Tax year change relief: new election allows four-year spread for bunched income.

• Author: Josephs, Stuart R.
• Position: Federal Tax

Rev. Proc. 2003-79, IRB 2003-45, Nov. 10, 2003, allows partners and S corporation shareholders to elect a four-year spread for their income from their partnership's or S corp's short year resulting from a change in tax year by the partnership or corporation.

This election is available when the partnership or corporation changes its year under the automatic approval procedures of Rev. Proc. 2002-38 or the prior approval procedures of Rev. Proc. 2002-39.

Rev. Procs. 2002-38 and 2002-39 provide these procedures for a partnership or S corp to change its year if its current year no longer qualifies as a natural business year (or, for certain S corps, an ownership tax year). Rev. Proc. 2003-79 only applies to partners and shareholders within Rev. Proc. 2003-79's scope.

It also only applies if the short year ends after May 9, 2002 and before June 1, 2004 (or, if a taxpayer uses a 52- to 53-week year, with reference to the last day of any month after April 30, 2002 and before June 1, 2004). An initial short year following an S election will not be considered a short year for Rev. Proc. 2003-79 purposes.

Background

Generally, a taxpayer wishing to change its tax year must obtain IRS approval, which is granted only if the taxpayer agrees to the IRS' prescribed terms, conditions and adjustments, including those necessary to neutralize the tax effects of a substantial distortion of income otherwise resulting from the requested year.

Rev. Proc. 2002-38 provides the exclusive procedures for certain partnerships and S corps to obtain automatic approval to change their tax years and contains these pertinent rules:

1. A partnership or S corp may secure IRS approval to adopt or change to its required tax year, a natural business year or an ownership tax year.

2. A permitted tax year includes a required tax year, natural business year or ownership tax year.

3. A natural business year is established by satisfying a 25-percent gross receipts test.

4. Generally, an S corp shareholder that is a tax-exempt entity not subject to tax on such corporation's income is disregarded in determining the corporation's ownership tax year unless the corporation is wholly owned by that entity.

5. If a taxpayer changes to or retains a natural business year or an ownership tax year and that year no longer qualifies as a permitted year, the taxpayer is using an impermissible year and should change to a permitted year.

   Rev. Proc. 2002-39 provides the exclusive procedures for taxpayers...