SECTION 6. TERMS AND

CONDITIONS OF CHANGE

.01 In General . A change in annual accounting period filed under this revenue procedure must be made pursuant to the

or foreign personal holding company (FPHC), the individual should compare the existing deferral period (between the pass-through entity's and the individual's current taxable years) with the new deferral period (between the new required year of the pass-through entity and the individual's new calendar 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 section 4.02(2)(a), (b), or (c) of this revenue procedure, the pass-through entity in which the individual has an interest has been in existence for at least three taxable years and the interest is de minimis . For this purpose, an interest in a pass-through entity is de minimis only if, for each of the prior three taxable years of the individual:

(i) the amount of income (including ordinary income or loss, capital gain or losses, rents, royalties, interest, dividends, and deduction equivalent of credits) from such pass-through entity is less than or equal to the lesser of (A) 5 percent of the individual's gross income (without adjustments) from all sources for those taxable years, or (B) $500,000; and

(ii) the amount of the individual's gross income (without adjustments) from all such pass-through entities is, in the aggregate, 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.

.03 Nonautomatic Changes . Individuals that are not eligible to obtain automatic approval for a change in accounting period under this revenue procedure, applicable regulations, or any other published administrative procedures, must secure prior approval from the Commissioner for a change in annual accounting period pursuant to § 442 and the regulations thereunder. See Rev. Proc. 2002–39.

.04 Example (i) F, an individual having a taxable year ending June 30, wants to change F's taxable year to the calendar year. F has interests in the capital and profits of five partnerships, IJK, LMN, OPQ, RST, and UVW. All of the partnerships have been in existence for at least three taxable years. F's interest in IJK is greater than 50 percent. IJK uses a majority interest taxable year of June 30. F's interest in LMN is 50 percent; the other 50 percent

interest is owned by G, an individual filing federal income tax returns on a calendar year basis. LMN also wants to change its taxable year to a calendar year. LMN uses a June 30 taxable year under the least aggregate deferral rules of § 1.706–1(b)(3). F's interests in OPQ, RST, and UVW are 15 percent, 10 percent, and 5 percent, respectively. OPQ uses its majority interest taxable year under § 706(b)(4), which ends May 31; RST and UVW each use their respective majority interest taxable years under § 706(b)(4), which end December 31. F's distributive share of income/(loss) from OPQ for each of the prior three taxable years is $5,000, $(1,000), and $2,000, respectively. F's gross income for each of those same taxable years from all sources was $150,000.

(ii) F's interests in F's pass-through entities will be disregarded only if each passthrough entity satisfies one of the exceptions enumerated under section 4.02(2) of this revenue procedure. F's interest in IJK may be disregarded under the exception in section 4.02(2)(a), because F is the majority interest partner in IJK. F's interest in LMN may be disregarded under the exception in section 4.02(2)(b), because both F and LMN are changing to the calendar taxable year, which is the taxable year of individual G, the other 50 percent partner. F's interests in RST and UVW may each be disregarded under the exception in section 4.02(2)(c), because F's new taxable year would result in less deferral than F's old taxable year (a new deferral period of 0 months as compared to the prior deferral period of 6 months from December 31 and June 30). Because F is not the majority interest partner in OPQ, and because F's new taxable year would not result in less deferral from this partnership, F's interest in OPQ may be disregarded only if the de minimis exception in section 4.02(2)(d) is satisfied. In this case, the income from OPQ for each of the prior three taxable years was less than the lesser of: (A) 5 percent of F's total gross income from all sources ($150,000 x 5% = $7,500); or (B) $500,000. Consequently, F's interest in OPQ may be disregarded under the de min- imis exception in section 4.02(2)(d). Because all of F's pass-through interests are disregarded under section 4.02(2), F is eligible to change under this revenue procedure.

August 11, 2003 302 2003-32 I.R.B.

terms and conditions provided in this revenue procedure.

.02 Short Period Tax Return . The individual must file a federal income tax return for the short period required to effect a change in annual accounting period by the due date of that return, including extensions, pursuant to § 1.443–1(a). The individual's taxable income for the short period must be annualized and the tax must be computed in accordance with the provisions of §§ 443(b) and (c), and §§ 1.443–1(b) and (c).

.03 Record Keeping . The books of the individual (records reflecting income adequately and clearly on the basis of an annual accounting period) must be closed as of the last day of the first effective year.

.04 Subsequent Year Tax Returns . Returns for subsequent taxable years generally must be made on the basis of a full 12 months ending on the last day of the new calendar taxable year, unless the individual secures the approval of the Commissioner to change that taxable year.

.05 Creation of Net Operating Loss . If the individual generates a net operating loss (NOL) in the short period required to effect a change in annual accounting period, the individual may not carry the NOL back, but must carry it over in accordance with the provisions of § 172, beginning with the first taxable year after the short period. However, except as otherwise provided in the Code or regulations, the short period NOL must be carried back or carried over in accordance with § 172 if it is either: (a) $50,000 or less, or (b) less than the NOL generated for the full 12-month period beginning with the first day of the short period. The individual must wait until this 12-month period has expired to determine whether the individual qualifies for the exception in (b) above.

.06 Creation of General Business Cred- its . If there is an unused general business credit or any other unused credit generated in the short period, the individual must carry that unused credit forward. An unused credit from the short period may not be carried back.

.07 Concurrent Change for Related En- tities . If an individual's interest in a passthrough entity is disregarded pursuant to section 4.02(2) because the related entity will be required to change its taxable year to the individual's new calendar taxable

year (or, if applicable, in the case of a CFC, to a taxable year beginning one month earlier than the individual's new taxable year), the related entity must change its taxable year concurrently either under Rev. Proc. 2002–37 or Rev. Proc. 2002–38, whichever is applicable. The related party is required to change notwithstanding the testing date provisions in § 706(b)(4) or 898(c)(1)(C)(ii).