Changing fiscal year-end following termination of S status.

• Author: Ellentuck, Albert B.

Facts

Excessco, Inc. was organized in 1988, and immediately elected S status. it elected to use the calendar year as its tax year. On July 1, 1995, its S status terminated. Excessco is a profitable corporation and its taxable income for 1995 is as follows:

1/1/95-6/30/95 $60,000 7/1/95-9/30/95 $12,900 10/1/95-12/31/95 $24,000

Excessco projects that its taxable income will average $8,000 per month during 1996. For valid business reasons Excessco wants to change to a September 30 tax year.

Issue

Can Excessco change to a September 30 tax year without IRS approval?

Analysis

As a result of the S termination, Excessco's S termination year (calendar year 1995) is treated as an S short year (January 1 through June 30) and a C short year (July 1 through December 3 1). Except for carryover purposes, the S and C short years are treated as two separate tax years for all purposes of the Internal Revenue Code.

The tax adviser begins by considering whether Excessco can change the end of its tax year beginning jan. 1, 1996. In most cases, a corporation must obtain IRS approval before changing its tax year by showing a business purpose for the change. method for obtaining consent is by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year. However, in certain circumstances, Regs. Sec. 1.442-1(c) permits a C corporation to change its tax year without obtaining prior approval: 1. The corporation cannot have changed its tax year at any time within the previous 10 calendar years. This 10-year period ends with the calendar year that includes the beginning of the short period required to effect the change in tax year. 2. The corporation does not have a net operating loss (NOL) in the short period required to effect the change. 3. The annualized taxable income for the short period is 80% or more of the taxable income for the previous tax year. 4. if the corporation holds a special status (personal holding company, exempt organization, foreign corporation, Western Hemisphere trade corporation or China Act trade corporation), the corporation holds the same special status during the short period and the immediately preceding tax year. 5. The corporation does not attempt to elect S status effective with the beginning of the first tax year following the short period.

Items 4 and 5 should not prevent a former S corporation such as Excessco from changing its tax year under Regs. Sec. 1.442-1(c). Generally, the special status corporations listed in item 4...