SECTION 2. BACKGROUND

.01 Section 442 and § 1.442–1(a) of the Income Tax Regulations generally provide that a taxpayer that wants to change its annual accounting period and use a new taxable year must obtain the approval of the Commissioner.

.02 Section 1.442–1(b)(2) provides that a change in annual accounting period will be approved only if the taxpayer agrees to the Commissioner’s prescribed terms, conditions, and adjustments for effecting the change.

.03 Rev. Proc. 2006–45 provides the exclusive procedures for certain corporations to obtain automatic approval of the Commissioner to change their annual accounting periods.

.04 Section 4.02(13) of Rev. Proc. 2006–45 excludes from the scope of the revenue procedure a corporation that ceases to be a member of a consolidated group during the consolidated group’s first effective year (as defined in section 5.05 of Rev. Proc. 2006–45).

.05 The Service has determined that it is appropriate to modify the scope of Rev. Proc. 2006–45 to clarify that any corporation leaving a consolidated group is excluded from the automatic change procedures under Rev. Proc. 2006–45 during the consolidated group’s taxable year (without regard to a change in the consolidated group’s accounting period) in which the corporation ceases to be a member of the consolidated group. A corporation that ceases to be a member of a consolidated group must continue to use the annual accounting period of the consolidated group, unless the corporation receives approval under Rev. Proc. 2002–39, 2002–1 C.B. 1046, to change its annual accounting period (or is required to change its annual accounting period upon joining another consolidated group).

.06 Section 898(c)(2) provides that a specified foreign corporation ( i.e., a CFC) may elect, in lieu of the taxable year under § 898(c)(1)(A) ( i.e., the majority U.S. shareholder year as defined in § 898(c)(3)), a taxable year beginning one month earlier than the majority U.S. shareholder year ( i.e., one-month deferral year described in § 898(c)(2)).

.07 Section 4.02(8) of Rev. Proc. 2006–45 includes in the scope of the revenue procedure a CFC that has a majority

U.S. shareholder year and that is changing to a one-month deferral year or to a 52–53-week taxable year that references such one-month deferral year.

.08 With respect to the terms and conditions of change under Rev. Proc. 2006–45, section 6.02(1) of that revenue procedure generally requires that a corporation compute its income and keep its books and records (including financial statements and reports to creditors) on the basis of the requested taxable year. That section further requires that the books and records of the corporation be closed as of the last day of the first effective year and that the corporation conform the accounting period used for financial statement purposes and reports to creditors concurrently.

.09 The Service has determined that in the case of a CFC changing to a one-month deferral year or to a 52–53-week taxable year that references such one-month deferral year, the CFC is not required to issue financial statements and reports to creditors on the basis of the requested year as otherwise required by section 6.02(1) of Rev. Proc. 2006–45. However, as required by section 6.02(1) of Rev. Proc. 2006–45, the CFC must close its books and records as of the last day of the first effective year and, every year after the first effective year, must close its books and records as of the last day of the requested taxable year, either a one-month deferral year or a 52–53-week taxable year that references such one-month deferral year. The CFC must also compute its income and earnings and profits for U.S. tax purposes on the basis of the requested year.