Changing a corporation's tax year.

• Author: Ellentuck, Albert B.
• Position: Case study

Facts: Ace Corporation currently has a June 30 year-end. Ace is considering changing to a calendar year to allow more efficient reconciliations and comparisons of its records to the records of its two brother-sister corporations. The change will result in a six-month short period ending Dec. 31, 1998. * Ace has a capital loss carryover of $25,000. The year ended June 30, 1998, was the fourth year of the carryover period. Based on current estimates of the corporation's income and deductions, the year ending June 30, 1999, is expected to have approximately $35,000 of capital gains. All the sales generating the capital gains are scheduled to occur after Jan. 1, 1999 (unless Ace takes steps to accelerate the transactions). * If the corporate year-end is changed effective July 1, 1998, the short period ending Dec. 31, 1998 is expected to result in a $16,000 net operating loss (NOL). Issues: What must Ace do to change to a calendar year-end? How will the change in tax year affect its capital loss carryover and projected NOL?

Analysis

In many cases, a corporation's year-end change will qualify for automatic or expeditious-approval. In other cases, IRS approval will be required prior to the change.

* Automatic Approval

A year-end change will be automatically approved by the Service if the corporation is entering an affiliated group that files a consolidated return and is changing to conform to the group's year-end. In addition, a change is automatic if the corporation meets all of the following conditions:

1. The corporation has not changed its year-end in the last 10 calendar years.

2. The short year will not report an NOL.

3. Taxable income for the short year, if annualized, is at least 80% of taxable income for the full tax year preceding the short year.

4. Any "special status" held by the corporation (as a personal holding company, a corporation that is an exempt organization, a foreign corporation not engaged in a trade or business within the US., a Western Hermisphere trade corporation or a China Trade Act corporation) applies to both the short year and the preceding year. In other words, if the corporation is a tax-exempt organization in the short year, it must also be exempt in the preceding year.

5. An S election is not made in the tax year immediately after the short year.

6. The corporation is not a member of a partnership.

   If a corporation meets these conditions, the tax-year change can be made by filing a statement with the return for the...