its partnership
interest.
Consequently, S will be required, under section 5.05(2)
of this revenue
procedure, to report the partnership income that accrues
between January 1
and May 31, 2002, as an ordinary income adjustment on
its short period tax
return as a term, condition, and adjustment of the
change. Thereafter, on
subsequent tax returns filed for its taxable year ending
on May 31st
(beginning May 31, 2003), S must report the partnership
income for the
partnership's taxable year ending December 31 based on
the Schedule K-1 in
accordance with section 706. To take into account S's
double inclusion of
the 5 months of partnership income from January 1 to May
31, 2002, S must
recognize an ordinary deduction adjustment in each of
the four taxable
years following the first effective year equal to
one-fourth of the
ordinary income adjustment amount included on S's short
period tax return.
Neither adjustment will affect S's basis in the
partnership.
EXAMPLE 2. D is a domestic corporation that currently
maintains its
books and files its tax returns on the calendar year,
but applies in 2002
for approval to change its taxable year to a year ending
on May 31st. D
owns a majority interest in a partnership, PS1, which in
turn owns a
minority interest in another partnership, PS2. PS1 and
PS2 have taxable
years ending on December 31st and September 30th,
respectively, as
required by the majority interest rule of section
706(b)(1)(b)(i). If D
changes its annual accounting period to May 31st, and
the first effective
year ends on May 31, 2002, PS1 will be required to
conform its taxable
year with D using a first effective year of May 31,
2002, as required
under section 5.04(8) of this revenue procedure.
Accordingly, D's
requested change in its taxable year would not increase
the deferral of
D's distributive share of income or gain from PS1.
However, PS2 will
retain its September 30th taxable year; thus, D's
requested change will
increase the deferral of D's distributive share of
income and gain from
PS2, which is passed through to D from PS1. Assuming the
deferral results
in a substantial distortion of income, D will be
required, under section
5.05(2) of this revenue procedure, to report its
distributive share of
PS2's income and gain accruing between January 1, 2002,
and May 31, 2002,
as an ordinary income adjustment on its tax return for
the short period
ending May 31st as a term and condition of the change in
D's taxable year.
EXAMPLE 3. The facts are the same as in Example 2,
except that PS2 owns
a minority interest in partnership PS3, which has a
December 31st taxable
year. Because D will be required as a term and condition
of the change in
D's taxable year to report its distributive share of
PS2's income and gain
accruing between January 1, 2002, and May 31, 2002, and
because that
distributive share will include a portion of PS2's
distributive share of
income from PS3, D does not need to make any additional
ordinary income
adjustment to take account of any increased deferral
from PS3.
EXAMPLE 4. Y, a domestic corporation that files its tax
returns on the
calendar year, applies in 2002 for consent to change its
taxable year to a
year ending on May 31st. Y has a general business credit
carryover of
$100x that will expire in the current taxable year. Y
reasonably expects
to incur on June 30, 2002, a substantial amount that is
deductible for
federal income tax purposes. If Y changes its annual
accounting period to
May 31st, and the first effective year ends on May 31,
2002, Y reasonably
expects it would be able to use $90x of the $100x
credit. However, if Y
continues to use the calendar year for 2002, Y
reasonably estimates that
it would be able to use only $25x of the expiring
credit. Under section
5.05(4) of this revenue procedure, Y will be allowed to
use only $25x of
the credit to offset income in the first effective year
as a term,
condition, and adjustment of the change.
SECTION 6. GENERAL APPLICATION PROCEDURES
.01 WHAT TO FILE.
(1) APPLICATION. To request the Commissioner's approval
to adopt,
change, or retain an annual accounting period under this
revenue
procedure, a taxpayer (other than an electing S
corporation) must
complete, sign, and file a current Form 1128,
Application to Adopt,
Change, or Retain a Tax Year. An electing S corporation
requesting to
adopt, change, or retain an annual accounting period
must complete the
appropriate section of, and sign and file, a current
Form 2553, Election
by a Small Business Corporation.
(2) SIGNATURE REQUIREMENT. The application must be
signed by the
taxpayer or on behalf of the taxpayer requesting the
adoption, change, or
retention of annual accounting period by an individual
with authority to
bind the taxpayer in such matters. For example, an
officer must sign on
behalf of a corporation, a general partner on behalf of
a state law
partnership, a member-manager on behalf of a limited
liability company, a
trustee on behalf of a trust, or an individual taxpayer
on behalf of a
sole proprietorship. If the taxpayer is a member of a
consolidated group,
a Form 1128 submitted on behalf of the taxpayer must be
signed by a duly
authorized officer of the common parent. If an agent is
authorized to
represent the taxpayer before the Service, receive the
original or a copy
of the correspondence concerning the request, or perform
any other act(s)
regarding the application filed on behalf of the
taxpayer, a power of
attorney reflecting such authorization(s) must be
attached to the
application. A taxpayer's representative without a power
of attorney to
represent the taxpayer as indicated in this section will
not be given any
information regarding the application.
(3) ADDITIONAL INFORMATION REGARDING PRIOR APPLICATIONS.
(a) ACCOUNTING PERIOD CHANGED. If a taxpayer 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
(under either an
automatic change procedure or a procedure requiring
prior approval), a
copy of the application for the previous change, the
ruling letter, and
any other related correspondence from the Service must
be attached to the
application filed for the requested taxable year.
(b) ACCOUNTING PERIOD NOT CHANGED. If a prior
application (filed under
either an automatic change procedure or a procedure
requiring prior
approval) was withdrawn, not perfected, or denied, or if
the change in
annual accounting period was not made, and the taxpayer
files another
application to change its annual accounting period
within the most recent
48-month period ending with the last month of the
requested taxable year,
a copy of the earlier application, together with any
related
correspondence from the Service, must be attached to the
application filed
for the requested taxable year. An explanation must be
furnished stating
why the earlier application was withdrawn or not
perfected or why the
change in annual accounting period was not made. The
Service will consider
the explanation in determining whether the subsequent
request for a change
in the taxpayer's annual accounting period will be
granted.
(4) ADDITIONAL INFORMATION FOR SECTION 5.03(1) AND (2).
If the taxpayer
requests to establish a natural business year under
section 5.03(1) or (2)
of this revenue procedure, it must provide its gross
receipts from sales
or services and approximate inventory costs (where
applicable) for each
month in the requested short period and for each month
of the three
immediately preceding taxable years.
(5) ADDITIONAL INFORMATION FOR SECTION 5.03(3). In the
case of a
taxpayer requesting to change to a natural business year
that satisfies
the 25-percent gross receipts test described in section
5.03(3) of this
revenue procedure, the taxpayer must supply the gross
receipts for the
most recent 47 months for itself (or any predecessor) in
compliance with
the instructions to Form 1128.
(6) ADDITIONAL INFORMATION FOR SECTION 5.04. The
taxpayer must indicate
whether it has an NOL or CL in the short period required
to effect the
change and provide the type and amount of any credits
generated in the
short period.
(7) ADDITIONAL INFORMATION FOR SECTION 5.05. If a
taxpayer requests to
change an annual accounting period and establishes a
business purpose
under section 5.02(2) of this revenue procedure, the
taxpayer must provide
the following additional information necessary to
determine whether a
substantial distortion of income (within the meaning of
section 5.05(1))
exists and, thus, whether the additional terms,
conditions, and
adjustments of section 5.05 apply:
(a) if the taxpayer has an interest in a pass-through
entity:
(i) reasonable estimates of the taxpayer's taxable
income for its
current taxable year (computed as if the taxpayer
remained on its existing
taxable year);
(ii) a comparison of the existing deferral period of any
pass-through
entity in which the taxpayer has a direct or, as
appropriate, indirect
interest (i.e., the period between the pass-through
entity's and the
taxpayer's current taxable years) with the proposed
deferral period for
such pass-through entity (i.e., the period between the
taxable year of the
pass-through entity that would be required after the
requested change and
the taxpayer's requested taxable year); and
(iii) reasonable estimates of the aggregate deferral of
income from all
pass-through entities described in section 5.05(1)(a);
(b) the amount of any NOL, CL, or credit carried over to
the first
effective year and the taxable year in which such NOL,
CL, or credit was
generated; and
(c) identification of any partnership, specified foreign
corporation
(as defined in section 898), foreign sales corporation
(as defined in
former section 922), or domestic international sales
corporation (as
defined in section 992) in which the taxpayer has a
majority interest.
.02 WHEN TO FILE.
(1) IN GENERAL. Except as provided in section 6.02(2) of
this revenue
procedure, a taxpayer must file a Form 1128 no earlier
than the day
following the end of the first effective year and no
later than the due
date (not including extensions) of the federal income
tax return for the
first effective year. However, the Service recommends
that the Form 1128
be filed as early as possible to provide the Service
adequate time to
respond to the request prior to the due date (including
extensions) of the
taxpayer's federal income tax return for the first
effective year. In the
case of a change that results in a short period of six
days or less, the
Form 1128 also must be filed no earlier than the day
following the end of
the short period and no later than the due date (not
including extensions)
of the federal income tax return for the short period,
even though the
short period is not treated as a separate taxable year
under section
1.441-2(b)(2). A taxpayer that fails to file a Form 1128
within the time
period prescribed in this section 6.02(1) may request an
extension of time
to file under section 301.9100 of the Procedure and
Administration
Regulations. Under section 301.9100-3, a Form 1128 filed
within 90 days
after the time period prescribed in this section 6.02(1)
may be considered
as timely filed if the taxpayer establishes that the
taxpayer acted
reasonably and in good faith and that granting relief
will not prejudice
the interests of the government. If a Form 1128 is filed
more than 90 days
after this period, prejudice to the interests of the
government will be
presumed and such requests will be approved only in
unusual and compelling
circumstances. See section 301.9100-3(c)(3).
(2) ELECTING S CORPORATIONS. An electing S corporation
must file a Form
2553 when the election to be an S corporation is filed
pursuant to section
1362(b) and section 1.1362-6. Generally, such election
must be filed at
any time during (a) the taxable year that immediately
precedes the taxable
year for which the election is to be effective or (b)
the taxable year for
which the election is to be effective, provided the
election is made
before the 16th day of the third month of the taxable
year.
.03 WHERE TO FILE.
(1) IN GENERAL. A taxpayer, other than an electing S
corporation or
exempt organization, applying for an adoption, change,
or retention in
annual accounting period pursuant to this revenue
procedure must file its
Form 1128, together with the appropriate user fee, with
the Service at the
following address: Internal Revenue Service, Associate
Chief Counsel
(Income Tax & Accounting), Attention: CC:PA:T:CRU, P.O.
Box 7604, Ben
Franklin Station, Washington, DC 20044 (or, in the case
of a designated
private delivery service: Internal Revenue Service,
Associate Chief
Counsel (Income Tax & Accounting), Attention:
CC:PA:T:CRU, Room 6561, 1111
Constitution Avenue, N.W., Washington, DC 20224).
(2) ELECTING S CORPORATIONS. An electing S corporation
requesting to
adopt, change, or retain an annual accounting period
pursuant to this
revenue procedure must file its Form 2553 with the
appropriate Service
Center designated in the instructions to the Form 2553.
The taxpayer
should not include the user fee with the Form 2553
mailed to the Service
Center. The Service Center will send the Form 2553 to
the national office
of the Service, which will then notify the taxpayer that
the fee is due.
(3) EXEMPT ORGANIZATIONS. An exempt organization
applying for a change
in annual accounting period pursuant to this revenue
procedure must file
its Form 1128, together with the appropriate user fee,
with the Service at
the following address: Internal Revenue Service,
Attention: T:EO:RA, P.O.
Box 27720, McPherson Station, Washington, DC 20038.
.04 USER FEE. Taxpayers are required to pay user fees
for requests to
adopt, change, or retain an annual accounting period
under this revenue
procedure. Rev. Proc. 2002-1 and, for tax-exempt
organizations, Rev. Proc.
2002-8, 2002-1 I.R.B. 259 (or any successors) contain
the schedule of user
fees and provide guidance for complying with the user
fee requirements.
.05 CONSOLIDATED GROUPS -- SEPARATE FORMS 1128 NOT
REQUIRED. A common
parent of a consolidated group files a single Form 1128
on behalf of the
consolidated group and pays only a single user fee. The
common parent must
indicate that the Form 1128 is for the common parent and
all its
subsidiaries and answer all relevant questions on the
application for each
member of the consolidated group. If one or more of the
members of the
group is requesting to use a 52-53-week taxable year
that ends within the
same 7-day period of the other members' requested
taxable year, the parent
must attach a statement to its tax return for the first
effective year as
required by Rev. Proc. 89-56, 1989-2 C.B. 643 (or any
successor). The
consolidated group must also comply with all of the
provisions of Rev.
Rul. 72-184, 1972-1 C.B. 289 (or any successor). See
section
1.1502-76(a)(1).
.06 ADDITIONAL PROCEDURES IF UNDER EXAMINATION, BEFORE
AN AREA OFFICE,
OR BEFORE A FEDERAL COURT.
(1) CERTAIN TAXPAYERS UNDER EXAMINATION.
(a) A partnership, S corporation, electing S
corporation, or PSC that
is under examination may apply for approval to change or
retain its annual
accounting period under this revenue procedure only if
the appropriate
director consents to the change or retention. The
director will consent to
the change or retention unless in the opinion of the
director, such
entity's annual accounting period ordinarily would be
included as an item
of adjustment in the year(s) for which the entity is
under examination.
For example, the director will consent to a change where
the entity is
using a permissible annual accounting period. The
director also will
consent to a change from an impermissible annual
accounting period where
the period became impermissible (e.g., due to a change
in ownership or a
change in the entity's business) subsequent to the years
under
examination. The question of whether the annual
accounting period from
which the entity is changing is permissible or became
impermissible
subsequent to the years under examination may be
referred to the national
office as a request for technical advice under the
provisions of Rev.
Proc. 2002-2 (or any successor) or, for tax-exempt
organizations, Rev.
Proc. 2002-5 (or any successor).
(b) A partnership, S corporation, electing S
corporation, or PSC
changing or retaining an annual accounting period under
this revenue
procedure with the consent of the appropriate director
must attach to the
application a statement from the director consenting to
the change or
retention. The partnership, S corporation, electing S
corporation, or PSC
must provide a copy of the application to the director
at the same time it
files the application with the national office. The
application must
contain the name(s) and telephone number(s) of the
examining agent(s).
(2) CERTAIN TAXPAYERS BEFORE AN AREA OFFICE. A
partnership, S
corporation, electing S corporation, or PSC that is
before an area office
must attach to the application a separate statement
signed by an
appropriate person certifying that, to the best of that
person's
knowledge, the entity's annual accounting period is not
an issue under
consideration by the area office. The entity must
provide a copy of the
application to the appeals officer at the same time it
files the
application with the national office. The application
must contain the
name and telephone number of the appeals officer.
(3) CERTAIN TAXPAYERS BEFORE A FEDERAL COURT. A
partnership, S
corporation, electing S corporation, or PSC that is
before a federal court
must attach to the application a separate statement
signed by an
appropriate person certifying that, to the best of that
person's
knowledge, the entity's annual accounting period is not
an issue under
consideration by the federal court. The entity must
provide a copy of the
application to the government counsel at the same time
it files the
application with the national office. The application
must contain the
name and telephone number of the government counsel.
SECTION 7. PROCESSING OF APPLICATION
.01 SERVICE DISCRETION. Notwithstanding any other
provision of this
revenue procedure, the Service reserves the right to
decline to process
any application filed under this revenue procedure in
situations in which
it would not be in the best interest of sound tax
administration to permit
the requested adoption, change, or retention. In this
regard, the Service
will consider whether the adoption, change, or retention
in annual
accounting period would clearly and directly frustrate
compliance efforts
of the Service in administering the income tax laws.
.02 APPLICABILITY OF REV. PROC. 2002-1, REV. PROC.
2002-4, AND ANY
SUCCESSOR REVENUE PROCEDURES. Rev. Proc. 2002-1 or, for
tax-exempt
organizations, Rev. Proc. 2002-4, 2002-1 I.R.B. 127 (or
any successors)
will apply to any request made under this revenue
procedure to adopt,
change, or retain an annual accounting period.
.03 INCOMPLETE APPLICATION -- 21 DAY RULE. If the
Service receives an
application that is not completed properly in accordance
with the
instructions on the Form 1128 (or Form 2553) and the
provisions of this
revenue procedure, or if supplemental information is
needed, the Service
will notify the taxpayer. The notification will specify
the information
that needs to be provided, and the taxpayer will be
permitted 21 days from
the date of the notification to furnish the necessary
information. The
Service reserves the right to impose shorter reply
periods if subsequent
requests for additional information are made. If the
required information
is not submitted to the Service within the reply period,
the application
will not be processed. A reasonable additional period to
furnish
information may be granted to a taxpayer. Any request
for an extension of
time to furnish necessary information must be made in
writing and
submitted within the 21-day period. If the extension
request is denied,
there is no right of appeal.
.04 CONFERENCE IN THE NATIONAL OFFICE. The taxpayer must
complete the
appropriate line on the Form 1128, or attach a statement
to the Form 2553,
to request a conference of right if an adverse response
is contemplated by
the Service. If the taxpayer does not complete the
appropriate line on the
Form 1128, attach a statement to the Form 2553, or
request a conference in
a later written communication, the Service will presume
that the taxpayer
does not desire a conference. If requested, a conference
will be arranged
in the national office prior to the Service's formal
reply to the
taxpayer's application. For taxpayers other than exempt
organizations, see
section 11 of Rev. Proc. 2002-1 (or any successor). For
exempt
organizations, see section 12 of Rev. Proc. 2002-4 (or
any successor).
.05 LETTER RULING. Unless otherwise specifically
provided, the
Commissioner's approval to adopt, change, or retain a
taxpayer's annual
accounting period will be set forth in a letter ruling
from the national
office that identifies the taxpayer's former annual
accounting period; the
annual accounting period the taxpayer is adopting,
changing to, or
retaining; the short period necessary to effect a
change; and the terms,
conditions, and adjustments under which the adoption,
change, or retention
is to be effected. See section 1. 442-1(b). A copy of
the letter ruling
must be attached to the taxpayer's federal income tax
return for the first
effective year.
.06 EFFECT OF NONCOMPLIANCE. If a taxpayer adopts,
changes, or retains
an annual accounting period without authorization or
without complying
with all of the provisions of this revenue procedure and
the letter ruling
granting permission for the change, the taxpayer has
initiated an
adoption, change, or retention of annual accounting
period without
obtaining the approval of the Commissioner as required
by sections 441(i),
442, 706(b), and 1378. Upon examination, a taxpayer that
has initiated an
unauthorized adoption, change, or retention of annual
accounting period
may be denied the adoption, change, or retention. For
example, the
taxpayer may be required to recompute its taxable income
or loss in
accordance with its former (or required, if applicable)
taxable year.
.07 EFFECT ON OTHER OFFICES OF THE SERVICE. The
provisions of this
revenue procedure are not intended to preclude an
appropriate
representative of the Service (for example, an appeals
officer with
delegated settlement authority) from settling a
particular taxpayer's case
involving an accounting period issue by agreeing to
terms, conditions, and
adjustments that differ from those that might be
provided under this
revenue procedure when it is in the best interest of the
government to do
so.
SECTION 8. EFFECT OF APPROVAL
.01 AUDIT PROTECTION.
(1) IN GENERAL. Except as provided in section 8.01(2) of
this revenue
procedure, a partnership, S corporation, electing S
corporation, or PSC
that files an application in compliance with all the
applicable provisions
of this revenue procedure will not be required by the
Service to change
its annual accounting period for a taxable year prior to
the first
effective year.
(2) EXCEPTIONS. The Service may change the annual
accounting period of
a taxpayer described in section 8.01(1) of this revenue
procedure for a
prior taxable year if:
(a) the taxpayer withdraws or does not perfect its
request;
(b) the national office denies the request;
(c) the taxpayer declines to implement the change;
(d) the taxpayer implements the change but does not
comply with all the
applicable provisions of this revenue procedure and the
letter ruling
granting permission for the change; or
(e) the national office modifies or revokes the ruling
because there
has been a misstatement or omission of material facts.
.02 SUBSEQUENTLY REQUIRED CHANGES.
(1) IN GENERAL. A taxpayer described in section 8.01(1)
of this revenue
procedure that adopts, changes, or retains its annual
accounting period
pursuant to this revenue procedure may be required to
subsequently change
its annual accounting period for the following reasons:
(a) the enactment of legislation;
(b) a decision of the United States Supreme Court;
(c) the issuance of temporary or final regulations;
(d) the issuance of a revenue ruling, revenue procedure,
notice, or
other statement published in the Internal Revenue
Bulletin;
(e) the issuance of written notice to the taxpayer that
the change in
accounting period was granted in error or is not in
accord with the
current views of the Service; or
(f) a change in the material facts on which the approval
was based.
(2) RETROACTIVE CHANGE OR MODIFICATION. Except in rare
or unusual
circumstances, if a taxpayer described in section
8.01(1) of this revenue
procedure adopted, changed, or retained its annual
accounting period under
this revenue procedure and is subsequently required
under section 8.02(1)
of this revenue procedure to change its annual
accounting period, the
required change will not be applied retroactively
provided that:
(a) the taxpayer complied with all the applicable
provisions of the
letter ruling granting permission for the change and
this revenue
procedure;
(b) there has been no misstatement or omission of
material facts;
(c) there has been no change in the material facts on
which the
approval was based;
(d) there has been no change in the applicable law; and
(e) the taxpayer to whom approval was granted acted in
good faith in
relying on the approval and applying the change
retroactively would be to
the taxpayer's detriment.
SECTION 9. REVIEW BY DIRECTOR
.01 IN GENERAL. A director must apply a ruling obtained
under this
revenue procedure in determining the taxpayer's tax
liability unless the
director recommends that the ruling should be modified
or revoked. The
director will ascertain if:
(1) the representations on which the ruling was based
reflect an
accurate statement of the material facts;
(2) the amount of the adjustments required to effect the
change, if
any, were properly determined;
(3) the adoption, change, or retention of annual
accounting period was
implemented as proposed in accordance with the terms and
conditions of the
letter ruling and this revenue procedure;
(4) there has been any change in the material facts on
which the ruling
was based during the period that the new or retained
annual accounting
period was used; and
(5) there has been any change in the applicable law
during the period
the new or retained annual accounting period was used.
.02 NATIONAL OFFICE CONSIDERATION. If a director
recommends that the
ruling (other than the amount of the adjustments
required to effect the
change) should be modified or revoked, the director will
forward the
matter to the national office for consideration before
any further action
is taken. Such a referral to the national office will be
treated as a
request for technical advice, and the provisions of Rev.
Proc. 2002-2 or,
for tax-exempt organizations, Rev. Proc. 2002-5 will be
followed.
SECTION 10. EFFECTIVE DATE AND TRANSITION RULE
.01 IN GENERAL. Except as provided in section 10.02 of
this revenue
procedure, this revenue procedure is effective for
applications filed on
or after May 10, 2002.
.02 TRANSITION RULE FOR PENDING APPLICATIONS. If a
taxpayer filed an
application before May 10, 2002, and the application is
pending with the
national office on May 10, 2002, the taxpayer may
request that the
application be processed in accordance with this revenue
procedure.
However, the national office will process applications
filed before May
10, 2002, in accordance with prior authorities unless,
prior to the later
of June 25, 2002, or the issuance of the letter ruling
granting or denying
consent to the adoption, change, or retention, the
taxpayer notifies the
national office that it requests that its application be
processed in
accordance with this revenue procedure.
SECTION 11. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 85-16 and Rev. Proc. 74-33 are superseded.
SECTION 12. 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 6, 7, and 10. The information in section 6 is
required in order
to determine whether the taxpayer's annual accounting
period will result
in a distortion of income. This information will be used
by the Service to
determine which terms, conditions, and adjustments will
be necessary to
effect the adoption, change, or retention of annual
accounting period. The
information in section 7 is required in order to
determine whether the
taxpayer desires a conference of right if an adverse
response to its
application is contemplated. The information in section
10 is required in
order to allow a taxpayer to apply the provisions of
this revenue
procedure to a pending application. The likely
respondents are the
following: individuals, corporations, associations,
trusts, estates,
partnerships, farms, business or other for-profit
organizations,
non-profit organizations, and small businesses or
organizations.
Except for the burdens contained in sections 6.01(5),
6.01(6), 7.04
(Forms 2553 only), and 10.02, the total annual reporting
burden for the
requirements contained in this revenue procedure is
reflected in the
burden estimates for Forms 1128 and 2553.
The estimated total annual reporting burden for the
requirements
contained in sections 6.01(5), 6.01(6), 7.04, and 10.02
of this revenue
procedure is 600 hours: the estimated average annual
burden per respondent
is 1.2 hours; the estimated number of respondents is
500; and the
estimated frequency of response is on occasion.
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 author of this revenue procedure is Martin Scully,
Jr. of the
Office of Associate Chief Counsel (Income Tax and
Accounting). For further
information regarding this revenue procedure, contact
Mr. Scully at (202)
622-4960 (not a toll-free call).
<<END RULING>>
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