SECTION 3. SIGNIFICANT CHANGES

Significant changes to Rev. Proc. 87–32 made by this revenue procedure include:

.01 Section 4.01(1) of this revenue procedure clarifies that a partnership, S corporation, electing S corporation, or PSC may change automatically to its required taxable year;

.02 Section 4.01(2) of this revenue procedure allows a partnership, S corporation, electing S corporation, or PSC to change automatically to a natural business year that satisfies the 25-percent gross receipts test, regardless of whether such year results in more deferral of income than its present taxable year;

.03 Sections 4.01(1), (2), and (3) of this revenue procedure allow, in appropriate circumstances, a partnership, S corporation, electing S corporation, or PSC to adopt, change to, or retain a 52–53-week taxable year ending with reference to the required taxable year, natural business year, or ownership taxable year;

.04 Section 4.01(4) of this revenue procedure allows any partnership, S corporation, electing S corporation, or PSC to automatically change from a 52–53week taxable year to a non–52–53-week taxable year that ends with reference to the same calendar month, and vice versa;

.05 Section 4.01(5) of this revenue procedure allows a partnership that would be required to change its taxable year because of a minor percentage change in

ownership to retain its current taxable year for one year, subject to certain circumstances;

.06 Section 4 of this revenue procedure allows a PSC to automatically change its taxable year even if the PSC makes an S corporation election for the taxable year immediately following the short period;

.07 Sections 4.02(1)-(4) of this revenue procedure generally prevent a partnership, S corporation, electing S corporation, or PSC from using this revenue procedure to change its annual accounting period if the taxpayer is under examination and does not obtain consent from the appropriate director, or is before an area office or before a federal court and its annual accounting period is an issue under consideration;

.08 Section 4.02(5) of this revenue procedure reduces the period of time required between a prior accounting period change and a change effected under this revenue procedure from 6 calendar years to 48 months, and provides that a change to a required or ownership taxable year, and a change to (or from) a 52–53-week taxable year from (or to) a non-52–53-week taxable year ending with reference to the same calendar month, will not be considered changes within the most recent 48-month period;

.09 Section 5.06 of this revenue procedure has been expanded to disregard the interests of certain tax-exempt entities for purposes of determining the ownership taxable year of an S corporation or electing S corporation, unless the S corporation or electing S corporation is whollyowned by such tax-exempt entities;

.10 Section 6.04 of this revenue procedure adds a term and condition requiring the taxpayer to compute its income and keep its books and records (including financial statements) on the basis of the requested taxable year, except in certain circumstances;

.11 Section 6.08 of this revenue procedure adds a term and condition to prevent the carryback of certain capital losses generated in the short period;

.12 Section 7.02(2) of this revenue procedure extends the filing requirements for filing a Form 1128 to the due date of the taxpayer’s federal income tax return (including extensions) for the first effective year; and

June 3, 2002 1040 2002–22 I.R.B.

change in ownership will be reversed. If, at the end of one taxable year, the partnership cannot meet either section 4.01(1) or (3) of this revenue procedure for its current taxable year, then it must change to its required or permitted taxable year under section 4.01(1) of this revenue procedure.

.02 Inapplicability . This revenue procedure does not apply to:

(1) Under examination . A change or retention in annual accounting period if the partnership, S corporation, electing S corporation, or PSC is under examination, unless it obtains consent of the appropriate director as provided in section 7.03(1) of this revenue procedure;

(2) Before an area office . A change or retention in annual accounting period if the partnership, S corporation, electing S corporation, or PSC is before an area office with respect to any income tax issue and its annual accounting period is an issue under consideration by the area office;

(3) Before a federal court . A change or retention in annual accounting period if the partnership, S corporation, electing S corporation, or PSC is before a federal court with respect to any income tax issue and its annual accounting period is an issue under consideration by the federal court;

(4) Partnerships and S corpora- tions . A change or retention in annual accounting period by 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; or

(5) Prior change . A change to, or retention of, a natural business year as described in section 4.01(2) of this revenue procedure if the partnership, S corporation, electing S corporation, or PSC has 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. For this purpose, the following changes are not considered prior changes in annual accounting period:

(a) a change to a required taxable year or ownership taxable year;

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

(c) a change in accounting period by an S corporation, electing S corporation, or PSC, in order to comply with the common taxable year requirements of §§ 1.1502–75(d)(3)(v) and 1.1502– 76(a)(1). .03 Nonautomatic Changes . Any partnership, S corporation, electing S corporation, or PSC that wants to adopt, change to, or retain an annual accounting period that cannot do so automatically under this revenue procedure (because the requested taxable year is not described in section 4.01, or because of a prior change as described in section 4.02(5)) or pursuant to a provision in the Code, regulations, or other published administrative procedures, must obtain the approval of the Commissioner. See § 1.442–1(b) and Rev. Proc. 2002–39 for rules relating to nonautomatic changes of annual accounting periods by partnerships, S corporations, electing S corporations, and PSCs.