SECTION 5. OPTIONAL TERMS AND

CONDITIONS FOR TAXPAYERS WITH PRIOR ACCOUNTING PERIOD CHANGES

.01 In General . Pursuant to the Commissioner’s authority under § 442 to prescribe terms and conditions necessary to effect a change in annual accounting period, this section provides that a taxpayer described in section 3.02 of this revenue procedure may elect to apply to all NOLs and CLs attributable to the short period, in lieu of the Original Carryback Term and Condition, either: (a) the Modified Carryback Term and Condition of section 4.01 of this revenue procedure (see section 5.02 of this revenue procedure); or (b) if the short period ends during 2001 or 2002, the Alternative Carryback Term and Condition (see section 5.03 of this revenue procedure). Unless such a taxpayer satisfies the applicable requirements of section 6 of this revenue procedure for timely electing one of the optional carryback terms and conditions described in this section 5, the Original Carryback Term and Condition will continue to apply. A taxpayer with both an NOL and a CL for the short period must apply the same term and condition (Original, Modified, or Alternative) to both the NOL and CL.

.02 Modified Carryback Term and Con- dition . A taxpayer described in section 3.02 of this revenue procedure may elect to apply the Modified Carryback Term and Condition of section 4.01 of this revenue procedure by following the procedures set forth in section 6 of this revenue procedure. Thus, if a taxpayer elects to apply the Modified Carryback Term and Condition, NOLs and CLs generated in the short period must be carried back in accordance with § 172 or 1212, whichever applies, except as otherwise provided in the Code or regulations. For example, an NOL generated in a short period ending in 2001 generally must be carried back 5 taxable years under § 172(b)(1)(H), and an NOL generated in a short period ending in 2000 generally must be carried back 2 taxable years under § 172(b)(1)(A)(i) (unless one of the special carryback periods or limitations of § 172 applies).

fies, amplifies, and supersedes Rev. Proc. 2000–11, 2000–1 C.B. 309. .07 Rev. Proc. 2002–39 provides the general procedures for establishing a business purpose and obtaining the approval of the Commissioner to adopt, change, or retain an annual accounting period in cases where the taxpayer does not meet the requirements for using an automatic approval revenue procedure.

.08 Section 6.08 of Rev. Proc. 2002–37 provides, as a term and condition for automatic approval, that a corporation generally is prohibited from carrying back an NOL or CL generated in the short period (the “Original Carryback Term and Condition”). The Original Carryback Term and Condition, however, is not imposed if the NOL or CL either (1) is $50,000 or less; or (2) results from a short period of 9 months or longer and is less than the NOL or CL for the 12-month period beginning with the first day of the short period. Section 5.04(6) of Rev. Proc. 2002–39 also imposes the Original Carryback Term and Condition for prior approval of a change in annual accounting period. Moreover, the Service has imposed a similar term and condition in consent letters issued prior to Rev. Proc. 2002–39. The purpose of the Original Carryback Term and Condition is to prevent artificial distortions of income from NOLs and CLs that are generated in the short period.

.09 The Service has determined that the purpose of the Original Carryback Term and Condition would not be frustrated if the exception to that term were expanded to include short periods of less than 9 months, provided that the NOL or CL generated in such short period were less than the NOL or CL for the 12-month period beginning with the first day of the short period.

.10 In an effort to provide relief to taxpayers who may have been economically disadvantaged by the events of September 11, 2001, the Service is also permitting certain taxpayers who received approval to change an annual accounting period for which the short period began on or after February 1, 2000, and whose short period loss would have qualified for the expanded exception, to carry back an NOL or CL generated in the short period.