Rev Proc 2002-39

approval to adopt, change, or retain its
annual accounting period. The information in section 10 is required in order to
allow a taxpayer to apply the provisions
of this revenue procedure to a pending
application. The likely respondents are
the following: partnerships, S corporations, electing S corporations, and PSCs.
The estimated total annual reporting
burden for the requirements contained in
section 7 of this revenue procedure is
reflected in the burden estimates for
Forms 1128 and 2553. The estimated total
annual reporting burden for the requirement contained in section 10 of this revenue procedure is 50 hours: the estimated
annual burden per respondent is 30 minutes; the estimated number of respondents
is 100; and the estimated annual frequency of response is once.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Michael F. Schmit and Roy
A. Hirschhorn of the Office of Associate
Chief Counsel (Income Tax and Accounting). For further information regarding
this revenue procedure, contact Mr.
Schmit or Mr. Hirschhorn at (202) 622–
4960 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 441, 442, 444, 706, 1378, 1502;
1.441–1, 1.441–3, 1.442–1, 1.706–1, 1.1378–1,
1.1502–76.)

Rev. Proc. 2002–39
CONTENTS
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
.01 Taxable Year Defined
(1) In general
(2) Annual accounting period
(3) Required taxable year
.02 Adoption of Taxable Year
.03 Change in Taxable Year

June 3, 2002

(1) In general
(2) Annualization of short period
return
(3) No retroactive change in annual
accounting period
.04 Retention of Taxable Year
.05 Approval of an Adoption, Change,
or Retention
(1) In general
(2) Automatic approval
.06 Business Purpose
(1) In general
(2) Sufficient business purposes
(3) Insufficient business purposes
.07 Section 444 Elections
SECTION 3. SCOPE
.01 Applicability
.02 Inapplicability
(1) Automatic approval
(2) Under examination
(3) Before an area office
(4) Before a federal court
(5) Partnerships and S corporations
SECTION 4. DEFINITIONS
.01 Taxpayer
.02 Corporation
.03 Pass-through Entity
.04 Required Taxable Year
.05 Permitted Taxable Year
.06 First Effective Year
.07 Short Period
.08 Field Office, Area Office, Director
.09 Under Examination
(1) In general
(2) Partnerships and S corporations
subject to TEFRA
.10 Issue Under Consideration
(1) During an examination
(2) Before an area office
(3) Before a federal court
SECTION 5. BUSINESS PURPOSE
AND TERMS, CONDITIONS, AND
ADJUSTMENTS
.01 In General
(1) Approval of requests
(2) Exceptions
.02 Business Purpose
(1) Taxpayers that establish a business purpose
(2) Taxpayers that are deemed to
have established a business purpose
.03 Natural Business Year
(1) Annual business cycle test
(2) Seasonal business test

1046

(3) 25–percent gross receipts test
.04 General Terms and Conditions
(1) Short period tax return
(2) Subsequent year tax returns
(3) Record keeping/book conformity
(4) Changes in natural business
year
(5) 52–53-week taxable years
(6) Creation of net operating loss
or capital loss
(7) Creation of general business
credits
(8) Concurrent change for related
entities
.05 Additional Terms, Conditions, and
Adjustments
(1) Substantial distortion
(2) Deferral of substantial passthrough income
(3) Special rule for certain passthrough entities
(4) Use of expiring NOLs, CLs, and
credits
(5) Other terms, conditions, and
adjustments
.06 Examples
SECTION 6. GENERAL APPLICATION
PROCEDURES
.01 What to File
(1) Application
(2) Signature requirement
(3) Additional information regarding prior applications
(4) Additional information for section 5.03 (1) and (2)
(5) Additional information for section 5.03 (3)
(6) Additional information for section 5.04
(7) Additional information for section 5.05
.02 When to File
(1) In general
(2) Electing S corporations
.03 Where to File
(1) In general
(2) Electing S corporations
(3) Exempt organizations
.04 User Fee
.05 Consolidated Groups — Separate
Forms 1128 Not Required
.06 Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court
(1) Certain taxpayers under examination

2002–22 I.R.B.

(2) Certain taxpayers before an
area office
(3) Certain taxpayers before a federal court
SECTION 7. PROCESSING OF APPLICATION
.01 Service Discretion
.02 Applicability of Rev. Proc. 2002–1,
Rev. Proc. 2002–4, and Any Successor
Revenue Procedures
.03 Incomplete Application - 21 Day
Rule
.04 Conference in the National Office
.05 Letter Ruling
.06 Effect of Noncompliance
.07 Effect on Other Offices of the Service
SECTION 8. EFFECT OF APPROVAL
.01 Audit Protection
(1) In general
(2) Exceptions
.02 Subsequently Required Changes
(1) In general
(2) Retroactive change or modification
SECTION 9. REVIEW BY DIRECTOR
.01 In General
.02 National Office Consideration
SECTION 10. EFFECTIVE DATE AND
TRANSITION RULE
.01 In General
.02 Transition Rule for Pending Applications
SECTION 11. EFFECT ON OTHER
DOCUMENTS
SECTION 12. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure provides the
general procedures under § 442 of the
Internal Revenue Code and § 1.442–1(b)
of the Income Tax Regulations for establishing a business purpose and obtaining
the approval of the Commissioner of
Internal Revenue to adopt, change, or
retain an annual accounting period for
federal income tax purposes. This revenue procedure also describes the terms,

2002–22 I.R.B.

conditions, and adjustments that the Commissioner may deem necessary to effect
the adoption, change, or retention.
SECTION 2. BACKGROUND
.01 Taxable Year Defined.
(1) In general. Section 441(b) and
§ 1.441–1(b)(1) provide that the term
“taxable year” generally means the taxpayer’s annual accounting period, if it is a
calendar or fiscal year, or, if applicable,
the taxpayer’s required taxable year.
(2) Annual accounting period. Section 441(c) and § 1.441–1(b)(3) provide
that the term “annual accounting period”
means the annual period (calendar year or
fiscal year) on the basis of which the taxpayer regularly computes its income in
keeping its books.
(3) Required taxable year. Section
1.441–1(b)(2) provides that certain taxpayers must use the particular taxable
year that is required under the Code and
the regulations thereunder. For example, a
partnership, S corporation, or personal
service corporation (PSC) has a required
taxable year that generally conforms to
the taxable years of its partners, shareholders, or employee-owners pursuant to
§§ 706(b), 1378, and 441(i), respectively.
Similarly, a specified foreign corporation
has a required taxable year that generally
represents the taxable year of its majority
U.S. shareholder pursuant to § 898. However, § 1.441–1(b)(2)(ii) describes exceptions under which certain taxpayers may
use a taxable year other than their
required taxable year. For example, a
partnership, S corporation, electing S corporation, or PSC may have a taxable year
other than its required taxable year if it
makes an election under § 444, elects to
use a 52–53-week taxable year that references its required taxable year or a taxable year elected under § 444, or establishes a business purpose and obtains
approval under § 442 for that taxable
year. See also §§ 706(b), 1378, and
441(i).
.02 Adoption of Taxable Year. Generally, a taxpayer may adopt any taxable
year that satisfies § 441 and the regulations thereunder without the approval of
the Commissioner. However, a partnership, electing S corporation, or PSC that
wants to adopt a taxable year other than
its required taxable year, a taxable year
elected under § 444, or a 52–53-week

1047

taxable year that references its required
taxable year or a taxable year elected
under § 444 must establish a business
purpose and obtain approval under § 442.
See § 1.441–1(c).
.03 Change in Taxable Year.
(1) In general. Section 1.442–
1(a)(1) generally provides that a taxpayer
that wants to change its annual accounting period and use a new taxable year
must obtain approval of the Commissioner.
(2) Annualization of short period
return. Section 443(b) and § 1.443–
1(b)(1)(i) provide that if a return is made
for a short period resulting from a change
of an annual accounting period, the taxable income for the short period must be
placed on an annual basis by multiplying
the income by 12 and dividing the result
by the number of months in the short
period. Unless § 443(b)(2) and § 1.443–
1(b)(2) apply, the tax for the short period
generally is the same part of the tax computed on an annual basis as the number of
months in the short period is of 12
months. But see, for example, §§ 1.706–
1(b)(8)(i)(B), 1.852–3(e), 1.857–2(a)(4),
1.1378–1(c)(2), and 1.1502–76 for exceptions to this general rule for a partnership,
a regulated investment company (RIC), a
real estate investment trust (REIT), an S
corporation, and a subsidiary ceasing to
be a member of a consolidated group,
respectively.
(3) No retroactive change in annual
accounting period. Unless specifically
authorized by the Commissioner, a taxpayer may not request, or otherwise
make, a retroactive change in annual
accounting period, regardless of whether
the change is to a required taxable year.
.04 Retention of Taxable Year. In certain cases, a partnership, S corporation,
electing S corporation, or PSC will be
required to change its taxable year unless
it establishes a business purpose and
obtains the approval of the Commissioner
under § 442, or makes an election under
§ 444, to retain its current taxable year.
See § 1.441–1(d). For example, a corporation using a June 30 fiscal year that
either becomes a PSC or elects to be an S
corporation, and as a result is required to
use the calendar year, must obtain the
approval of the Commissioner to retain its
current fiscal year. Similarly, a partnership using a taxable year that corresponds

June 3, 2002

to its required taxable year generally must
obtain the approval of the Commissioner
to retain that taxable year if its required
taxable year changes as a result
of a change in ownership. But see
§ 706(b)(4)(B). However, a partnership
that has previously established a business
purpose to the satisfaction of the Commissioner to use a particular fiscal year is
not required to obtain the approval of the
Commissioner to retain such fiscal year if
its required taxable year changes.
.05 Approval of an Adoption, Change,
or Retention.
(1) In general. Section 1.442–1(b)
provides that in order to secure the
approval of the Commissioner to adopt,
change, or retain an annual accounting
period, a taxpayer must file an application, generally on Form 1128, Application
to Adopt, Change, or Retain a Tax Year,
with the Commissioner within such time
and in such manner as is provided in
administrative procedures published by
the Commissioner. In general, an adoption, change, or retention in annual
accounting period will be approved where
the taxpayer establishes a business purpose for the requested annual accounting
period and agrees to the Commissioner’s
prescribed terms, conditions, and adjustments for effecting the adoption, change,
or retention.
(2) Automatic approval. Under the
Code and regulations, certain taxpayers
are allowed to change their annual
accounting periods without approval or
with automatic approval (see, e.g.,
§§ 444, 859(b), and § 1.442–1(c) and
(d)). In addition, the Service has issued
revenue procedures that enable certain
taxpayers to obtain automatic approval to
adopt, change, or retain their annual
accounting periods. See, for example,
Rev. Proc. 2002–37, 2002–22 I.R.B. 1030
(or any successor) for corporations; Rev.
Proc. 2002–38, 2002–22 I.R.B. 1037 (or
any successor) for partnerships, S corporations, electing S corporations, and
PSCs; and Rev. Proc. 66–50, 1966–2 C.B.
1260 (or any successor) for individuals.
.06 Business Purpose.
(1) In general. Section 1.442–1(b)
provides that in determining whether a
taxpayer has established a business purpose and which terms, conditions, and
adjustments will be required, consideration will be given to all the facts and cir-

June 3, 2002

cumstances relating to the adoption,
change, or retention, including the tax
consequences resulting therefrom. See
also H.R. Rep. No. 99–841, 99th Cong.,
2d Sess., II–318, 1986–3 (Vol. 4) C.B.
319.
(2) Sufficient business purposes.
Section 1.442–1(b)(2) provides that generally the requirement of a business purpose will be satisfied, and adjustments to
neutralize any tax consequences will not
be required, if the requested annual
accounting period coincides with the taxpayer’s required taxable year, ownership
taxable year, or natural business year. A
taxpayer generally is deemed to have
established a natural business year if it
satisfies the “25-percent gross receipts
test.” See Rev. Proc. 83–25, 1983–1 C.B.
689, superseded by Rev. Proc. 87–32,
1987–2 C.B. 396, superseded by Rev.
Proc. 2002–38, 2002–22 I.R.B. 1037. In
Rev. Rul. 87–57, 1987–2 C.B. 117, the
Service determined that a partnership, S
corporation, or PSC established, to the
satisfaction of the Secretary, a business
purpose for adopting, retaining, or changing its taxable year in the following four
situations:
(a) the taxpayer established that
the taxable year satisfied the 25-percent
gross receipts test and resulted in less
deferral than its other natural business
year;
(b) the taxpayer would have established a natural business year under the
25-percent gross receipts test, except that
a labor strike closed the taxpayer’s business during a period that included its normal peak season;
(c) the taxpayer, for the past 10
years, had a three-month period of insignificant gross receipts during which, due
to weather conditions, its business was
not operational; and
(d) the taxpayer, which previously
used the cash receipts and disbursements
method and changed to an accrual
method, would have established a natural
business year under the 25-percent gross
receipts test if it had calculated its gross
receipts under an accrual method.
(3) Insufficient business purposes.
Section 1.442–1(b) provides that, in the
case of a partnership, S corporation, electing S corporation, or PSC, deferral of
income to partners, shareholders, or
employee-owners will not be treated as a

1048

business purpose for using a taxable year
other than its required taxable year. In
addition, the legislative history to the Tax
Reform Act of 1986 provides that the following reasons ordinarily will not be sufficient for a partnership, S corporation, or
PSC to establish that the business purpose
requirement for a particular taxable year
has been met:
(a) the use of a particular year for
regulatory or financial accounting purposes;
(b) the hiring patterns of a particular business, e.g., the fact that a firm typically hires staff during certain times of
the year;
(c) the use of a particular year for
administrative purposes, such as the
admission or retirement of partners or
shareholders, promotion of staff, and
compensation or retirement arrangements
with staff, partners, or shareholders; and
(d) the fact that a particular business involves the use of price lists, model
years, or other items that change on an
annual basis.
Although the above items are not themselves sufficient to establish a business
purpose, they may be considered in connection with other items by the Commissioner in determining whether a taxpayer
has a business purpose for a particular
taxable year. H.R. Rep. No. 99–841, 99th
Cong., 2d Sess., II–318, 1986–3 (Vol. 4)
C.B. 319
.07 Section 444 Elections. A partnership, S corporation, electing S corporation, or PSC generally can elect under
§ 444 to use a taxable year other than its
required taxable year, but only if the
deferral period of the taxable year elected
is not longer than the shorter of 3 months
or the deferral period of the taxable year
being changed. A partnership and an S
corporation with a § 444 election must
make required payments under § 7519
that approximate the amount of the deferral benefit and a PSC with a § 444 election is subject to the minimum distribution requirements of § 280H. A taxpayer
may automatically adopt, change to, or
retain a taxable year permitted by § 444
by filing a Form 8716, Election to Have
a Taxable Year Other Than a Required
Taxable Year. A taxpayer that wants to terminate its § 444 election must follow the
automatic procedures under § 1.444–

2002–22 I.R.B.

1T(a)(5) to change to its required taxable
year or establish a business purpose for
using a different taxable year pursuant to
§ 442, the regulations thereunder, and
Rev. Proc. 2002–38 or this revenue procedure (whichever is applicable).
SECTION 3. SCOPE
.01 Applicability. Except as provided
in section 3.02 of this revenue procedure,
this revenue procedure applies to any taxpayer requesting the Commissioner’s
approval to adopt, change, or retain an
annual accounting period for federal
income tax purposes.
.02 Inapplicability. This revenue procedure does not apply to:
(1) Automatic approval. An adoption, change, or retention of annual
accounting period that is permitted to be
made pursuant to a provision of the Code
or regulations or a published automatic
approval procedure. Before submitting an
application pursuant to this revenue procedure, taxpayers are encouraged to
review the automatic approval procedures
referenced in § 1.442–1 and the following
revenue procedures: Rev. Proc. 2002–37
(for corporations); Rev. Proc. 2002–38
(for partnerships, S corporations, electing
S corporations, and PSCs); Rev. Proc.
66–50, as modified by Rev. Proc. 81–40,
1981–2 C.B. 604 (for individuals); Rev.
Proc. 85–58, 1985–2 C.B. 740, and Rev.
Proc. 76–10, 1976–1 C.B. 548, as modified by Rev. Proc. 79–3, 1979–1 C.B. 483
(for exempt organizations); Rev. Proc.
87–27, 1987–1 C.B. 769 (for employee
retirement plans and employee trusts);
and Rev. Proc. 85–15, 1985–1 C.B. 516
(for changes to comply with § 441(g)).
(2) Under examination. A taxpayer
with a required taxable year that is under
examination, unless the taxpayer obtains
the consent of the appropriate director as
provided in section 6.06(1) of this revenue procedure.
(3) Before an area office. A taxpayer with a required taxable year that is
before an area office with respect to any
income tax issue if its annual accounting
period is an issue under consideration by
the area office.
(4) Before a federal court. A taxpayer with a required taxable year that is
before a federal court with respect to any
income tax issue if its annual accounting

2002–22 I.R.B.

period is an issue under consideration by
the federal court.
(5) Partnerships and S corporations. A partnership or S corporation if,
on the date the entity would otherwise file
its application with the Service Center,
the entity’s annual accounting period is an
issue under consideration in the examination of a partner’s or shareholder’s federal
income tax return or an issue under consideration by an area office or by a federal court with respect to a partner’s or
shareholder’s federal income tax return.
SECTION 4. DEFINITIONS
.01 Taxpayer. The term “taxpayer” has
the same meaning as the term “person” as
defined in § 7701(a)(1) (e.g., an individual, trust, estate, partnership, association, or corporation) rather than the meaning of the term “taxpayer” as defined in
§ 7701(a)(14) (any person subject to tax).
.02 Corporation. The term “corporation” includes each member of a consolidated group. However, the common parent of a consolidated group may change
the group’s annual accounting period
under this revenue procedure if every
member of the consolidated group meets
all the requirements and complies with all
the conditions of this revenue procedure.
.03 Pass-through Entity. For purposes
of this revenue procedure, the term “passthrough entity” means a partnership; an S
corporation (as defined in § 1361); an
electing S corporation (i.e., a corporation
attempting to make an S election for the
first effective year); a trust; an estate; a
common trust fund (as defined in § 584);
a controlled foreign corporation (CFC)
(as defined in § 957), but only to the
extent the taxpayer is a U.S. shareholder
(as defined in § 951(b)); a foreign personal holding company (FPHC) (as
defined in § 552), but only to the extent
the taxpayer is a U.S. shareholder (as
defined in § 551(a)); a passive foreign
investment company (PFIC), but only to
the extent the taxpayer has elected to treat
the PFIC as a qualified electing fund (as
defined in § 1295); a closely-held REIT
(as defined in § 6655(e)(5)(B)), but only
if the taxpayer is described in
§ 6655(e)(5)(A)); or any other similar
entity.
.04 Required Taxable Year. The
“required taxable year” is the particular
taxable year that certain taxpayers are

1049

required to use under the Code or regulations thereunder. For example, the
“required taxable year” is the taxable year
determined under § 706(b) in the case of
a partnership, § 1378 in the case of an S
corporation or an electing S corporation,
and § 441(i) in the case of a PSC, without taking into account any taxable year
that is allowable by reason of a § 444
election. See generally § 1.441–1(b)(2)
(providing examples of other entities with
required taxable years).
.05 Permitted Taxable Year. The term
“permitted taxable year” means the
required taxable year; a natural business
year; the ownership taxable year; a taxable year elected under § 444; a 52–53week taxable year that references the
required taxable year, natural business
year, ownership taxable year, or taxable
year elected under § 444; or any other
taxable year for which the taxpayer establishes a business purpose to the satisfaction of the Commissioner.
.06 First Effective Year. The first
effective year is the first taxable year for
which an adoption, change, or retention in
annual accounting period is effective.
Thus, in the case of a change, the first
effective year is the short period required
to effect the change. The first effective
year is also the first taxable year for complying with all the terms and conditions
set forth in the letter ruling granting permission to effect the adoption, change, or
retention of the taxpayer ’s annual
accounting period.
.07 Short Period. In the case of a
change in annual accounting period, a
taxpayer’s short period is the period
beginning with the day following the
close of the old taxable year and ending
with the day preceding the first day of the
new taxable year.
.08 Field Office, Area Office, Director.
The terms “field office,” “area office,”
and “director” have the same meaning as
those terms have in Rev. Proc. 2002–1,
2002–1 I.R.B. 1 (or any successor).
.09 Under Examination.
(1) In general.
(a) Except as provided in section
4.08(2) of this revenue procedure, an
examination of a taxpayer with respect to
a federal income tax return begins on the
date the taxpayer is contacted in any manner by a representative of the Service for

June 3, 2002

the purpose of scheduling any type of
examination of the return. An examination ends:
(i) in a case in which the Service
accepts the return as filed, on the date of
the “no change” letter sent to the taxpayer;
(ii) in a fully agreed case, on the
earliest of the date the taxpayer executes
a waiver of restrictions on assessment or
acceptance of overassessment (for
example, a Form 870, 4549, or 4605), the
date the taxpayer makes a payment of tax
that equals or exceeds the proposed deficiency, or the date of the “closing” letter
(for example, Letter 891(IN) or 987(DO))
sent to the taxpayer; or
(iii) in an unagreed or a partially
agreed case, on the earliest of the date the
taxpayer (or its representative) is notified
by an appeals officer that the case has
been referred to an area office from a
field office, the date the taxpayer files a
petition in the Tax Court, the date on
which the period for filing a petition with
the Tax Court expires, or the date of the
notice of claim disallowance.
(b) An examination does not end
as a result of the early referral of an issue
to an area office under the provisions of
Rev. Proc. 96–9, 1996–1 C.B. 575, or
Rev. Proc. 99–28, 1999–2 C.B. 109.
(c) An examination resumes on
the date the taxpayer (or its representative) is notified by an appeals officer (or
otherwise) that the case has been referred
to a field office for reconsideration.
(2) Partnerships and S corporations
subject to TEFRA. For an entity (including a limited liability company) treated as
a partnership or an S corporation that is
subject to the TEFRA unified audit and
litigation provisions (note that an S corporation is not subject to the TEFRA unified audit and litigation provisions for
taxable years beginning after December
31, 1996, see Small Business Job Protection Act of 1996, Pub. L. No. 104–188,
§ 1317(a), 110 Stat. 1755, 1787 (1996)),
an examination begins on the date of the
notice of the beginning of an administrative proceeding sent or personally delivered to the Tax Matters Partner/Tax Matters Person (TMP). An examination ends:
(a) in the case in which the Service accepts the partnership or S corporation return as filed, on the date of the “no
adjustments” letter or the “no change”

June 3, 2002

notice of the final administrative adjustment sent to the TMP;
(b) in a case in which no formal
notice is given, on the date on which the
period under § 6229 expires;
(c) in a fully agreed case, when all
the partners or shareholders execute a
Form 870–P, 870–L, 870–S, or any variation thereof; or
(d) in an unagreed or a partially
agreed case, on the earliest of the date the
TMP (or its representative) is notified by
an appeals officer that the case has been
referred to an area office from a field
office, the date the TMP (or a partner or
shareholder) requests judicial review, or
the date on which the period for requesting judicial review expires.
.10 Issue Under Consideration.
(1) During an examination. A taxpayer’s annual accounting period is an
issue under consideration for the taxable
years under examination if the taxpayer
receives written notification (for example,
by examination plan, information document request (IDR), or notification of
proposed adjustments or income tax
examination changes) from the examining
officer(s) specifically citing the taxpayer’s annual accounting period as an issue
under consideration. For example, a taxpayer’s annual accounting period is an
issue under consideration as a result of an
examination plan that identifies the propriety of the taxpayer’s annual accounting
period as a matter to be examined. The
question of whether the taxpayer’s annual
accounting period is an issue under consideration may be referred to the national
office as a request for technical advice
under the provisions of Rev. Proc.
2002–2, 2002–1 I.R.B. 82 (or any successor), or, for exempt organizations, Rev.
Proc. 2002–5, 2002–1 I.R.B. 173 (or any
successor).
(2) Before an area office. A taxpayer’s annual accounting period is an issue
under consideration for the taxable years
before an area office if the taxpayer’s
annual accounting period is included as
an item of adjustment in the examination
report referred to an area office or is specifically identified in writing to the taxpayer by an area office.
(3) Before a federal court. A taxpayer’s annual accounting period is an
issue under consideration for the taxable
years before a federal court if the taxpay-

1050

er’s annual accounting period is an item
included in the statutory notice of deficiency, the notice of claim disallowance,
the notice of final administrative adjustment, the pleadings (for example, the
petition, complaint, or answer) or amendments thereto, or is specifically identified
in writing to the taxpayer by the government counsel.
SECTION 5. BUSINESS PURPOSE
AND TERMS, CONDITIONS, AND
ADJUSTMENTS
.01 In General.
(1) Approval of requests. Except as
provided in section 5.01(2) of this revenue procedure, a request to adopt,
change, or retain an annual accounting
period ordinarily will be approved if the
taxpayer:
(a) establishes a business purpose
(within the meaning of section 5.02 of
this revenue procedure) for the requested
annual accounting period; and
(b) agrees to the Commissioner’s
prescribed terms, conditions, and adjustments (as described in sections 5.04 and
5.05 of this revenue procedure) under
which the adoption, change, or retention
will be effected.
(2) Exceptions. Notwithstanding the
general rule of section 5.01(1)(a) of this
revenue procedure, a taxpayer with a
required taxable year (other than a partnership, S corporation, electing S corporation, or PSC) will not be granted
approval under this revenue procedure to
adopt, change, or retain a taxable year
other than its required taxable year or, in
appropriate circumstances, a 52–53-week
taxable year that ends with reference to
its required taxable year. In addition, a
partnership, S corporation, electing S corporation, or PSC will be granted approval
to adopt, change, or retain an annual
accounting period only if it establishes a
business purpose under section 5.02(1)
for that annual accounting period. Notwithstanding the general rule of section
5.01(1)(b) of this revenue procedure, the
Service may determine that, based on the
unique facts of a particular case and in
the interest of sound tax administration,
terms, conditions, and adjustments that
differ from those provided in this revenue
procedure are more appropriate for an
adoption, change, or retention made
under this revenue procedure.

2002–22 I.R.B.

.02 Business Purpose.
(1) Taxpayers that establish a business purpose. Taxpayers that establish a
business purpose for the requested annual
accounting period under this section
5.02(1) ordinarily will be granted
approval to adopt, change, or retain that
annual accounting period under this revenue procedure subject only to the general terms and conditions described in
section 5.04 of this revenue procedure.
(a) Natural business year. A taxpayer (including a partnership, S corporation, electing S corporation, or PSC)
requesting to adopt, change, or retain an
annual accounting period that is the taxpayer ’s natural business year (as
described in section 5.03 of this revenue
procedure) has established a business purpose to the satisfaction of the Commissioner.
(b) Facts and circumstances. A
taxpayer (including a partnership, S corporation, electing S corporation, or PSC)
may establish a business purpose for the
requested taxable year based on all the
relevant facts and circumstances. However, the Service anticipates that a taxpayer will be granted permission to adopt,
change, or retain an annual accounting
period under this facts and circumstances
test only in rare and unusual circumstances. For this purpose, deferral of
income to owners will not be treated as a
business purpose. In addition, administrative and convenience business reasons
such as those described in Rev. Rul.
87–57 and the following will not be sufficient to establish a business purpose
under this section:
(i) the use of a particular year for
regulatory or financial accounting purposes;
(ii) the hiring patterns of a particular business, e.g., the fact that a firm
typically hires staff during certain times
of the year;
(iii) the use of a particular year
for administrative purposes, such as the
admission or retirement of partners or
shareholders, promotion of staff, and
compensation or retirement arrangements
with staff, partners, or shareholders;
(iv) the fact that a particular
business involves the use of price lists,
model years, or other items that change
on an annual basis;

2002–22 I.R.B.

(v) the use of a particular year
by related entities; and
(vi) the use of a particular year
by competitors.
(2) Taxpayers that are deemed to
have established a business purpose. A
taxpayer other than a partnership, S corporation, electing S corporation, or PSC
that does not establish a business purpose
for the requested annual accounting
period under section 5.02(1) of this revenue procedure generally will be deemed
to have established a business purpose if
it provides a non-tax reason for the
requested annual accounting period and
agrees to the additional terms, conditions,
and adjustments described in section 5.05
of this revenue procedure, which are
intended to neutralize the tax effects of
any resulting substantial distortion of
income. For this purpose, non-tax reasons
for the requested annual accounting
period may include administrative and
convenience business reasons such as
those described in section 5.02(1)(b) that
Congress intended, and the Service has
held, to be insufficient to satisfy the business purpose requirement for a partnership, S corporation, electing S corporation, or PSC to adopt, change to, or retain
a taxable year other than its required taxable year. The Service anticipates that an
individual taxpayer that is not a sole proprietor will be able to establish a non-tax
reason for a fiscal year only in rare and
unusual circumstances.
.03 Natural Business Year. A natural
business year is the annual accounting
period encompassing all related income
and expenses. The natural business year
of a taxpayer may be determined under
any of the following tests (taking into
account the principles of Rev. Rul.
87–57):
(1) Annual business cycle test.
(a) In general. If the taxpayer’s
gross receipts from sales and services for
the short period and the three immediately preceding taxable years indicate that
the taxpayer has a peak and a non-peak
period of business, the taxpayer’s natural
business year is deemed to end at, or soon
after, the close of the highest peak period
of business. A business whose income is
steady from month to month throughout
the year will not satisfy this test. A taxpayer that has not been in existence for a
sufficient period to provide gross receipts

1051

information for the three immediately
preceding taxable years may provide
information other than gross receipts to
demonstrate a peak and non-peak period
of business, such as a description of its
business and/or reasonable estimates of
future gross receipts.
(b) Safe harbor. For purposes of
section 5.03(1)(a) of this revenue procedure, 1 month will be deemed to be “soon
after” the close of the highest peak period
of business.
(c) Example. A, a corporation, operates a
retail business. The highest peak of A’s annual business cycle occurs in December each year. In January, a significant amount of the merchandise that
was purchased by A’s customers in December is
either returned or exchanged. A’s natural business
year is deemed to end at (December 31st), or soon
after (January 31st), the close of the highest peak
period of business in December. Accordingly, under
the provisions of this revenue procedure, a request
by A for a taxable year ending either December 31st
or January 31st would be granted, subject to the
general terms and conditions of section 5.04 of this
revenue procedure.

(2) Seasonal business test.
(a) In general. If the taxpayer’s
gross receipts from sales and services for
the short period and the three immediately preceding taxable years indicate that
the taxpayer’s business is operational for
only part of the year (e.g., due to weather
conditions) and, as a result, the taxpayer
has insignificant gross receipts during the
period the business is not operational, the
taxpayer ’s natural business year is
deemed to end at, or soon after, the operations end for the season. A taxpayer that
has not been in existence for a sufficient
period to provide gross receipts information for the three immediately preceding
taxable years may provide information
other than gross receipts to demonstrate
that it satisfies the requirements of a seasonal business, such as a description of its
business and/or reasonable estimates of
future gross receipts.
(b) Safe Harbor. For purposes of
section 5.03(2)(a) of this revenue procedure, an amount equal to less than 10 percent of the taxpayer’s total gross receipts
for the year will be deemed to be “insignificant,” and 1 month will be deemed to
be “soon after” the close of operations.
(c) Example. B, a partnership,
operates a ski resort from November

June 3, 2002

through March of each year. During September and October, and during April,
employees prepare the resort for the ski
season, and close it down for the season,
respectively. The resort earns less than 10
percent of its annual gross receipts during
the period of April through October, when
it is closed to guests. B’s natural business
year is deemed to end at (March 31st), or
soon after (April 30th), the close of the
resort operations. Accordingly, under the
provisions of this revenue procedure, a
request by B for a taxable year ending
either March 31st or April 30th would be
granted, subject to the general terms and
conditions of section 5.04 of this revenue
procedure.
(3) 25-percent gross receipts test. A
natural business year may be established
by any taxpayer other than a member of a
tiered structure (as defined in § 444 and
§ 1.444–2T) using the 25-percent gross
receipts test. The 25-percent gross
receipts test is determined as follows:
(a) Prior three years’ gross
receipts.
(i) Gross receipts from sales and
services for the most recent 12-month
period that ends with the last month of
the requested annual accounting period
are totaled and then divided into the
amount of gross receipts from sales and
services for the last 2 months of this
12-month period.
(ii) The same computation as in
(a)(i) above is made for the two preceding
12-month periods ending with the last
month of the requested annual accounting
period.
(b) Natural business year.
(i) Except as provided in (b)(ii)
below, if each of the three results
described in (a) equals or exceeds 25 percent, the requested annual accounting
period is deemed to be the taxpayer’s
natural business year.
(ii) The taxpayer must determine
whether any annual accounting period
other than the requested annual accounting period also meets the 25-percent gross
receipts test of paragraph (b)(i). If one or
more annual accounting periods produce
higher averages of the three percentages
(rounded to the 1/100 of a percent)
described in (a) than the requested annual
accounting period, then the requested
annual accounting period will not qualify

June 3, 2002

as the taxpayer’s natural business year
under the 25-percent gross receipts test.
(c) Special rules.
(i) To apply the 25-percent gross
receipts test for any particular taxable
year, the taxpayer must compute its gross
receipts under the method of accounting
used to prepare its federal income tax
returns for such taxable year.
(ii) Regardless of the taxpayer’s
method of accounting, the taxpayer’s
share of income from a pass-through
entity generally must be reported as gross
receipts in the month that the passthrough entity’s taxable year ends.
(iii) If a taxpayer has a predecessor organization and is continuing the
same business as its predecessor, the taxpayer must use the gross receipts of its
predecessor for purposes of computing
the 25-percent gross receipts test.
(iv) If the taxpayer (including
any predecessor organization) does not
have a 47-month period of gross receipts
(36-month period for requested taxable
year plus additional 11-month period for
comparing requested taxable year with
other potential taxable years), then it cannot establish a natural business year using
the 25-percent gross receipts test.
(v) If the requested taxable year
is a 52–53-week taxable year, the calendar month ending nearest to the last day
of the 52–53-week taxable year is treated
as the last month of the requested taxable
year for purposes of computing the
25-percent gross receipts test.
.04 General Terms and Conditions.
The following general terms and conditions apply to all taxpayers that obtain
approval under this revenue procedure to
adopt, change, or retain an annual
accounting period:
(1) Short period tax return. The taxpayer must file a federal income tax
return for the short period required to
effect a change in annual accounting
period by the due date of that return,
including extensions pursuant to § 1.443–
1(a). The taxpayer’s taxable income for
the short period generally must be annualized and the tax must be computed in
accordance with the provisions of
§ 443(b) and § 1.443–1(b). However, for
changes to (or from) a 52–53-week taxable year referencing the same month as
the current (or requested) taxable year,
see special rules in § 1.441–2. See also,

1052

for example, §§ 1.706–1(b)(8)(i)(B),
1.852–3(e), 1.857–2(a)(4), 1.1378–
1(c)(2), and 1.1502–76 for exceptions to
the annualization rule for a partnership,
RIC, REIT, S corporation, and subsidiary
corporation ceasing to be a member of a
consolidated group, respectively.
(2) Subsequent year tax returns.
Returns for subsequent taxable years generally must be made on the basis of a full
12 months (or on a 52–53-week basis)
ending on the last day of the requested
taxable year, unless the taxpayer secures
the approval of the Commissioner to
change its requested taxable year.
(3) Record keeping/book conformity. The books of the taxpayer must be
closed as of the last day of the first effective year. Thereafter, the taxpayer must
compute its income and keep its books
and records (including financial statements and reports to creditors) on the
basis of the requested taxable year, except
that this requirement shall not apply (1) to
books and records maintained solely for
foreign law purposes (e.g., foreign tax
reporting purposes), or (2) if the
requested taxable year is either the taxpayer’s required taxable year or ownership taxable year.
(4) Changes in natural business
year. If a partnership, S corporation,
electing S corporation, or PSC changes to
or retains a natural business year under
this revenue procedure and that annual
accounting period no longer qualifies as a
permitted taxable year, the taxpayer is
using an impermissible annual accounting
period and should change to a permitted
taxable year. Certain partnerships, S corporations, electing S corporations, and
PSCs may qualify for automatic approval
to change their annual accounting period
under Rev. Proc. 2002–38. Other taxpayers must request approval under this revenue procedure.
(5) 52–53-week taxable years. If
applicable, the taxpayer must comply
with § 1.441–2(e) (relating to the timing
of taking items into account in those
cases where the taxable year of a passthrough entity or PSC ends with reference
to the same calendar month as one or
more of its partners or shareholders or
employee-owners).
(6) Creation of net operating loss
or capital loss. If the taxpayer generates a
net operating loss (NOL) or capital loss

2002–22 I.R.B.

(CL) in the short period required to effect
a change in annual accounting period, the
taxpayer may not carry the NOL or CL
back, but must carry it over in accordance
with the provisions of §§ 172 and 1212,
respectively, beginning with the first taxable year after the short period. However,
except as otherwise provided in the Code
or regulations (e.g., § 280H and the regulations thereunder in the case of a PSC)
the short period NOL or CL is carried
back or carried over in accordance with
§§ 172 or 1212, respectively, if it is
either: (a) $50,000 or less, or (b) results
from a short period of 9 months or longer
and is less than the NOL or CL for a full
12-month period beginning with the first
day of the short period.
(7) Creation of general business
credits. If there is an unused general business credit or any other unused credit
generated in the short period, the taxpayer
must carry that unused credit forward. An
unused credit from the short period may
not be carried back.
(8) Concurrent change for related
entities. In appropriate cases, if a taxpayer
owns a majority interest in a pass-through
entity, the entity will be required to concurrently change its annual accounting
period as a term and condition of the
approval of the taxpayer’s request to
change its annual accounting period, notwithstanding the testing date provisions
in §§ 706(b)(4)(A)(ii), 898(c)(1)(C)(ii),
§ 1.921–1T(b)(6), and the special provision in § 706(b)(4)(B). If this condition
applies, the pass-through entity must
comply with the appropriate procedures
to obtain approval for the change. See,
e.g., Rev. Proc. 2002–37 and Rev. Proc.
2002–38.
.05 Additional Terms, Conditions, and
Adjustments. The additional terms, conditions, and adjustments described in this
section 5.05 apply to taxpayers that
obtain approval under this revenue procedure to change an annual accounting
period and that establish a business purpose under section 5.02(2) of this revenue
procedure. These additional terms, conditions, and adjustments are necessary to
neutralize the tax effects of a substantial
distortion of income that otherwise would
result from the change, including: a deferral of a substantial portion of the taxpayer’s income, or shifting of a substantial

2002–22 I.R.B.

portion of deductions, from one taxable
year to another; a similar deferral or shifting in the case of any other person, such
as a beneficiary of an estate; the creation
of a short period in which there is a substantial NOL, CL, or credit (including a
general business credit), or the creation of
a short period in which there is a substantial amount of income to offset an expiring NOL, CL, or credit.
(1) Substantial distortion. Distortion of income will not be considered
substantial, and no adjustments under this
section 5.05 will be required for such distortion, if the amount of the distortion is
less than both:
(i) five percent of the taxpayer’s
estimated gross receipts for its current
taxable year (computed as if the taxpayer
remained on its existing taxable year);
and
(ii) $500,000.
(2) Deferral of substantial passthrough income.
(a) In general. An adjustment will
be required under this section 5.05(2) if
the change creates a substantial distortion
of income as a result of increasing the
deferral of the taxpayer’s distributive
share of income from a pass-through
entity between the taxable year of the
pass-through entity and the taxpayer’s
taxable year. For this purpose, if the passthrough entity’s taxable year is determined based on the taxable year of its
owners, the taxpayer must compare the
existing deferral period (i.e., between the
pass-through entity’s and the taxpayer’s
current taxable years) with the proposed
deferral period (i.e., between the taxable
year of the pass-through entity that would
be required after the requested change
and the taxpayer’s requested taxable year)
to determine whether the deferral period
is increased. If the taxpayer indirectly
owns an interest in a pass-through entity
through one or more other pass-through
entities, the existing and proposed deferral periods generally must be determined
by comparing the taxable year of the
directly-owned pass-through entity with
the taxpayer’s taxable year. However, if
the proposed change does not increase the
deferral period between the taxable year
of the directly-owned pass-through entity
and the taxpayer’s taxable year, the existing and proposed deferral periods must be

1053

determined by comparing the taxable year
of the next lower-tier indirectly-owned
pass-through entity with the taxpayer’s
taxable year until either: (1) an increase
in the deferral period is found or (2) the
next lower-tier entity either does not exist
or is not a pass-through entity.
(b) Computing deferral. The
amount of deferral that results from the
change is the taxpayer’s allocable share
of income from each pass-through entity
described in (a), including ordinary
income or loss, capital gain or loss, rents,
royalties, interest, dividends, and the
deduction equivalents of credits that
accrue during the taxpayer’s first effective year. In the case of a partnership, the
taxpayer’s share of income also includes
guaranteed payments to the taxpayer that
are both deductible by the partnership
under its method of accounting during the
partnership’s first taxable year ending
after the taxpayer’s first effective year
and attributable (on a ratable basis) to the
taxpayer’s first effective year. A taxpayer
must aggregate the deferral of income
from each pass-through entity described
in (a). However, if the aggregate deferral
of income from all pass-through entities
described in (a) is negative (i.e., an aggregate loss), there is no deferral of income.
For this purpose, the taxpayer may use
reasonable estimates to determine the
income that accrues during the first effective year. The Service may, on examination, use any available data, including
information on previous years’ Schedules
K–1, to verify the reasonableness of the
taxpayer’s estimates.
(c) Adjustment. If the deferral of
income computed in section 5.05(2)(b) of
this revenue procedure represents a substantial distortion of income (as defined
in section 5.05(1)), the taxpayer must
include the entire amount of the distortion
(and not merely the excess over the
amounts specified in section 5.05(1)) as
ordinary income for the first effective
year. The taxpayer also must report its
allocable share of income from the passthrough entity in the taxable year following the first effective year in accordance
with general tax principles (e.g., § 706).
The taxpayer must establish a suspense
account for the amount included in ordinary income for the first effective year
and deduct this amount ratably over the

June 3, 2002

four taxable years immediately succeeding the first effective year. Notwithstanding the preceding sentence, if all or a portion of the suspense account is
attributable to an interest in a passthrough entity that is subsequently disposed of, any amount so attributable that
remains in the suspense account in the
year of the disposition may be deducted
in that year. In all cases, the deduction
under this paragraph will be treated as an
ordinary deduction. The adjustments
described in this section do not affect the
taxpayer’s basis in the pass-through entity
(such as basis in a partnership determined
under § 705). See Examples 1, 2, and 3,
section 5.06 of this revenue procedure.
(3) Special rule for certain passthrough entities. An adjustment similar to
that described in this paragraph 5.05(2)
will be required in the case of a deferral
of income or shifting of deductions to
another taxpayer, such as a beneficiary of
an estate.
(4) Use of expiring NOLs, CLs, and
credits. An adjustment will be required
under this section 5.05(4) if the change
creates a substantial distortion of income
as a result of the creation of income in the
short period (or the shifting of foreign
taxes paid or accrued) to offset expiring
NOLs, CLs, or credits (including general
business credits). The amount of distortion that results from a change is the
amount by which any NOL, CL, and
credit that is carried over to the first
effective year and that expires in that year
exceeds the NOL, CL, and credit that
could have been used to offset income in
the taxpayer’s current taxable year (computed as if the taxpayer remained on its
existing taxable year). If this distortion is
substantial (as defined in section 5.05(1)),
any NOL, CL, or credit carried over to
the first effective year will be allowed to
offset income in the first effective year
only to the extent that such NOL, CL, or
credit could have been used to offset
income in the taxpayer’s current taxable
year. See Example 4, section 5.06 of this
revenue procedure.
(5) Other terms, conditions, and
adjustments. In addition to the terms, conditions, and adjustments described in this
section 5.05, the Service may impose any
other term, condition, or adjustment that
it deems appropriate under the circumstances.

June 3, 2002

.06 Examples. The following examples
illustrate the additional terms, conditions,
and adjustments that may be required
under section 5.05 of this revenue procedure to obtain the Commissioner ’s
approval for a change of an annual
accounting period. In all examples, the
taxpayer is within the scope of this revenue procedure, the taxpayer has established a business purpose under section
5.02(2) of this revenue procedure, and
any distortion of income resulting from
the change is substantial.

required to conform its taxable year with D using a
first effective year of May 31, 2002, as required
under section 5.04(8) of this revenue procedure.
Accordingly, D’s requested change in its taxable
year would not increase the deferral of D’s distributive share of income or gain from PS1. However,
PS2 will retain its September 30th taxable year;
thus, D’s requested change will increase the deferral
of D’s distributive share of income and gain from
PS2, which is passed through to D from PS1.
Assuming the deferral results in a substantial distortion of income, D will be required, under section
5.05(2) of this revenue procedure, to report its dis-

Example 1. P, a foreign corporation, maintains

tributive share of PS2’s income and gain accruing

its books and files its foreign country tax returns on

between January 1, 2002, and May 31, 2002, as an

the basis of a taxable year ending on May 31st. In

ordinary income adjustment on its tax return for the

2001, P acquires all the stock of S, a domestic cor-

short period ending May 31st as a term and condi-

poration, that maintains its books and files its tax

tion of the change in D’s taxable year.

returns on the calendar year. S has a minority inter-

Example 3. The facts are the same as in Example

est in a partnership that uses the calendar year. In

2, except that PS2 owns a minority interest in part-

order to facilitate the filing of consolidated financial

nership PS3, which has a December 31st taxable

statements for P and S, S applies for approval to

year. Because D will be required as a term and con-

change its taxable year to a taxable year ending on

dition of the change in D’s taxable year to report its

May 31st beginning on May 31, 2002. The change
result of increasing the deferral of S’s distributive

distributive share of PS2’s income and gain accruing
between January 1, 2002, and May 31, 2002, and
because that distributive share will include a portion

share of income from its partnership interest. Con-

of PS2’s distributive share of income from PS3, D

sequently, S will be required, under section 5.05(2)

does not need to make any additional ordinary
income adjustment to take account of any increased
deferral from PS3.

will create a substantial distortion of income as a

of this revenue procedure, to report the partnership
income that accrues between January 1 and May 31,
2002, as an ordinary income adjustment on its short
period tax return as a term, condition, and adjustment of the change. Thereafter, on subsequent tax
returns filed for its taxable year ending on May 31st
(beginning May 31, 2003), S must report the partnership income for the partnership’s taxable year
ending December 31 based on the Schedule K–1 in
accordance with § 706. To take into account S’s
double inclusion of the 5 months of partnership
income from January 1 to May 31, 2002, S must
recognize an ordinary deduction adjustment in each
of the four taxable years following the first effective
year equal to one-fourth of the ordinary income
adjustment amount included on S’s short period tax
return. Neither adjustment will affect S’s basis in the
partnership.
Example 2. D is a domestic corporation that currently maintains its books and files its tax returns on
the calendar year, but applies in 2002 for approval
to change its taxable year to a year ending on May

Example 4. Y, a domestic corporation that files
its tax returns on the calendar year, applies in 2002
for consent to change its taxable year to a year ending on May 31st. Y has a general business credit
carryover of $100x that will expire in the current
taxable year. Y reasonably expects to incur on June
30, 2002, a substantial amount that is deductible for
federal income tax purposes. If Y changes its annual
accounting period to May 31st, and the first effective year ends on May 31, 2002, Y reasonably
expects it would be able to use $90x of the $100x
credit. However, if Y continues to use the calendar
year for 2002, Y reasonably estimates that it would
be able to use only $25x of the expiring credit.
Under section 5.05(4) of this revenue procedure, Y
will be allowed to use only $25x of the credit to
offset income in the first effective year as a term,
condition, and adjustment of the change.

SECTION 6. GENERAL
APPLICATION PROCEDURES

31st. D owns a majority interest in a partnership,
PS1, which in turn owns a minority interest in
another partnership, PS2. PS1 and PS2 have taxable
years ending on December 31st and September 30th,
respectively, as required by the majority interest rule
of § 706(b)(1)(b)(i). If D changes its annual
accounting period to May 31st, and the first effective year ends on May 31, 2002, PS1 will be

1054

.01 What to File.
(1) Application. To request the
Commissioner ’s approval to adopt,
change, or retain an annual accounting
period under this revenue procedure, a
taxpayer (other than an electing S corporation) must complete, sign, and file a

2002–22 I.R.B.

current Form 1128, Application to Adopt,
Change, or Retain a Tax Year. An electing
S corporation requesting to adopt,
change, or retain an annual accounting
period must complete the appropriate section of, and sign and file, a current Form
2553, Election by a Small Business Corporation.
(2) Signature requirement. The
application must be signed by the taxpayer or on behalf of the taxpayer
requesting the adoption, change, or retention of annual accounting period by an
individual with authority to bind the taxpayer in such matters. For example, an
officer must sign on behalf of a corporation, a general partner on behalf of a state
law partnership, a member-manager on
behalf of a limited liability company, a
trustee on behalf of a trust, or an individual taxpayer on behalf of a sole proprietorship. If the taxpayer is a member of a
consolidated group, a Form 1128 submitted on behalf of the taxpayer must be
signed by a duly authorized officer of the
common parent. If an agent is authorized
to represent the taxpayer before the Service, receive the original or a copy of the
correspondence concerning the request, or
perform any other act(s) regarding the
application filed on behalf of the taxpayer, a power of attorney reflecting such
authorization(s) must be attached to the
application. A taxpayer’s representative
without a power of attorney to represent
the taxpayer as indicated in this section
will not be given any information regarding the application.
(3) Additional information regarding prior applications.
(a) Accounting period changed. If
a taxpayer changed its annual accounting
period at any time within the most recent
48-month period ending with the last
month of the requested taxable year
(under either an automatic change procedure or a procedure requiring prior
approval), a copy of the application for
the previous change, the ruling letter, and
any other related correspondence from
the Service must be attached to the application filed for the requested taxable year.
(b) Accounting period not
changed. If a prior application (filed
under either an automatic change procedure or a procedure requiring prior
approval) was withdrawn, not perfected,
or denied, or if the change in annual

2002–22 I.R.B.

accounting period was not made, and the
taxpayer files another application to
change its annual accounting period
within the most recent 48-month period
ending with the last month of the
requested taxable year, a copy of the earlier application, together with any related
correspondence from the Service, must be
attached to the application filed for the
requested taxable year. An explanation
must be furnished stating why the earlier
application was withdrawn or not perfected or why the change in annual
accounting period was not made. The Service will consider the explanation in
determining whether the subsequent
request for a change in the taxpayer’s
annual accounting period will be granted.
(4) Additional information for section 5.03(1) and (2). If the taxpayer
requests to establish a natural business
year under section 5.03(1) or (2) of this
revenue procedure, it must provide its
gross receipts from sales or services and
approximate inventory costs (where
applicable) for each month in the
requested short period and for each month
of the three immediately preceding taxable years.
(5) Additional information for section 5.03(3). In the case of a taxpayer
requesting to change to a natural business
year that satisfies the 25-percent gross
receipts test described in section 5.03(3)
of this revenue procedure, the taxpayer
must supply the gross receipts for the
most recent 47 months for itself (or any
predecessor) in compliance with the
instructions to Form 1128.
(6) Additional information for section 5.04. The taxpayer must indicate
whether it has an NOL or CL in the short
period required to effect the change and
provide the type and amount of any credits generated in the short period.
(7) Additional information for section 5.05. If a taxpayer requests to change
an annual accounting period and establishes a business purpose under section
5.02(2) of this revenue procedure, the taxpayer must provide the following additional information necessary to determine
whether a substantial distortion of income
(within the meaning of section 5.05(1))
exists and, thus, whether the additional
terms, conditions, and adjustments of section 5.05 apply:

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(a) if the taxpayer has an interest
in a pass-through entity:
(i) reasonable estimates of the
taxpayer’s taxable income for its current
taxable year (computed as if the taxpayer
remained on its existing taxable year);
(ii) a comparison of the existing
deferral period of any pass-through entity
in which the taxpayer has a direct or, as
appropriate, indirect interest (i.e., the
period between the pass-through entity’s
and the taxpayer’s current taxable years)
with the proposed deferral period for such
pass-through entity (i.e., the period
between the taxable year of the passthrough entity that would be required
after the requested change and the taxpayer’s requested taxable year); and
(iii) reasonable estimates of the
aggregate deferral of income from all
pass-through entities described in section
5.05(1)(a);
(b) the amount of any NOL, CL,
or credit carried over to the first effective
year and the taxable year in which such
NOL, CL, or credit was generated; and
(c) identification of any partnership, specified foreign corporation (as
defined in § 898), foreign sales corporation (as defined in former § 922), or
domestic international sales corporation
(as defined in § 992) in which the taxpayer has a majority interest.
.02 When to File.
(1) In general. Except as provided
in section 6.02(2) of this revenue procedure, a taxpayer must file a Form 1128 no
earlier than the day following the end of
the first effective year and no later than
the due date (not including extensions) of
the federal income tax return for the first
effective year. However, the Service recommends that the Form 1128 be filed as
early as possible to provide the Service
adequate time to respond to the request
prior to the due date (including extensions) of the taxpayer’s federal income
tax return for the first effective year. In
the case of a change that results in a short
period of six days or less, the Form 1128
also must be filed no earlier than the day
following the end of the short period and
no later than the due date (not including
extensions) of the federal income tax
return for the short period, even though
the short period is not treated as a separate taxable year under § 1.441–2(b)(2). A
taxpayer that fails to file a Form 1128

June 3, 2002

within the time period prescribed in this
section 6.02(1) may request an extension
of time to file under § 301.9100 of the
Procedure and Administration Regulations. Under § 301.9100–3, a Form 1128
filed within 90 days after the time period
prescribed in this section 6.02(1) may be
considered as timely filed if the taxpayer
establishes that the taxpayer acted reasonably and in good faith and that granting
relief will not prejudice the interests of
the government. If a Form 1128 is filed
more than 90 days after this period, prejudice to the interests of the government
will be presumed and such requests will
be approved only in unusual and compelling circumstances. See § 301.9100–
3(c)(3).
(2) Electing S corporations. An
electing S corporation must file a Form
2553 when the election to be an S corporation is filed pursuant to § 1362(b) and
§ 1.1362–6. Generally, such election must
be filed at any time during (a) the taxable
year that immediately precedes the taxable year for which the election is to be
effective or (b) the taxable year for which
the election is to be effective, provided
the election is made before the 16th day
of the third month of the taxable year.
.03 Where to File.
(1) In general. A taxpayer, other
than an electing S corporation or exempt
organization, applying for an adoption,
change, or retention in annual accounting
period pursuant to this revenue procedure
must file its Form 1128, together with the
appropriate user fee, with the Service at
the following address: Internal Revenue
Service, Associate Chief Counsel (Income
Tax & Accounting), Attention: CC:PA:
T:CRU, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044 (or, in the
case of a designated private delivery service: Internal Revenue Service, Associate
Chief Counsel (Income Tax & Accounting), Attention: CC:PA:T:CRU, Room
6561, 1111 Constitution Avenue, N.W.,
Washington, DC 20224).
(2) Electing S corporations. An
electing S corporation requesting to
adopt, change, or retain an annual
accounting period pursuant to this revenue procedure must file its Form 2553
with the appropriate Service Center designated in the instructions to the Form
2553. The taxpayer should not include the
user fee with the Form 2553 mailed to the

June 3, 2002

Service Center. The Service Center will
send the Form 2553 to the national office
of the Service, which will then notify the
taxpayer that the fee is due.
(3) Exempt organizations. An
exempt organization applying for a
change in annual accounting period pursuant to this revenue procedure must file
its Form 1128, together with the appropriate user fee, with the Service at the following address: Internal Revenue Service,
Attention: T:EO:RA, P.O. Box 27720,
McPherson Station, Washington, DC
20038.
.04 User Fee. Taxpayers are required
to pay user fees for requests to adopt,
change, or retain an annual accounting
period under this revenue procedure. Rev.
Proc. 2002–1 and, for tax-exempt organizations, Rev. Proc. 2002–8, 2002–1 I.R.B.
259 (or any successors) contain the
schedule of user fees and provide guidance for complying with the user fee
requirements.
.05 Consolidated Groups — Separate
Forms 1128 Not Required. A common
parent of a consolidated group files a
single Form 1128 on behalf of the consolidated group and pays only a single
user fee. The common parent must indicate that the Form 1128 is for the common parent and all its subsidiaries and
answer all relevant questions on the application for each member of the consolidated group. If one or more of the members of the group is requesting to use a
52–53-week taxable year that ends within
the same 7-day period of the other members’ requested taxable year, the parent
must attach a statement to its tax return
for the first effective year as required by
Rev. Proc. 89–56, 1989–2 C.B. 643 (or
any successor). The consolidated group
must also comply with all of the provisions of Rev. Rul. 72–184, 1972–1 C.B.
289 (or any successor). See § 1.1502–
76(a)(1).
.06 Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court.
(1) Certain taxpayers under examination.
(a) A partnership, S corporation,
electing S corporation, or PSC that is
under examination may apply for
approval to change or retain its annual
accounting period under this revenue procedure only if the appropriate director

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consents to the change or retention. The
director will consent to the change or
retention unless in the opinion of the
director, such entity’s annual accounting
period ordinarily would be included as an
item of adjustment in the year(s) for
which the entity is under examination.
For example, the director will consent to
a change where the entity is using a permissible annual accounting period. The
director also will consent to a change
from an impermissible annual accounting
period where the period became impermissible (e.g., due to a change in ownership or a change in the entity’s business)
subsequent to the years under examination. The question of whether the annual
accounting period from which the entity
is changing is permissible or became
impermissible subsequent to the years
under examination may be referred to the
national office as a request for technical
advice under the provisions of Rev. Proc.
2002–2 (or any successor) or, for taxexempt organizations, Rev. Proc. 2002–5
(or any successor).
(b) A partnership, S corporation,
electing S corporation, or PSC changing
or retaining an annual accounting period
under this revenue procedure with the
consent of the appropriate director must
attach to the application a statement from
the director consenting to the change or
retention. The partnership, S corporation,
electing S corporation, or PSC must provide a copy of the application to the
director at the same time it files the application with the national office. The application must contain the name(s) and telephone number(s) of the examining
agent(s).
(2) Certain taxpayers before an
area office. A partnership, S corporation,
electing S corporation, or PSC that is
before an area office must attach to the
application a separate statement signed by
an appropriate person certifying that, to
the best of that person’s knowledge, the
entity’s annual accounting period is not
an issue under consideration by the area
office. The entity must provide a copy of
the application to the appeals officer at
the same time it files the application with
the national office. The application must
contain the name and telephone number
of the appeals officer.
(3) Certain taxpayers before a federal court. A partnership, S corporation,

2002–22 I.R.B.

electing S corporation, or PSC that is
before a federal court must attach to the
application a separate statement signed by
an appropriate person certifying that, to
the best of that person’s knowledge, the
entity’s annual accounting period is not
an issue under consideration by the federal court. The entity must provide a copy
of the application to the government
counsel at the same time it files the application with the national office. The application must contain the name and telephone number of the government counsel.
SECTION 7. PROCESSING OF
APPLICATION
.01 Service Discretion. Notwithstanding any other provision of this revenue
procedure, the Service reserves the right
to decline to process any application filed
under this revenue procedure in situations
in which it would not be in the best interest of sound tax administration to permit
the requested adoption, change, or retention. In this regard, the Service will consider whether the adoption, change, or
retention in annual accounting period
would clearly and directly frustrate compliance efforts of the Service in administering the income tax laws.
.02 Applicability of Rev. Proc. 2002–1,
Rev. Proc. 2002–4, and Any Successor
Revenue Procedures. Rev. Proc. 2002–1
or, for tax-exempt organizations, Rev.
Proc. 2002–4, 2002–1 I.R.B. 127 (or any
successors) will apply to any request
made under this revenue procedure to
adopt, change, or retain an annual
accounting period.
.03 Incomplete Application — 21 Day
Rule. If the Service receives an application that is not completed properly in
accordance with the instructions on the
Form 1128 (or Form 2553) and the provisions of this revenue procedure, or if
supplemental information is needed, the
Service will notify the taxpayer. The notification will specify the information that
needs to be provided, and the taxpayer
will be permitted 21 days from the date of
the notification to furnish the necessary
information. The Service reserves the
right to impose shorter reply periods if
subsequent requests for additional information are made. If the required information is not submitted to the Service within
the reply period, the application will not
be processed. A reasonable additional

2002–22 I.R.B.

period to furnish information may be
granted to a taxpayer. Any request for an
extension of time to furnish necessary
information must be made in writing and
submitted within the 21-day period. If the
extension request is denied, there is no
right of appeal.
.04 Conference in the National Office.
The taxpayer must complete the appropriate line on the Form 1128, or attach a
statement to the Form 2553, to request a
conference of right if an adverse response
is contemplated by the Service. If the taxpayer does not complete the appropriate
line on the Form 1128, attach a statement
to the Form 2553, or request a conference
in a later written communication, the Service will presume that the taxpayer does
not desire a conference. If requested, a
conference will be arranged in the
national office prior to the Service’s formal reply to the taxpayer’s application.
For taxpayers other than exempt organizations, see section 11 of Rev. Proc.
2002–1 (or any successor). For exempt
organizations, see section 12 of Rev.
Proc. 2002–4 (or any successor).
.05 Letter Ruling. Unless otherwise
specifically provided, the Commissioner’s
approval to adopt, change, or retain a taxpayer’s annual accounting period will be
set forth in a letter ruling from the
national office that identifies the taxpayer’s former annual accounting period; the
annual accounting period the taxpayer is
adopting, changing to, or retaining; the
short period necessary to effect a change;
and the terms, conditions, and adjustments under which the adoption, change,
or retention is to be effected. See § 1.
442–1(b). A copy of the letter ruling must
be attached to the taxpayer’s federal
income tax return for the first effective
year.
.06 Effect of Noncompliance. If a taxpayer adopts, changes, or retains an
annual accounting period without authorization or without complying with all of
the provisions of this revenue procedure
and the letter ruling granting permission
for the change, the taxpayer has initiated
an adoption, change, or retention of
annual accounting period without obtaining the approval of the Commissioner as
required by §§ 441(i), 442, 706(b), and
1378. Upon examination, a taxpayer that
has initiated an unauthorized adoption,
change, or retention of annual accounting

1057

period may be denied the adoption,
change, or retention. For example, the
taxpayer may be required to recompute its
taxable income or loss in accordance with
its former (or required, if applicable) taxable year.
.07 Effect on Other Offices of the Service. The provisions of this revenue procedure are not intended to preclude an
appropriate representative of the Service
(for example, an appeals officer with delegated settlement authority) from settling
a particular taxpayer’s case involving an
accounting period issue by agreeing to
terms, conditions, and adjustments that
differ from those that might be provided
under this revenue procedure when it is in
the best interest of the government to do
so.
SECTION 8. EFFECT OF APPROVAL
.01 Audit Protection.
(1) In general. Except as provided
in section 8.01(2) of this revenue procedure, a partnership, S corporation, electing S corporation, or PSC that files an
application in compliance with all the
applicable provisions of this revenue procedure will not be required by the Service
to change its annual accounting period for
a taxable year prior to the first effective
year.
(2) Exceptions. The Service may
change the annual accounting period of a
taxpayer described in section 8.01(1) of
this revenue procedure for a prior taxable
year if:
(a) the taxpayer withdraws or does
not perfect its request;
(b) the national office denies the
request;
(c) the taxpayer declines to implement the change;
(d) the taxpayer implements the
change but does not comply with all the
applicable provisions of this revenue procedure and the letter ruling granting permission for the change; or
(e) the national office modifies or
revokes the ruling because there has been
a misstatement or omission of material
facts.
.02 Subsequently Required Changes.
(1) In general. A taxpayer described
in section 8.01(1) of this revenue procedure that adopts, changes, or retains its
annual accounting period pursuant to this
revenue procedure may be required to

June 3, 2002

subsequently change its annual accounting period for the following reasons:
(a) the enactment of legislation;
(b) a decision of the United States
Supreme Court;
(c) the issuance of temporary or
final regulations;
(d) the issuance of a revenue ruling, revenue procedure, notice, or other
statement published in the Internal Revenue Bulletin;
(e) the issuance of written notice
to the taxpayer that the change in
accounting period was granted in error or
is not in accord with the current views of
the Service; or
(f) a change in the material facts
on which the approval was based.
(2) Retroactive change or modification. Except in rare or unusual circumstances, if a taxpayer described in section
8.01(1) of this revenue procedure
adopted, changed, or retained its annual
accounting period under this revenue procedure and is subsequently required under
section 8.02(1) of this revenue procedure
to change its annual accounting period,
the required change will not be applied
retroactively provided that:
(a) the taxpayer complied with all
the applicable provisions of the letter ruling granting permission for the change
and this revenue procedure;
(b) there has been no misstatement or omission of material facts;
(c) there has been no change in
the material facts on which the approval
was based;
(d) there has been no change in
the applicable law; and
(e) the taxpayer to whom approval
was granted acted in good faith in relying
on the approval and applying the change
retroactively would be to the taxpayer’s
detriment.
SECTION 9. REVIEW BY DIRECTOR
.01 In General. A director must apply
a ruling obtained under this revenue procedure in determining the taxpayer’s tax
liability unless the director recommends
that the ruling should be modified or
revoked. The director will ascertain if:

June 3, 2002

(1) the representations on which the
ruling was based reflect an accurate statement of the material facts;
(2) the amount of the adjustments
required to effect the change, if any, were
properly determined;
(3) the adoption, change, or retention of annual accounting period was
implemented as proposed in accordance
with the terms and conditions of the letter
ruling and this revenue procedure;
(4) there has been any change in the
material facts on which the ruling was
based during the period that the new or
retained annual accounting period was
used; and
(5) there has been any change in the
applicable law during the period the new
or retained annual accounting period was
used.
.02 National Office Consideration. If a
director recommends that the ruling
(other than the amount of the adjustments
required to effect the change) should be
modified or revoked, the director will forward the matter to the national office for
consideration before any further action is
taken. Such a referral to the national
office will be treated as a request for technical advice, and the provisions of Rev.
Proc. 2002–2 or, for tax-exempt organizations, Rev. Proc. 2002–5 will be followed.
SECTION 10. EFFECTIVE DATE AND
TRANSITION RULE
.01 In General. Except as provided in
section 10.02 of this revenue procedure,
this revenue procedure is effective for
applications filed on or after May 10,
2002.
.02 Transition Rule for Pending Applications. If a taxpayer filed an application
before May 10, 2002, and the application
is pending with the national office on
May 10, 2002, the taxpayer may request
that the application be processed in accordance with this revenue procedure. However, the national office will process
applications filed before May 10, 2002, in
accordance with prior authorities unless,
prior to the later of June 25, 2002, or the
issuance of the letter ruling granting or
denying consent to the adoption, change,
or retention, the taxpayer notifies the
national office that it requests that its

1058

application be processed in accordance
with this revenue procedure.
SECTION 11. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 85–16 and Rev. Proc.
74–33 are superseded.
SECTION 12. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545–1786. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless the collection of information displays a valid OMB control
number.
The collections of information in this
revenue procedure are found in sections
6, 7, and 10. The information in section 6
is required in order to determine whether
the taxpayer’s annual accounting period
will result in a distortion of income. This
information will be used by the Service to
determine which terms, conditions, and
adjustments will be necessary to effect
the adoption, change, or retention of
annual accounting period. The information in section 7 is required in order to
determine whether the taxpayer desires a
conference of right if an adverse response
to its application is contemplated. The
information in section 10 is required in
order to allow a taxpayer to apply the
provisions of this revenue procedure to a
pending application. The likely respondents are the following: individuals, corporations, associations, trusts, estates,
partnerships, farms, business or other forprofit organizations, non-profit organizations, and small businesses or organizations.
Except for the burdens contained in
sections 6.01(5), 6.01(6), 7.04 (Forms
2553 only), and 10.02, the total annual
reporting burden for the requirements
contained in this revenue procedure is
reflected in the burden estimates for
Forms 1128 and 2553.

2002–22 I.R.B.

The estimated total annual reporting
burden for the requirements contained in
sections 6.01(5), 6.01(6), 7.04, and 10.02
of this revenue procedure is 600 hours:
the estimated average annual burden per
respondent is 1.2 hours; the estimated
number of respondents is 500; and the
estimated frequency of response is on
occasion.

2002–22 I.R.B.

Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

1059

DRAFTING INFORMATION
The author of this revenue procedure
is Martin Scully, Jr. of the Office of Associate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, contact
Mr. Scully at (202) 622–4960 (not a tollfree call).

June 3, 2002