Modified Procedures for Automatic Accounting Period Changes

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MORE FLEXIBILITY and less restrictions when changing tax year-ends.

The IRS recently issued Rev. Proc. 2000-11, 2000-3 IRB, which affords C corporations more flexibility and less restrictions when changing tax yearends. Most notably, assuming other conditions are met, a C corporation is now eligible to change its tax year-end even if it makes a subchapter S election for the period immediately following the short year required by the change.

This procedure only applies to C corporations. The IRS intends to issue a new automatic change procedure for pass-through entities such as S corporations and partnerships in the near future. However, until such guidance is issued, Rev. Proc. 87-32, 1987-2 C.B. 396, continues to provide the applicable authority on yearend changes of pass-through entities.

Background

As a general rule, the IRS requires a tax payer to obtain the commissioner's approval under IRC section 442 before changing its taxable year to conform with a change in annual accounting period. A taxpayer normally requests the commissioner's approval by filing Form 1128 and an appropriate user fee by the 15th day of the second calendar month following the close of the resulting short period. However, under certain circumstances outlined below, the prior approval of the IRS will not be required. In these instances, no user fee is payable.

Automatic Changes. C corporations are generally allowed to change their taxable years under Treasury Regulations section 1.442-1(c) without the commissioner's prior approval if the following general conditions are met:

The corporation has not changed its annual accounting period at any time within the previous 10 calendar years,

The corporation does not have a net operating loss (NOL) for the short period,

The taxable income for the short period, if annualized, is at least 80% of the taxable income for the full taxable year immediately preceding the short period, and

The corporation does not attempt to make an S corporation election that would become effective with respect to a taxable year that would immediately follow the short period required to effect the change of annual accounting period.

Revenue Procedure 92-13. Rev. Proc. 92-13, 1992-1 C.B. CAS, provided limited relief to C corporations that found it difficult to meet the stringent requirements contained under Treasury Regulations section 1.442-1(c). Although this revenue procedure reduced the waiting period after a previous request for change from 10 to six years, many other provisions blocked the hoped-for benefit. For instance, a corporation requesting a year-end change could not hold an interest in a partnership, be a beneficiary of a trust, be an S corporation, or attempt to make an S election effective for the taxable year immediately following the short period. In addition, any NOL in the short period could not be carried back unless it was $10,000 or less and could only be carried forward ratably over a six-year period.

Revenue Procedure 2000-11

The IRS recently granted corporate tax payers relief from the limitations imposed under Treasury Regulations section 1.4421(c) and Rev. Proc. 92-13 through the issuance of Rev. Proc. 2000-11. Eligibility and procedural requirements have been modified or, in some cases, eliminated, thereby easing the ability of a corporation to obtain expeditious consent to change its accounting period. This provides much-needed relief for C corporations with NOIs that want to change tax years in order to elect subchapter S status. Provided below are some of the significant changes (and opportunities where applicable) available under the new procedure.

Corporation Making an S Election Under Rev. Proc. 92-13, a corporation desiring to make an S election for the tax year immediately following the short period resulting from a change in tax year could not receive expeditious consent for the requested change. …