Applying for a fiscal year under Sec. 444 when an S election is made.

• Author: Ellentuck, Albert B.

Facts: C Inc., an existing C corporation, has a June 30 fiscal tax-year. On July 1, 2002, the corporation, which manufactures building materials, elects S status. The shareholders, who file on a calendar-year basis, want the S corporation to retain its June 30 year-end. The corporation does not meet the requirements of the 25% test that allows automatic approval of a natural business year. Issue: Can C Inc. elect to continue using a fiscal year ending June 30?

Analysis

An existing fiscal-tax-year regular C corporation is not automatically entitled to retain its fiscal tax-year on electing S status.

A new S corporation can normally make the Sec. 444 election and use a fiscal year, but it is restricted in the tax years that it can select. (If the corporation makes a Sec. 444 election, it must submit required payments.)

Generally, an S corporation can elect a Sec. 444 fiscal year that results in deferral of income for only three months or less. This restriction limits the corporation to a September 30, October 31 or November 30 year-end. (Certain S corporations may have kept their year beginning in 1986 under grandfather rules.) A C corporation electing S status must use the C year as a reference point, as illustrated by the following examples:

Example 1: C Corp. uses a tax year ending June 30. It elects S status effective July 1, 2002. It has no supportable business purpose for a fiscal year. The S corporation cannot retain the June 30 year-end, but it can make the Sec. 444 election to use a September 30, October 31 or November 30 year-end. The corporation will have an initial short S year that begins on July 1, 2002 and ends on the last day of September, October or November (whichever is applicable).

Example 2: C Corp. uses an October 31 year-end. It elects S status for the year beginning Nov. 1, 2002. It has no supportable business reason for a fiscal year. It can make a Sec. 444 election to retain its October year-end, or to use a November 30 year-end (because the change shortens the deferral period). It cannot, however, make the Sec. 444 election to use a September 30 year-end; that increases the deferral period. If a November year-end is elected, the first S return would be filed for the short period from Nov. 1-Nov. 30, 2002.

Example 3: C Corp. uses a calendar year. It elected S status on Jan. 1, 2002. It does not have a supportable business reason for a fiscal year. It cannot make a Sec. 444 election, because any year-end other than...