June 2000


By Randy Schwartzman

The IRS recently issued Rev. Proc. 2000-11, 2000-3 IRB, which affords C corporations more flexibility and less restrictions when changing tax year-ends. 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 year-end changes of pass-through entities.


As a general rule, the IRS requires a taxpayer 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. 665, 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 taxpayers relief from the limitations imposed under Treasury Regulations section 1.442-1(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 NOLs 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. Under Rev. Proc. 2000-11, expeditious consent is allowed provided the change is to a permitted S corporation tax year.

Corporations with NOLs. Rev. Proc. 2000-11 provides many more favorable NOL carryback and carryforward terms than were available under Rev. Proc. 92-13. Under the new procedure, the NOL incurred during the short period may be carried back so long as it does not exceed $50,000. In some instances, the NOL could be more than $50,000 if the short period is at least nine months and the short period NOL is less than the NOL would have been for a full 12-month period. For NOL carryforward purposes, the six-year requirement under Rev. Proc. 92-13 has been eliminated.

Member of a Pass-Through Entity. Under Rev. Proc. 92-13, a corporation that was a partner in a partnership or beneficiary of a trust or estate was not eligible for expeditious consent. An interest in a pass-through entity by a corporation will now be disregarded for purposes of Rev. Proc. 2000-11 if any of the following conditions are met:

* The corporation requesting the change is a majority partner in the partnership (profits and capital interest of more than 50%), such that the partnership is required to change to the new taxable year;
* The corporation's new tax year results in no change or less deferral of income from the pass-through entity than the corporation's current deferral period. This occurs, for example, when the pass-through entity has a different tax year than the corporate owner and would not be required to change its year-end as a result of the corporate owner's year-end change; or
* The corporation's interest in the pass-through entity does not meet either of the two exceptions above, but the pass-through entity has been in existence for at least three taxable years and the corporation's interest is de minimis. For this purpose, an interest is de minimis if, for each of the three prior tax years, income from the pass-through entity is less than or equal to $500,000 and 5% of the corporation's gross receipts.

Six-Calendar-Year Period. The Rev. Proc. 92-13 requirement that a corporation has not changed its tax year at any time within the preceding six calendar years continues to apply under Rev. Proc. 2000-11. However, the following year-end changes are excluded when determining whether a change has occurred:

* Changes to comply with the taxable year of a common parent under the consolidated return acquisition rules;
* Any prior change in tax year by a newly acquired, majority-owned subsidiary;
* A change from a 52­53 week tax year to a tax year ending with reference to the same calendar month, and vice versa.

Other Benefits. Generally, a corporation that was a shareholder in a foreign sales corporation, interest charge domestic international sales corporation, controller foreign corporation, or foreign personal holding company was not eligible for expeditious consent under Rev. Proc. 92-13. Under Rev. Proc. 2000-11, more liberalized qualification rules apply with respect to corporations that hold such interests.

Effective Date and Transition Rules

A taxpayer electing to change its tax year under this procedure is required to file a Form 1128. The form is due on or before the due date, including extensions, for filing the tax return for the short period. If an automatic change in tax year is made, the corporation must file a tax return and annualize the taxable income for the short period. In addition, the corporation must keep its books and records (including financial statements and reports to creditors) on the basis of the new taxable year. This conformity requirement in Rev. Proc. 2000-11 was not in Rev. Proc. 92-13.

Rev. Proc. 2000-11 is generally effective for all accounting period changes for which the short period ends on or after January 18, 2000. However, an eligible corporation may elect early application of this procedure if the time for filing Form 1128 has not expired. The principal benefit to electing the early application of this procedure is that no user fee would be required and the change would automatically be granted.

A Word of Caution

The benefits obtained by changing a taxpayer's year-end (i.e., making an early subchapter S election) should be weighed against potential detriments associated with making the change (i.e., increased filing requirements or a reduction of the NOL carryforward period as a result of the short period tax filing). *

Randy Schwartzman, CPA, of BDO Seidman, LLP (New York) currently serves on the NYSSCPA's Mergers and Acquisitions Tax Committee and its S Corporation and Closely Held Business Tax Committee.

Edwin B. Morris, CPA
Rosenberg, Neuwirth & Kuchner

Contributing Editor:
Ira D. Fox, CPA
Faber & Fox CPAs

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