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 the regulations thereunder, and includes each member of a consolidated group that is a member of the group on the last day of the first effective year.

.02 Pass-through Entity . The term “pass-through entity” means a partnership (as defined in § 7701(a)(2) and the regulations thereunder); a trust (as defined in § 301.7701–4); an estate; a common trust fund (as defined in § 584); a PFIC that the corporation has elected to treat 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).

.03 Required Taxable Year . The “required taxable year” is the particular taxable year that certain taxpayers are re

quired 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 Natural Business Year . A “natural business year” is a year for which a corporation satisfies the following “25-percent gross receipts test”:

(1) 25-percent gross receipts test . Except as provided in (2) below, the 25-percent gross receipts test is satisfied if each of the results described in (a) and (b) below equals or exceeds 25-percent:

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

(2) Exception . The corporation must determine whether any annual accounting period other than the requested annual accounting period also meets the 25-percent gross receipts test described in (1). 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 corporation’s natural business year.

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

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

(c) If a corporation has a predecessor organization and is continuing the same business as its predecessor, the corporation must use the gross receipts from sales and services of its predecessor for purposes of

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.04 Subsequent Year Tax Returns . Returns for subsequent taxable years generally must be made on the basis of a full 12 months (or on a 52–53-week basis) ending on the last day of the requested taxable year, unless the corporation secures the approval of the Commissioner to change that taxable year.

.05 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 pass-through entity ends with reference to the same calendar month as one or more of its owners).

.06 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 back, but must carry it over in accordance with the provisions of §§ 172 and 1212, respectively, beginning with the first taxable year after the short period. However, except as otherwise provided in the Code or regulations, the short period NOL or CL is carried back or carried over in accordance with § 172 or 1212, respectively, if it is either: (a) $50,000 or less, or (b) less than the NOL or CL, respectively, generated for the full 12-month period beginning with the first day of the short period. The corporation must wait until this 12-month period has expired to determine whether it qualifies for the exception in (b) above.

.07 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 corporation must carry that unused credit forward. An unused credit from the short period may not be carried back.

.08 Consolidated Groups . In the case of a change in annual accounting period by the common parent of a consolidated group, the consolidated return rules will apply ( e.g., § 1.1502–21) unless this revenue procedure specifically provides otherwise. In addition, every member of the consolidated group must meet all the requirements and meet and comply with all the terms and conditions of this revenue procedure.

.09 Concurrent Change for Related En- tities . If a corporation’s interest in a passthrough entity, FSC, or IC-DISC (related

computing the 25-percent gross receipts test.

(d) If the corporation (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.

.05 First Effective Year . The “first effective year” is the first taxable year for which a change in annual accounting period is effective. The first effective year generally is the short period required to effect the change. In the case of a short period of 6 days or less, the first effective year is the taxable year that includes such short period under § 1.441–2(b)(2)(ii). The first effective year also is 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.

.06 Short Period . In the case of a change in annual accounting 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.