SECTION 2. BACKGROUND

Procedures for Requesting an Adoption, Change, or Retention of Accounting Period

Notice 2001–34

This notice provides a proposed revenue procedure that, when finalized, will provide the procedures under § 442 of the Internal Revenue Code, and the regulations thereunder, to establish a business purpose and request the approval of the Commissioner to adopt, change, or retain a taxpayer’s annual accounting period. The proposed revenue procedure will apply to taxpayers that are outside the scope of the revenue procedures that provide for automatic approval to adopt, change, or retain an annual accounting period. See, e.g., Rev. Proc. 2000–11, 2000–3, I.R.B. 309; Notice 2001–35, 2001–23 I.R.B 1314, and Rev. Proc. 66–50, 1966–2 C.B. 1260. This proposed revenue procedure is being issued concurrently with new proposed regulations under §§ 441, 442, 706 and 1378, and a proposed revenue procedure (Notice 2001–35, 2001–23 I.R.B.) updating Rev. Proc. 87–32, 1987–2 C.B. 396, which will provide procedures under which a partnership, S corporation, electing S corporation, or PSC may obtain automatic approval to adopt, retain, or change its annual accounting period. References in this proposed revenue procedure to the regulations under §§ 441, 442, 706, and 1378 are to the new proposed regulations, and references to “Rev. Proc. 2001–XX” are to the proposed revenue procedure updating Rev. Proc. 87–32. All three documents are intended to be finalized concurrently.

Under its current ruling practice, the Internal Revenue Service weighs the merits of a taxpayer’s stated business purpose for the requested annual accounting period against the amount of distortion of income or other tax consequences resulting from the adoption of, change to, or retention of that annual accounting period. In general, the only circumstance in which the Service has determined that a taxpayer’s business purpose overcomes more than de minimis distortion of income is where the taxpayer is adopting, changing to, or retaining, its natural busi

ness year. In any other case, such as where a taxpayer is requesting to change its annual accounting period to conform to its financial reporting period, the taxpayer generally has been denied approval to use an annual accounting period that results in more than de minimis distortion of income.

Under the proposed revenue procedure, the Service in its ruling practice would no longer weigh the merit of a taxpayer’s stated business purpose against the amount of distortion of income. Taxpayers wanting to adopt, change to, or retain a natural business year generally would be granted approval under the proposed revenue procedure (provided they agree to general terms and conditions) as under the current IRS ruling practice. Also consistent with the current IRS ruling practice, establishing a natural business year generally will be the only circumstance under which a partnership, S corporation, electing S corporation, or PSC will be granted approval. However, the IRS ruling practice for other taxpayers generally will be liberalized. These other taxpayers that do not establish a natural business year generally would be granted approval under the proposed revenue procedure if they agree to certain additional terms, conditions, and adjustments designed to neutralize the tax effects of substantial distortion of income resulting from the change. Under the Service’s current ruling practice, these other taxpayers generally would have been denied approval to change their annual accounting period if the change would have resulted in more than de minimis distortion of income.

The proposed revenue procedure provides audit protection to taxpayers adopting, changing, or retaining an annual accounting period under the revenue procedure. In conjunction with the provision of audit protection, taxpayers under examination that do not obtain consent of the appropriate director are not within the scope of the proposed revenue procedure. The Service and Treasury Department specifically request comments regarding whether the benefits of providing audit protection outweigh the burden on taxpayers under examination of having to obtain a director’s consent, particularly with respect to C corporations which gen

.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 re-

turn (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