Procedures Clarified For Accounting Period Changes
The IRS has issued Notice 2002-72 which clarifies certain procedures for obtaining approval of an adoption, change or retention of an annual accounting period.
The new guidance provides that:
- certain entities with required tax years that must concurrently change their annual accounting period as a term and condition for the approval of a related taxpayer's change of annual accounting period must do so under the applicable automatic approval procedures notwithstanding any limitations in those procedures to the contrary or any conflicting testing date provisions;
- the IRS will not apply the rule in section 5.06 of Rev. Proc. 2002-38, under which less than 100% ownership of an S corporation by a tax-exempt entity is disregarded for purposes of determining the S corporation's ownership tax year, to require any S corporation to change its annual accounting period in any tax year beginning before January 1, 2003;
- a partnership that is allowed, under section 4.01(5) of Rev. Proc. 2002- 38, to retain its current tax year for one year in the case of a minor, temporary percent change in ownership may also apply to retain its current year or to change to any other tax year for which it can establish a business purpose, under Rev. Proc. 2002-38 or Rev. Proc. 2002-39, whichever is applicable;
- an interest in a pass-through entity that does not meet the requirements under section 4.02(2)(c) of Rev. Proc. 2002-37 may still be disregarded under the de minimis test in section 4.02(2)(d) of that procedure;
- the filing instructions in section 7.02 of Rev. Proc. 2002-37 for a corporate, U.S. shareholder completing and filing a Form 1128, Application to Adopt, Change, or Retain a Tax Year, on behalf of a controlled foreign corporation or a foreign personal holding company apply as well to a noncorporate, U.S. shareholder; and
- the exception to the terms and conditions provided in each of the revenue procedures respecting recordkeeping and book conformity pertains to books and records kept for financial statement, not tax, purposes.
The modified procedures are: (1) Rev. Proc. 2002-37, I.R.B. 2002-22, 1030, which provides the exclusive procedures for certain corporations to obtain automatic approval to change their annual accounting periods under Code Sec. 442 and Reg. Sec. 1.442-1(b); (2) Rev. Proc. 2002-38, I.R.B. 2002-22, 1037, which provides the exclusive procedures for certain partnerships, S corporations, electing S corporations and PSCs to obtain automatic approval to adopt, change or retain their annual accounting periods under Code Sec. 442 and Reg. Sec. 1.442-1(b); and (3) Rev. Proc. 2002-39, I.R.B. 2002-22, 1046, which provides the general procedures for taxpayers not within the scope of either Rev. Proc. 2002-37 or Rev. Proc. 2002-38 to establish a business purpose and obtain the prior approval of the IRS to adopt, change or retain an annual accounting period.