SECTION 3. APPLICATION

§ 1.921–1T(b)(6), and the special provision in § 706(b)(4)(b). If the entity that is required to change is a corporation, such as a CFC, it is deemed to be within section 4.01 of Rev. Proc. 2002–37, and if it is a pass-through entity, such as a partnership, it is deemed to be within section 4.01(1) of Rev. Proc. 2002–38. The preceding sentence applies notwithstanding any conflicting testing date provision under the Code or regulations or any other limitation under section 4.02 of Rev. Proc. 2002–37 or section 4.02 of Rev. Proc. 2002–38.

B. Ownership Taxable Year of Certain S Corporations

Section 5.06 of Rev. Proc. 2002–38 (relating to the definition of an “ownership taxable year”) provides that, under principles similar to the principles set forth in § 1.706–3T for determining the taxable year of a partnership, a shareholder that is taxexempt under § 501(a) is disregarded if such shareholder is not subject to tax on any income attributable to the S corporation. The Service will not apply this rule to require an S corporation to change its taxable year for any taxable year beginning before January 1, 2003.

C. Certain changes in ownership of partnerships

Section 4.01(5)(B) of Rev. Proc. 2002–38 is modified to read as follows:

* * * “(B) it is reasonably foreseeable that, at the end of one taxable year, the change in ownership will be reversed. If, at the end of one taxable year, the partnership’s current taxable year does not meet section 4.01(1) of this revenue procedure, then the partnership must change to its required taxable year under section 4.01(1), or apply to either retain its current taxable year or change to any other taxable year for which it can establish a business purpose, under this revenue procedure or Rev. Proc. 2002– 39, whichever is applicable.” D. De mimimis Test for Interest in Pass- through Entities

Section 4.02(2)(d) of Rev. Proc. 2002–37 is modified to read as follows:

* * *

5. the filing instructions in section 7.02 tion 6.10 of Rev. Proc. 2002–37 or section “for pass-through entities not qualifyof Rev. Proc. 2002–37 for a corporate 5.04(8) of Rev. Proc. 2002–39, must be ing for the exceptions in section 4.02(a), United States shareholder completing and made under the applicable automatic rev- 4.02(b), or 4.02(c) of this revenue procefiling a Form 1128, Application to Adopt, enue procedure notwithstanding any con- dure, the pass-through entity in which the Change, or Retain a Tax Year, on behalf of flicting testing date provisions under corporation has an interest has been in exa controlled foreign corporation (CFC) or §§ 706(b)(4)(A)(ii), 898(c)(1)(C)(ii), istence for at least 3 taxable years and the

2002–46 I.R.B. 843 November 18, 2002

5. the filing instructions in section 7.02 of Rev. Proc. 2002–37 for a corporate United States shareholder completing and filing a Form 1128, Application to Adopt, Change, or Retain a Tax Year, on behalf of a controlled foreign corporation (CFC) or

A. Concurrent Changes by Related En- tities

A change in annual accounting period by an entity that must concurrently change its annual accounting period as a term and condition of another taxpayer’s annual accounting period change under either section 6.10 of Rev. Proc. 2002–37 or section 5.04(8) of Rev. Proc. 2002–39, must be made under the applicable automatic revenue procedure notwithstanding any conflicting testing date provisions under §§ 706(b)(4)(A)(ii), 898(c)(1)(C)(ii),

interest is de minimis . For this purpose, an interest in a pass-through entity is de mini- mis only if:”

* * * E. Filing Requirements for Period Changes by CFCs and FPHCs

Any United States shareholder (including a non-corporate United States shareholder) completing and filing a Form 1128 on behalf of a CFC or FPHC must file the Form 1128 where the United States shareholder files the shareholder’s federal income tax return.

F. Record Keeping/Book Conformity The common term and condition in Rev. Proc. 2002–37 (section 6.04), Rev. Proc. 2002–38 (section 6.04), and Rev. Proc. 2002–39 (section 5.04(3)) relating to record keeping and book conformity is clarified to remove any implication or inference that books and records maintained for tax purposes need not be kept on the basis of the requested taxable year. Taxpayers are reminded that their books and records for United States federal income tax purposes must in all circumstances be kept on the basis of their approved annual accounting period, regardless of whether the taxpayer comes within one of the two exceptions to the term and condition pertaining to financial books and records.