SECTION 2. BACKGROUND

.01 Section 1.442–1(a)(1) of the Income Tax Regulations provides that if a taxpayer wishes to change its annual accounting period (as defined in § 441(c)) and adopt a new taxable year (as defined in § 441(b)), it must obtain prior approval from the Commissioner.

.02 Section 1.442–1(b)(1) provides that in order to secure prior approval of a change of a taxpayer’s annual accounting period, the taxpayer must file an application on Form 1128, Application to Adopt, Change, or Retain a Tax Year, with the Commissioner on or before the 15 ^th day of the second calendar month following the close of the short taxable year required to effect the change. Section 1.442–1(b)(1) also provides that approval will not be granted unless the taxpayer and the Commissioner agree to the terms, conditions, and adjustments under which the change will be effected.

.03 Section 1.442–1(c) provides a special rule whereby certain corporations may change their annual accounting periods without the prior approval of the Commissioner. Rev. Proc. 92–13 also provided procedures whereby certain corporations that did not satisfy the conditions of § 1.442–1(c) could obtain expeditious approval of a change of their annual accounting period.

.04 Section 1.443–1(b)(1)(i) provides that if a return is made for a short period resulting from a change of an annual ac

2000–3 I.R.B. 309 January 18, 2000

(c) for pass-through entities not qualifying for the exceptions in either section 4.02(a) or 4.02(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, or dividends) 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) is a shareholder of a FSC or ICDISC, 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 § 441(h)) would be required to change its taxable year pursuant to §§ 1.921–1T(b)(4) and (b)(6) to the new taxable year of the corporation. See section 5.08 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 § 1.706–1T(a)(2)) from the FSC or IC-DISC than the present taxable year of the corporation;

(4) is a FSC or an IC-DISC. See § 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) is an S corporation (as defined in § 1361). See Rev. Proc. 87–32 for procedures to follow for certain automatic changes in the annual accounting period of an S corporation;

a corporation making an S corporation election effective for the taxable year immediately following a change in accounting period, provided the corporation is changing to a permitted S corporation taxable year;

.07 Section 4.02(14) modifies the scope restriction for a cooperative association with a loss in the short period required to effect the change to allow an otherwise automatic change if the patrons of the cooperative association remain substantially the same before and after the accounting period change; and

.08 Section 5.06 deletes the requirement that a net operating loss (NOL) in the short period required to effect the change must be deducted ratably over 6 years. Further, section 5.06 increases (from $10,000 to $50,000) the exception to the general rule proscribing a carryback of a short period NOL.