New procedures for changing accounting periods.

• Author: Bakale, Anthony

The IRS recently issued Rev. Procs. 2002-37, 2002-38 and 2002-39, which provide new procedures for C corporations, S corporations and other entities to change accounting periods. These procedures will allow a greater number of taxpayers to receive automatic approval to change accounting period. Taxpayers not eligible for automatic approval may also benefit from a more flexible business-purpose test.

Rev. Proc. 2002-37

Under Rev. Proc. 2002-37, if a C corporation fulfills certain requirements, it will be presumed to have established a business purpose necessary to receive automatic approval to change its annual accounting period under Sec. 442. The revenue procedure increases the scope of taxpayers that can receive such approval.

In addition to certain 52-53-week tax-year elections and a Sec. 898 election (which were available under the prior revenue procedure), a corporation that wants to change to or retain a natural business year that satisfies the 25%-gross-receipts test or change to a 52-53-week tax year ending with reference to such natural business year may now generally do so under Rev. Proc. 2002-37.

The revenue procedure decreases the period of time a taxpayer must wait for automatic approval between accounting-period changes from six calendar years to 48 months. It expanded the list of prior changes that the Service will not consider as prior changes for purposes of the 48-month rule to include a change to:

1. A parent's accounting period, to file a consolidated return under Regs. Sec. 1.1501-75(d)(3)(v);

2. A majority shareholder's tax year, to file consolidated financial statements; and

3. A required tax year or an ownership tax year.

Prior to Rev. Proc. 2002-37, corporations with interests in passthrough entities were not eligible to change their accounting periods automatically. Under the new procedure, if a passthrough entity is a partnership owned 50% by each partner and the corporation and the partnership want to change to the tax year of one of the 50% partners, the interest will be disregarded in applying the automatic change procedures.

Certain shareholders of a closely held real estate investment trust, a controlled foreign corporation (CFC), a foreign personal holding company (FPHC) or a passive foreign investment company are also potentially permissible interests under the new procedure, which adds an exception for a de minimis interest. The procedure allows an automatic-change exception for a CFC or an FPHC that wants...