SECTION 10. EFFECTIVE DATE AND

TRANSITION RULE

.01 Effective Date .02 Transition Rule

2001–23 I.R.B. 1315 June 4, 2001

year, a 52–53-week taxable year ending with reference to its required taxable year, or a taxable year elected under § 444 without the approval of the Commissioner pursuant to § 441. If, however, a partnership, S corporation, or PSC wants to adopt any other taxable year, it must establish a business purpose and obtain approval under § 442. See §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 from the Commissioner.

(2) Annualization of short period re- turn. 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 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 § 443(b)(2) and § 1.443–1(b)(2) apply, the tax for the short period 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. See § 1.706–1(b)(4)(i) for an exception for partnerships.

(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 a Taxable Year . In certain cases, a partnership, 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 § 442, or makes an election under § 444, to retain its current taxable year. See § 1.441–1(d). For example, a corporation on 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 § 706(b)(4)(B). However, a partnership

that has previously established a business purpose to the satisfaction of the Commissioner to use a June 30 fiscal year is not required to obtain the approval of the Commissioner to retain its June 30 fiscal year if its required taxable year changes from September 30 to November 30.

.05 Approval of an adoption, change, or retention . Section 1.442–1(b) provides that in order to secure approval 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 no earlier than the day following the close of the first taxable year in which the taxpayer wants the adoption, change, or retention to be effective (the “first effective year”) and no later than the 15 ^th day of the third calendar month following the close of the first effective year. 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.

(1) Section 1.442–1(b) 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. Section 1.442–1(b) also 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.

(2) A taxpayer is deemed to have established a natural business year if it satisfies the “25-percent gross receipts test.” See Rev. Proc. 87–32, superseding Rev. Proc. 83–25, 1983–1 C.B. 689. The Conference Report to the Tax Reform Act of 1986 states that the Secretary may prescribe other tests in addition to the 25-percent gross receipts test to be used to establish the existence of a business purpose if, in the discretion of the Secretary, such tests are desirable and expedient towards the efficient administration of the tax

.06 Business purpose .

laws. See H.R. Rep. No. 99– 841 (Conf. Rep.), 99th Cong., 2d Sess., II–318 (1986), 1986–3 (Vol. 4) C.B. 319.

.07 Section 444 Election s. A partnership, S corporation, electing S corporation, or PSC generally can elect under § 444 to use a taxable year other than its required taxable year if the deferral period of the new taxable year is three months or less. A partnership and an S corporation with a § 444 election must make required payments under § 7519 that approximate the amount of deferral benefit and a PSC with a § 444 election is subject to the minimum distribution requirements of § 280H. A taxpayer may automatically adopt, change to, or retain a taxable year permitted under § 444 by filing a Form 8716, Election to Have a Tax Year Other Than a Required Tax Year . A taxpayer that wants to terminate its § 444 election must follow the automatic procedures under § 1.444–1T(a)(5) to change to its required taxable year or establish a business purpose for its taxable year pursuant to § 442 and Rev. Proc. 2001–XX [insert cite].

.08 Rev. Proc. 87–32. Rev. Proc. 87–32 generally provided automatic approval provisions for a partnership, S corporation, electing S corporation, or PSC to retain or change to a natural business year and for an S corporation or electing S corporation to adopt, change to, or retain an ownership taxable year. In addition, special notification procedures were provided for a partnership, S corporation, electing S corporation, or PSC to adopt, change to, or retain a required taxable year.