SECTION 4. SCOPE

.01 Applicability . (1) In general . Except as provided in section 4.02, this revenue procedure, which is the exclusive procedure for corporations within its scope, applies to a corporation requesting automatic approval to change its annual accounting period.

(2) Certain 52–53-week taxable years . This revenue procedure applies to a corporation (including a member of a consolidated group) that wants to change to (or from) a 52–53-week taxable year,

June 3, 2002 1032 2002–22 I.R.B.

(c) a prior change from a 52–53week taxable year that references a particular month to a non–52–53-week taxable year that ends on the last day of that month, and vice versa; or

(d) a prior change in accounting period to a required taxable year or an ownership taxable year.

(2) Interest in a pass-through entity . A corporation that has an interest in a pass-through entity 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 pass-through entity would be required under the Code or regulations to change its taxable year to the new taxable year of the corporation (or, if applicable in the case of a CFC or FPHC, to a taxable year that begins one month-earlier than the new taxable year of the corporation). See section 6.10 of this revenue procedure for a special term and condition related to this exception;

(b) the pass-through entity is a partnership that is owned 50-percent by each of two partners and the corporation and the partnership both want to change to the taxable year of the other 50-percent partner. See section 6.10 of this revenue procedure for a special term and condition related to this exception;

(c) the new taxable year of the corporation would result in no change in or less deferral (as described in § 1.706– 1(b)(3)) from the pass-through entity than the present taxable year of the corporation. If the pass-through entity is a partnership, CFC, or FPHC, the corporation should compare the existing deferral period (between the pass-through entity’s and the corporation’s current taxable years) with the new deferral period (between the new required taxable year of the pass-through entity and the corporation’s new taxable year). See section 4.04 of this revenue procedure for an example of this rule; or

(d) for pass-through entities not qualifying for the exceptions in either section 4.02(2)(a) or (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, dividends and deduction equivalents of credits) from such passthrough 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) Shareholder of certain FSCs or IC-DISCs . A corporation that is a shareholder of a foreign sales corporation (FSC) or interest charge domestic international sales corporation (IC-DISC), 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 6.10 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 § 1.706–1(a)(3)) from the FSC or IC-DISC than the present taxable year of the corporation;

(4) FSC or an IC-DISC . A corporation that 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) S corporation . A corporation that is an S corporation (as defined in § 1361). See Rev. Proc. 2002–38, 2002–22 I.R.B. 1037, for procedures to follow for certain automatic changes in the annual accounting period of an S corporation;

(6) Electing S corporation . A corporation that attempts to make an S corporation election for the taxable year immediately following the short period, unless the change is to a permitted taxable year;

(7) PSC . A corporation that is a personal service corporation (PSC) (as defined in § 441(i)). See Rev. Proc. 2002–38 for procedures to follow for certain automatic changes in the annual accounting period of a PSC;

(8) CFC or FPHC . A corporation that is a CFC (as defined in § 957), including a CFC that is also a PFIC (as defined in § 1297(a)), or a FPHC (as defined in § 552), unless the CFC or FPHC either does not have a required taxable year under final regulations under § 898, or is changing to its required taxable year or to a 52–53-week taxable year that references its required taxable year;

(9) Tax-exempt organization . A corporation that 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 of a tax-exempt organization that is not within the scope of this revenue procedure;

(10) Possessions corporation . A corporation that has in effect an election under § 936;

(11) Cooperative association . A corporation that 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 the patrons of the cooperative association are substantially the same in the year before the change of annual accounting 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; or

(12) Corporation with a required taxable year . A corporation that is not described in sections 4.02(1) through (11) of this revenue procedure that has a required taxable year ( e.g., a REIT, or a qualified settlement fund or designated settlement fund as defined in § 1.468B),

2002–22 I.R.B. 1033 June 3, 2002

unless the corporation is changing to its required taxable year.

.03 Nonautomatic Changes . Corporations that are unable to obtain automatic approval for a change in accounting period under this revenue procedure, the applicable regulations, or any other revenue procedure must secure prior approval from the Commissioner for a change in an accounting period pursuant to § 442 and the regulations thereunder. See Rev. Proc. 2002–39, 2002–22 I.R.B. 1046. .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 calen dar year taxpayers. X and Y have taxable years end ing June 30, and Z has a taxable year ending Sep tember 30. ABC does not have a business purpose

for a particular taxable year, and thus, pursuant to

§ 1.706–1, 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 num ber 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 cal endar year, ABC would be required to change its

taxable year under § 706 to its majority interest tax able 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)(c) of this revenue procedure.

(2) Example 2 . (i) Corporation X, a calendar

year taxpayer, wants to change its taxable year to a

year ending June 30. X has interests in five partner ships, 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)(c) 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 sat isfy the de minimis exception in section 4.02(2)(d).

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)(d)(ii). Conse quently, JKL and MNO fail to satisfy the de minimis

exception in section 4.02(2)(d). Because X’s inter ests in all of its pass-through entities will not be

disregarded, X is not within the scope of this rev enue procedure.