Rp-2003-79

26 CFR 601.204: Changes in accounting periods and
methods of accounting.
(Also Part I, §§ 442; 1.442–1.)

Rev. Proc. 2003–79
SECTION 1. PURPOSE
Rev. Proc. 2002–38, 2002–1 C.B.
1037, and Rev. Proc. 2002–39, 2002–1
C.B. 1046, provide procedures for a partnership or S corporation to change its
annual accounting period if its current taxable year no longer qualifies as a natural
business year (or, for certain S corporations, an ownership taxable year). This
revenue procedure provides procedures
under which a partner or S corporation
shareholder (within the scope of this revenue procedure) of such a partnership
or S corporation may elect to take into
account ratably over four taxable years the
partner’s or S corporation shareholder’s
share of income from the partnership or S
corporation that is attributable to the short
taxable year ending on or after May 10,
2002, but before June 1, 2004.
SECTION 2. BACKGROUND
.01 Section 442 of the Internal Revenue
Code and § 1.442–1(a) of the Income Tax
Regulations generally provide that a taxpayer that wants to change its annual accounting period and use a new taxable year
must obtain the approval of the Commissioner.
.02 Section 1.442–1(b)(2) provides,
in relevant part, that a change in annual
accounting period will be approved only
where the taxpayer agrees to the Commissioner’s prescribed terms, conditions, and
adjustments for effecting the change.
.03 Section 1.442–1(b)(3) provides that
such terms, conditions, and adjustments
may include adjustments necessary to neutralize the tax effects of a substantial distortion of income that would otherwise result from the requested annual accounting
period.
.04 Rev. Proc. 2002–38 provides the
exclusive procedures for certain partnerships and S corporations to obtain automatic approval to adopt, change, or retain their annual accounting periods under
§ 442 and § 1.442–1(b). Among the provisions of Rev. Proc. 2002–38:

November 10, 2003

(1) Section 4 provides that a partnership or S corporation may secure the Commissioner’s approval to adopt or change to
its “required taxable year,” a “natural business year,” or an “ownership taxable year;”
(2) Section 5.04 defines a “permitted
taxable year” to include a required taxable
year, natural business year, or ownership
taxable year;
(3) Section 5.05 provides that a partnership or S corporation establishes a natural
business year by satisfying a “25-percent
gross receipts test;”
(4) Section 5.06 provides generally that
an S corporation shareholder that is a taxexempt entity under § 501(a) and that is not
subject to tax on any income attributable
to the S corporation is disregarded for purposes of determining an ownership taxable
year of the S corporation unless the S corporation is wholly-owned by such tax-exempt entity; and
(5) Sections 6.05 and 6.06 provide that
if a taxpayer changes to or retains a natural business year or an ownership taxable
year and that year 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 under Rev. Proc. 2002–38 or
Rev. Proc. 2002–39, whichever applies.
.05 Rev. Proc. 2002–39 provides the
exclusive procedures for taxpayers, including partnerships and S corporations,
that do not qualify under one of the automatic approval procedures, to obtain prior
approval of the Commissioner to adopt,
change, or retain their annual accounting
periods under § 442 and § 1.442–1(b).
Among the provisions of Rev. Proc.
2002–39:
(1) Section 5.01 provides that a request to adopt, change, or retain an
annual accounting period ordinarily will
be approved if the taxpayer establishes a
business purpose;
(2) Section 5.02 provides that a taxpayer requesting to adopt, change, or retain an annual accounting period that is the
taxpayer’s natural business year has established a business purpose to the satisfaction of the Commissioner;
(3) Section 5.03 provides that a natural business year of a taxpayer may be determined under the “annual business cycle
test,” the “seasonal business test,” or the
“25% gross receipts test;” and

1036

(4) Section 5.04 provides that if a partnership or S corporation changed to or retained under Rev. Proc. 2002–39 a taxable year that was its natural business year,
and that taxable year no longer qualifies as
a permitted taxable year, the partnership
or S corporation is using an impermissible annual accounting period and should
change to a permitted taxable year under Rev. Proc. 2002–38 or Rev. Proc.
2002–39, whichever applies.
.06 In the case of a partnership or S corporation that changes its taxable year to a
permitted taxable year, a partner or S corporation shareholder may be required to
include in gross income in a single taxable year income items and expense items
from more than one taxable year of the
partnership or S corporation. The Internal Revenue Service and Treasury Department have determined that it is appropriate
to allow partners and S corporation shareholders within the scope of this revenue
procedure to elect to spread ratably over
a four-year period their share of income
from the partnership’s or S corporation’s
short taxable year.
SECTION 3. DEFINITIONS
For purposes of this revenue procedure:
.01 Share of income. The term “share
of income” means a partner’s or S corporation shareholder’s share of “income items”
that exceeds its share of “expense items”
from the partnership or S corporation that
are attributable to the short taxable year;
.02 Income Items and Expense Items.
The terms “income items” and “expense
items” have the same meaning as in
§ 1.702–3T(b); and
.03 Short Taxable Year. The term “short
taxable year” means the short taxable year
of the partnership or S corporation that is
required to effect the change in annual accounting period. An initial short year following an election under section 1362(a)
will not be considered a “short taxable
year” for purposes of this revenue procedure.
SECTION 4. SCOPE
This revenue procedure applies to a
partner or S corporation shareholder, if:
.01 The partnership or S corporation has
changed, or will change, its taxable year
solely because either:

2003-45 I.R.B.

(1) its current taxable year no longer
qualifies as a natural business year under Rev. Proc. 2002–38 or Rev. Proc.
2002–39, whichever applies; or
(2) in the case of an S corporation, its
current taxable year no longer qualifies as
an ownership taxable year because a taxexempt owner is disregarded under section
5.06 of Rev. Proc. 2002–38;
.02 The partnership’s or S corporation’s
short taxable year ends on or after May 10,
2002, but before June 1, 2004 (or, in the
case of a taxpayer that uses a 52–53-week
taxable year, with reference to the last day
of any calendar month after April 30, 2002,
and before June 1, 2004);
.03 As a consequence of the partnership
or S corporation changing its taxable year
to a permitted taxable year, income items
and expense items from more than one taxable year of the partnership or S corporation would, but for the provisions of this
revenue procedure, be includible in the income of the partner or S corporation shareholder in a single taxable year; and
.04 The partner’s or S corporation
shareholder’s share of income items
exceeds its share of expense items attributable to the short taxable year of the
partnership or S corporation.
SECTION 5. FOUR-YEAR SPREAD
PERIOD
.01 A partner or S corporation shareholder within the scope of this revenue procedure may elect to take into account its
share of income from the short taxable year
of the partnership or S corporation ratably
over a four-year period.
.02 A partner or S corporation shareholder within the scope of this revenue
procedure that elects a ratable four-year
spread period under this revenue procedure
must apply the provisions of § 1.702–3T
(b), (d), (e), (f) and (g) with the following
modifications for purposes of this section:
(1) the term “partner” in §1.702–3T
means any partner or S corporation shareholder within the scope of this revenue
procedure;
(2) the term “partnership” includes S
corporations;
(3) the term “distributive share” includes a shareholder’s pro rata share of S
corporation items; and

2003-45 I.R.B.

(4) references to “section 806 of the
1986 Act” should be replaced with “Rev.
Proc. 2002–38 or Rev. Proc. 2002–39,
whichever applies.”
SECTION 6. PROCEDURES FOR
ELECTING FOUR-YEAR SPREAD
PERIOD
A partner or S corporation shareholder
within the scope of this revenue procedure
that wants to elect to spread income ratably
over a four-year period under this revenue
procedure must make the election by:
(1) recording the appropriate ratable income amount (i.e., one quarter of its share
of income) on either:
(a) a timely filed original federal income tax return for the taxable year of the
partner or S corporation shareholder with
or within which the partnership’s or S corporation’s short taxable year ends; or
(b) in the case of a partner or S corporation shareholder within the scope of this
revenue procedure that wants to make the
four-year spread period election, but prior
to November 24, 2003, has timely filed a
federal income tax return for the taxable
year with or within which the partnership’s
or S corporation’s short taxable year ends,
on an appropriate amended federal income
tax return that is filed on or before April
12, 2004; and
(2) attaching to the original or amended
federal income tax return for the taxable
year with or within which the partnership’s
or S corporation’s short taxable year ends,
and to the federal income tax returns for
every other taxable year of the spread period, a completed Form 8082, Notice of
Inconsistent Treatment or Administrative
Adjustment Request, containing an explanation in Part III similar to the following:
“Election under Rev. Proc. 2003–79 to apply a ratable 4-year spread of the share of
income attributable to a change in annual
accounting period.”
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–38 and Rev. Proc.
2002–39 are modified.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Roy A. Hirschhorn and

1037

Jeffrey S. Marshall of the Office of Associate Chief Counsel (Income Tax and
Accounting).
For further information
regarding this revenue procedure, contact
Mr. Hirschhorn or Mr. Marshall at (202)
622–4960 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, §§ 62, 162, 267, 274; 1.62–2, 1.162–17,
1.267(a)–1, 1.274–5.)

Rev. Proc. 2003–80
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 2002–63, 2002–2 C.B. 691, by providing rules under which the amount of
ordinary and necessary business expenses
of an employee for lodging, meal, and
incidental expenses or for meal and incidental expenses incurred while traveling
away from home will be deemed substantiated under § 1.274–5 of the Income Tax
Regulations when a payor (the employer,
its agent, or a third party) provides a per
diem allowance under a reimbursement
or other expense allowance arrangement
to pay for the expenses. In addition, this
revenue procedure provides an optional
method for employees and self-employed
individuals who pay or incur meal costs
to use in computing the deductible costs
of business meal and incidental expenses
paid or incurred while traveling away
from home. This revenue procedure also
provides an optional method for use in
computing the deductible costs of incidental expenses paid or incurred while
traveling away from home by employees
and self-employed individuals who do not
pay or incur meal costs and who are not
reimbursed for the incidental expenses.
Use of a method described in this revenue
procedure is not mandatory, and a taxpayer
may use actual allowable expenses if the
taxpayer maintains adequate records or
other sufficient evidence for proper substantiation. This revenue procedure does
not provide rules under which the amount
of an employee’s lodging expenses will
be deemed substantiated when a payor
provides an allowance to pay for those
expenses but not meal and incidental expenses.

November 10, 2003