SECTION 5. DEFINITIONS

The following definitions apply solely for the purpose of this revenue procedure:

.01 Corporation . The term “corporation” includes associations, joint-stock companies, and insurance companies, as provided in § 7701(a)(3), and includes each member of a consolidated group. However, 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.

.02 Pass-through Entity . The term “pass-through entity” means a partnership; a trust; an estate; a common trust fund (as defined in § 584); a CFC (as defined in § 957), but only to the extent the corporation is a U.S. shareholder (as defined in § 951(b)); an FPHC (as defined in § 552), but only to the extent the corporation is a U.S. shareholder (as defined in § 551(a)); a PFIC, but only if the corporation has elected to treat such PFIC as a qualified electing fund (as defined in § 1295); and a closely-held REIT (as defined in § 6655(e)(5)(B)), but only to the extent the corporation is described in § 6655(e)(5)(A).

(a) Gross receipts from sales and services for the most recent 12-month period that ends with the last month of

.03 Required Taxable Year . The required taxable year is the particular taxable year that certain taxpayers are required to use under the Code and the regulations thereunder. See § 1.441– 1(b)(2) for examples of taxpayers, including certain corporations, with required taxable years.

.04 Permitted Taxable Year . A “permitted taxable year” of an electing S corporation is the required taxable year; a taxable year elected under § 444; a natural business year that satisfies the 25-percent gross receipts test described in section 5.06 of this revenue procedure; the ownership taxable year; or a 52–53week taxable year that references the required taxable year, taxable year elected under § 444, natural business year, or ownership taxable year.

.05 Ownership Taxable Year . An “ownership taxable year” of an electing S corporation is the taxable year (if any) that, as of the first day of the first effective year, constitutes the taxable year of one or more shareholders (including any shareholder that concurrently changes to such taxable year) holding more than 50-percent of the corporation’s issued and outstanding shares of stock. For this purpose, under principles similar to § 1.706–3T for determining the taxable year of a partnership, a shareholder that is tax-exempt under § 501(a) is disregarded if such shareholder is not subject to tax on any income attributable to the electing S corporation. Tax-exempt shareholders are not disregarded, however, if the electing S corporation is wholly-owned by such tax-exempt entities. A shareholder in an electing S corporation that wants to concurrently change its taxable year must follow the instructions generally applicable to taxpayers changing their taxable years contained in § 1.442–1(b), Rev. Proc. 2002–39, or any other applicable administrative procedure published by the Commissioner.

.06 Natural Business Year . A corporation establishes a “natural business year” under this revenue procedure by satisfying the following “25-percent gross receipts test:”

(1) Prior three years gross receipts .

June 3, 2002 1034 2002–22 I.R.B.

the requested annual accounting period are totaled and then divided into the amount of gross receipts from sales and services for the last 2 months of this 12-month period. (b) The same computation as in (1)(a) above is made for the two preceding 12-month periods ending with the last month of the requested annual accounting period.

and records (including financial statements and reports to creditors) on the basis of the requested taxable year, except that this requirement shall not apply (1) to books and records maintained solely for foreign law purposes ( e.g., foreign tax reporting purposes), or (2) if the requested taxable year is the corporation’s required taxable year.

.05 Changes in Natural Business Year . If an electing S corporation changes to a natural business year that satisfies the 25-percent gross receipts test under this revenue procedure and that annual accounting period no longer qualifies as a natural business year, the taxpayer is using an impermissible annual accounting period and should change to a permitted taxable year or any other taxable year for which the taxpayer establishes a business purpose to the satisfaction of the Commissioner. Certain S corporations may qualify for automatic approval to change their annual accounting period under Rev. Proc. 2002–38. Other taxpayers must request approval under Rev. Proc. 2002– 39. .06 Changes in Ownership Taxable Year . An electing S corporation that changes to an ownership taxable year under this revenue procedure must change to a permitted taxable year or any other taxable year for which the taxpayer establishes a business purpose to the satisfaction of the Commissioner, or request approval to retain its current taxable year, if, as of the first day of any taxable year, its ownership taxable year changes. Certain S corporations may qualify for automatic approval to change or retain their annual accounting period under Rev. Proc. 2002–38. Other taxpayers must request approval under Rev. Proc. 2002– 39. .07 52–53-week Taxable Years . If applicable, the corporation must comply with § 1.441–2(e) (relating to the timing of taking items into account in those cases where the taxable year of a passthrough entity ends with reference to the same calendar month as one or more of its owners).

.08 Creation of Net Operating Loss or Capital Loss . If the corporation generates a net operating loss (NOL) or capital loss (CL) in the short period required to effect a change in annual accounting period, the corporation may not carry the NOL or CL

(2) Natural business year .

(a) Except as provided in (b) below, if each of the three results described in (1) equals or exceeds 25 percent, then the requested annual accounting period is deemed to be the taxpayer’s natural business year.

(b) The taxpayer must determine whether any annual accounting period other than the requested annual accounting period also meets the 25-percent gross receipts test described in (2)(a). If one or more other annual accounting periods produce higher averages of the three percentages (rounded to 1/100 of a percent) described in (1) than the requested annual accounting period, then the requested annual accounting period will not qualify as the taxpayer’s natural business year.

(3) Special rules . (a) To apply the 25-percent gross receipts test for any particular year, the taxpayer must compute its gross receipts under the method of accounting used to prepare its federal income tax returns for such taxable year.

(b) Regardless of the taxpayer’s method of accounting, the taxpayer’s share of income from a pass-through entity generally must be reported as gross receipts in the month that the passthrough entity’s taxable year ends.

(c) If a taxpayer has a predecessor organization and is continuing the same business as its predecessor, the taxpayer must use the gross receipts of its predecessor for purposes of computing the 25-percent gross receipts test. (d) If the taxpayer (including any predecessor organization) does not have a 47-month period of gross receipts (36month period for requested taxable year plus additional 11-month period for comparing requested taxable year with other potential taxable years), then it cannot establish a natural business year under this revenue procedure.

(e) If the requested taxable year is a 52–53-week taxable year, the calendar

month ending nearest to the last day of the 52–53-week taxable year is treated as the last month of the requested taxable year for purposes of computing the 25-percent gross receipts test. .07 First Effective Year . The first effective year is the first taxable year for which a change in annual accounting period is effective, e.g., the short period required to effect the change. Thus, in the case of a change, the first effective year is the short period required to effect the change. The first effective year is also the first taxable year for complying with all the terms and conditions set forth in this revenue procedure necessary to effect the change in annual accounting period.

.08 Short Period . A corporation’s short period is the period beginning with the day following the close of the old taxable year and ending with the day preceding the first day of the new taxable year.