SECTION 4. SCOPE

.01 Applicability . (1) In general . This revenue procedure applies to a corporation requesting consent to change its annual accounting period. 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.

(2) 52-53-week year. Notwithstanding section 4.02 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 to a taxable year that ends with reference to the same month, and vice versa.

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

.02 Inapplicability . This revenue procedure does not apply to a corporation that:

(1) has changed its annual accounting period at any time within the 6 calendar years ending with the calendar year that includes the beginning of the short period required to effect the change. For

this purpose, the following changes will not be considered a change in annual accounting period:

(a) a change in accounting period by a subsidiary to its common parent’s taxable year in order to comply with the common taxable year requirement of § 1.1502–76(a)(1). See § 1.442–1(d); (b) any prior change in accounting period by a majority-owned, newly acquired subsidiary that wants to change to the taxable year of its domestic or foreign parent with which it does not file consolidated tax returns in order to file consolidated financial statements, provided the change is made within 12 months of the acquisition. For purposes of this subsection, “majority-owned” means ownership that satisfies the test of § 1504(a)(2), substituting “more than 50 percent” for “at least 80 percent;”

(c) a change from a 52-53-week taxable year to a taxable year that ends with reference to the same month, and vice versa;

(2) is a member of a partnership or a beneficiary of a trust or an estate (collectively referred to as “pass-through entities”) 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 partnership in which the corporation is a majority interest partner ( i.e., a partner having an interest in the partnership’s profits and capital of more than 50 percent) would be required to change its taxable year pursuant to § 706(b) 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;

(b) the new taxable year of the corporation would result in no change in or less deferral (as described in § 1.706–1T(a)(2)) from the pass-through entity than the present taxable year of the corporation. If the pass-through entity is a partnership, the corporation should compare the existing deferral period (between the partnership’s and the corporation’s current taxable years) with the new deferral period (between the taxable year of the partnership that would be required under § 706 and the corporation’s new taxable year). See section 4.04 of this revenue procedure for an example of this rule; or

January 18, 2000 310 2000–3 I.R.B.

(6) attempts to make an S corporation election for the taxable year immediately following the short period, unless the change is to a permitted S corporation year. For this purpose, a “permitted S corporation year” includes a calendar year, a taxable year permitted under § 444, or an ownership taxable year or natural business year (as defined in Rev. Proc. 87–32, 1987–2 C.B. 396);

(7) is a personal service corporation (as defined in § 441(i)). See Rev. Proc. 87–32 for procedures to follow for certain automatic changes in the annual accounting period of a personal service corporation;

(8) is a CFC (as defined in § 957) or a foreign personal holding company (FPHC) (as defined in § 552);

(9) is a shareholder of a CFC or FPHC. However, an interest in a CFC or FPHC is disregarded if the shareholder is the majority U.S. shareholder ( i.e., the shareholder that meets the ownership requirement of § 898(b)(2)(A)) and the CFC or FPHC would be required to change its taxable year to the new taxable year of the shareholder. See section 5.08 of this revenue procedure for a special term and condition related to this exception;

(10) is a tax-exempt organization, other than an organization exempt from federal income tax under § 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 for a tax-exempt organization not meeting the scope of this revenue procedure;

(11) is a direct or indirect shareholder of a passive foreign investment company (PFIC) that is a qualified electing fund (within the meaning of § 1295) with respect to the shareholder;

(12) is a PFIC that U.S. persons (who own directly or indirectly, in the aggregate, 10 percent or more of the company) elected under § 1295 to treat as a qualified electing fund;

(13) is a corporation which has in effect an election under § 936; or

(14) is a cooperative association (within the meaning of § 1381(a)) with a loss in the short period required to effect the change of annual accounting period, unless all the patrons of the cooperative association are substantially the same in the year before the change of annual ac

counting 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.

.03 Nonautomatic changes . Corporations that are unable to use the automatic provisions of this revenue procedure must secure prior approval from the Commissioner for a change in an accounting period pursuant to § 442 and the regulations thereunder.

.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 a taxable year 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 § 1.706–1T, 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 § 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)(b) of this revenue procedure.

(2) Example 2 . (i) Corporation X, a calendar year taxpayer, wants to change its tax 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.

(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)(b) 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)(c). 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)(c)(ii). Consequently, JKL and MNO fail to satisfy the de minimis exception in section 4.02(2)(c). 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.