Rp 2006-46

5.06 of this revenue procedure, the corporation must supply the gross receipts from
sales and services for the most recent 47
months for itself (or any predecessor) in
compliance with the instructions to Form
1128.
(7) Consolidated application. A common parent must file a single application to
change the annual accounting period of its
consolidated group, which consists of the
parent and any subsidiary that is a member
of the group on the last day of the short period.
SECTION 8. REVIEW OF
APPLICATION
.01 Service Center Review. A Service
Center may deny a change of annual accounting period under this revenue procedure only if: (a) the Form 1128 is not filed
timely, or (b) the corporation fails to meet
the scope or any term and condition of this
revenue procedure. If the change is denied,
the Service Center will return the Form
1128 with an explanation for the denial.
.02 Review of Director. The appropriate
director may ascertain if the change in annual accounting period was made in compliance with all the applicable provisions
of this revenue procedure. Corporations
changing their annual accounting period
pursuant to this revenue procedure without
complying with all the provisions (including the terms and conditions) of this revenue procedure ordinarily will be deemed
to have initiated the change in annual accounting period without the approval of

the Commissioner. Upon examination, a
corporation that has initiated an unauthorized change of annual accounting period
may be denied the change. For example,
the corporation may be required to recompute its taxable income or loss in accordance with its former (or required, if applicable) taxable year.
SECTION 9. EFFECTIVE DATE
This revenue procedure generally is effective for all changes in annual accounting periods for which the first effective
year ends on or after October 18, 2006.
However, if the time period for filing Form
1128 or Form 5471 with respect to a taxable year set forth in section 7.02(2) of this
revenue procedure has not yet expired, a
corporation within the scope of this revenue procedure may elect early application
of the revenue procedure by providing the
notification set forth in section 7.02(3) on
the top of page 1 of Form 1128 or Form
5471 and by satisfying the other procedural requirements of section 7.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–37 is clarified, modified, amplified, and superseded.
SECTION 11. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has 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 collection of information in this
revenue procedure is found in section 7.
The information in section 7 is required in
order to determine whether the corporation
properly obtained automatic approval to
change its annual accounting period. The
likely respondents are corporations. 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
5471.
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 Roy A. Hirschhorn and
Jeffrey Marshall of the Office of Associate Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue procedure, contact
Mr. Marshall 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; 1.441–1, 1.441–3, 1.442–1, 1.706–1, 1.1378–1.)

Rev. Proc. 2006–46
TABLE OF CONTENTS
SECTION 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 861
SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 861

.01 Taxable Year Defined. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) In general.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Annual accounting period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Required taxable year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Adoption of a Taxable Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Change in Taxable Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) In general.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Annualization of short period return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) No retroactive change in annual accounting period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006–45 I.R.B.

859

861
861
861
861
862
862
862
862
862

November 6, 2006

.04 Retention of a Taxable Year.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Approval of an Adoption, Change, or Retention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Business Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Sufficient business purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Natural business year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Section 444 Elections.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

862
862
862
862
862
863

SECTION 3. SIGNIFICANT CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863
SECTION 4. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863

.01 Applicability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Required taxable year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Natural business year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Ownership taxable year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) Certain 52–53-week taxable years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) Certain taxpayers that are required to make concurrent changes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Inapplicability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Under examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Before an area office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Before a federal court. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) Issue under consideration in partner or shareholder return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) Prior change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6) Terminated S corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7) Section 444 election.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Nonautomatic Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

863
863
863
863
863
863
863
863
863
864
864
864
864
864
864

SECTION 5. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 864

.01 Taxpayer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Partnership.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Electing S Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 PSC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Required Taxable Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Permitted Taxable Year.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Natural Business Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) 25-percent gross receipts test.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Exception. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Special rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.08 Ownership Taxable Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.09 Grandfathered Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.10 First Effective Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.11 Short Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.12 Field Office, Area Office, Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.13 Under Examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) In general.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Partnerships and S corporations subject to TEFRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.14 Issue Under Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) During an examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Before an area office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Before a federal court. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

864
864
864
864
864
864
864
864
864
864
865
865
865
865
865
865
865
865
865
865
866
866

SECTION 6. TERMS AND CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 866

.01 In General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Record Keeping/Book Conformity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) In general.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Certain short periods exempt from financial statement conformity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Certain taxpayers using required year exempt from financial statement conformity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 First Effective Year Tax Return.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) When to file. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Annualization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

November 6, 2006

860

866
866
866
866
866
866
866
866

2006–45 I.R.B.

.04 Subsequent Year Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Changes in Natural Business Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Changes in Ownership Taxable Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 52–53-week Taxable Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.08 Creation of Net Operating Loss or Capital Loss.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.09 Creation of General Business Credits.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

866
866
866
866
866
867

SECTION 7. GENERAL APPLICATION PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 867

.01 Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Filing Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Where to file. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) When to file. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Label.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) Signature requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) No user fee.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6) Additional information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Additional Procedures If Under Examination, Before an Area Office, or Before a Federal Court. . . . . . . . . . . . . . . . . . . . . . .
(1) Taxpayer under examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Taxpayer before an area office.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Taxpayer before a federal court.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

867
867
867
867
867
867
867
867
867
867
867
868

SECTION 8. EFFECT OF APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868

.01 Audit Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) In general.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Subsequently Required Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) In general.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Retroactive change.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

868
868
868
868
868
868

SECTION 9. REVIEW OF APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868

.01 Service Center Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868
.02 Review of Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868
SECTION 10. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868
SECTION 11. EFFECT ON OTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868
SECTION 12. PAPERWORK REDUCTION ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868
DRAFTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 869

SECTION 1. PURPOSE
This revenue procedure provides the
exclusive procedures for a partnership
(as defined in section 5.02 of this revenue procedure), S corporation, electing
S corporation (as defined in section 5.03
of this revenue procedure), personal service corporation (PSC) (as defined in
section 5.04 of this revenue procedure),
or trust within its scope — to obtain automatic approval to adopt, change, or
retain its annual accounting period under
§ 442 of the Internal Revenue Code and
§ 1.442–1(b) of the Income Tax Regulations. This revenue procedure clarifies,
modifies, amplifies, and supersedes Rev.
Proc. 2002–38, 2002–1 C.B. 1037. A
partnership, S corporation, electing S cor-

2006–45 I.R.B.

poration, PSC, or trust complying with
the applicable provisions of this revenue
procedure will be deemed to have established a business purpose and obtained the
approval of the Commissioner of Internal
Revenue to adopt, change, or retain its
annual accounting period under § 442 and
the regulations thereunder.
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 year or fiscal year, or, if applicable, the taxpayer’s required taxable year.

861

(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.
(a) In general. Section 1.441–1(b)(2)
provides that certain taxpayers must use
the particular taxable year that is required
under the Code or regulations thereunder.
Exceptions to the required taxable year are
provided for certain taxpayers, including
a partnership, S corporation, or PSC, that
make an election under § 444, elect to use
a 52–53-week taxable year that ends with
reference to its required taxable year or a
taxable year elected under § 444, or estab-

November 6, 2006

lish a business purpose for having a different taxable year and obtain approval under
§ 442.
(b) Partnerships. Section 706(b) and
§ 1.706–1(b)(2) generally provide that a
partnership’s taxable year must be its required taxable year. However, a partnership may have a taxable year other than its
required taxable year if it makes an election under § 444, elects to use a 52–53week taxable year that ends with reference
to its required taxable year or a taxable
year elected under § 444, or establishes a
business purpose for having a different taxable year and obtains the approval of the
Commissioner under § 442. The required
taxable year for a partnership is:
(i) the taxable year of one or more of
its partners who have an aggregate interest
in partnership profits and capital of greater
than 50 percent;
(ii) if there is no taxable year described
in clause (i), the taxable year of all the principal partners of the partnership (i.e., all
the partners having an interest of 5 percent
or more in partnership profits or capital);
or
(iii) if there is no taxable year described
in clause (i) or (ii), the taxable year that
results in the least aggregate deferral of
income to the partners.
(c) S corporations. Section 1378 and
§ 1.1378–1(a) provide that the taxable year
of an S corporation must be a permitted
year. The term “permitted year” means
(1) the required taxable year (i.e., a taxable year ending on December 31), (2) a
taxable year elected under § 444, (3) a
52–53-week taxable year ending with reference to the required taxable year or a taxable year elected under § 444, or (4) any
other accounting period for which the corporation establishes to the satisfaction of
the Commissioner a business purpose.
(d) PSCs.
Section 441(i)(1) and
§ 1.441–3 provide that the taxable year
of a PSC must be the calendar year unless
the PSC makes an election under § 444,
elects to use a 52–53-week taxable year
that ends with reference to the calendar
year or a taxable year elected under § 444,
or establishes, to the satisfaction of the
Commissioner, a business purpose for
having a different period for its taxable
year.
(e) Trusts. Section 644(a) provides that
the taxable year of any trust generally must
be the calendar year.

November 6, 2006

.02 Adoption of a Taxable Year. A
newly-formed partnership, S corporation,
or PSC may adopt its required taxable year,
a taxable year elected under § 444, or a
52–53-week taxable year ending with reference to its required taxable year or a taxable year elected under § 444 without the
approval of the Commissioner pursuant to
§ 441. If, however, a partnership, S corporation, or PSC wants to adopt any other
taxable year, it 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) generally provides that a taxpayer that wants
to change its annual accounting period and
use a new taxable year must obtain the approval of the Commissioner.
(2) Annualization of short period return.
Section 443(b) and
§ 1.443–1(b)(1)(i) generally 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 §§ 1.706–1(b)(8)(i)(B)
and 1.1378–1(c)(2) for exceptions to this
general rule for partnerships and S corporations, 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 a 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 on 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

862

of the Commissioner to retain its current
fiscal year. Similarly, a partnership using
a taxable year that corresponds 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 previously has 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
provided such fiscal year currently qualifies as a permitted taxable year.
.05 Approval of an Adoption, Change,
or Retention. Section 1.442–1(b) provides, in part, 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 if 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.
.06 Business Purpose.
(1) Sufficient business purposes. Section 1.442–1(b)(2) provides that the requirement of a business purpose generally 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. Section 1.442–1(b)(2) also 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 business purpose.
(2) Natural business year. A taxpayer
is deemed to have established a natural
business year if it satisfies the “25-percent gross receipts test” described in section 5.07 of this revenue procedure.

2006–45 I.R.B.

.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 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 under § 444 by filing a
Form 8716, “Election To Have a Tax Year
Other Than a Required Tax Year.” A taxpayer that wants to terminate its § 444 election must follow the automatic procedures
under § 1.444–1T(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, Rev. Proc. 2002–39, 2002–1 C.B.
1046 (or any successor), or this revenue
procedure (whichever is applicable).
SECTION 3. SIGNIFICANT CHANGES
Significant changes to Rev.
Proc.
2002–38 made by this revenue procedure
include:
.01 Section 4.01 of this revenue procedure removes from the scope a partnership that has a minor, temporary percentage change in ownership.
.02 Section 4.01(1) of this revenue procedure adds to the scope a trust that wants
to change to its required taxable year.
.03 Section 4.01(5) of this revenue procedure clarifies that a taxpayer that is required to make a concurrent change as a
term and condition for the approval of a related taxpayer’s change of accounting period is included in the scope notwithstanding any limitation in this revenue procedure to the contrary.
.04 Section 4.02(6) of this revenue procedure excludes from the scope a terminated S corporation.
.05 Section 4.02(7) of this revenue procedure excludes from the scope a partnership, S corporation, electing S corporation,
or PSC that makes or terminates a § 444
election. A taxpayer that makes or terminates a § 444 election must follow the pro-

2006–45 I.R.B.

cedures in § 444 and the regulations thereunder.
.06 Section 5.05 of this revenue procedure adds a trust to the definition of a required taxable year.
.07 Section 5.08 of this revenue procedure clarifies that, for taxable years beginning after December 31, 2002, a shareholder that is tax-exempt under § 501(a)
generally is disregarded for purposes of
determining the ownership taxable year of
an S or electing S corporation.
.08 Section 5.10 of this revenue procedure modifies the definition of first effective year to include a short period of 6 days
or less.
.09 Section 6.02(1) of this revenue
procedure provides that only certain short
periods are exempt from the financial
statement conformity requirement and
incorporates the clarification in Notice
2002–72, 2002–2 C.B. 843, of the recordkeeping/book conformity term and condition with regard to certain taxpayers
changing to their required taxable year.
.10 Section 6.08 of this revenue procedure incorporates the modified carryback
term and condition of section 4.01 of Rev.
Proc. 2003–34, 2003–1 C.B. 856.
.11 Section 9.02 of this revenue procedure clarifies that, for a taxpayer that must
change to a required year, failure to comply with all the applicable provisions of
this revenue procedure does not relieve the
taxpayer from any applicable penalties or
interest if the taxpayer fails to make the
change.
SECTION 4. SCOPE
.01 Applicability. Except as provided
in section 4.02, this revenue procedure,
which is the exclusive procedure for a taxpayer (as defined in section 5.01 of this
revenue procedure) within its scope to secure the Commissioner’s approval, applies
to:
(1) Required taxable year. A partnership, S corporation, electing S corporation,
PSC, or trust that wants to change to its required taxable year (as defined in section
5.05 of this revenue procedure), or a partnership, S corporation, electing S corporation, or PSC that wants to change to a
52–53-week taxable year ending with reference to such required taxable year;

863

(2) Natural business year. A partnership, S corporation, electing S corporation, or PSC (other than a member of a
tiered structure as defined in § 444 and
§ 1.444–2T) that wants to change to or retain a natural business year that satisfies
the 25-percent gross receipts test described
in section 5.07 of this revenue procedure,
or to a 52–53-week taxable year ending
with reference to such taxable year;
(3) Ownership taxable year. An S corporation or electing S corporation that
wants to adopt, change to, or retain its
ownership taxable year (as defined in section 5.08 of this revenue procedure), or to
a 52–53-week taxable year ending with
reference to such taxable year;
(4) Certain 52–53-week taxable years.
A partnership, S corporation, electing
S corporation, or PSC that wants to change
from a 52–53-week taxable year that references a particular calendar month to a
non-52–53-week taxable year that ends on
the last day of the same calendar month
that is a permitted taxable year, and vice
versa;
(5) Certain taxpayers that are required
to make concurrent changes. Notwithstanding any limitation in this revenue procedure to the contrary (including any limitations in section 4.02 of this revenue procedure) or any conflicting testing date provisions, this revenue procedure applies to
a taxpayer that is required to concurrently
change its annual accounting period as a
term and condition for the approval of a related taxpayer’s change of annual accounting period.
.02 Inapplicability. Except as provided
in section 4.01(5) of this revenue procedure, this revenue procedure does not apply to:
(1) Under examination. A change or
retention in annual accounting period if the
taxpayer is under examination (as defined
in section 5.13 of this revenue procedure),
unless it obtains consent of the appropriate
director as provided in section 7.03(1) of
this revenue procedure;
(2) Before an area office. A change or
retention in annual accounting period if the
taxpayer is before an area office with respect to any income tax issue and its annual
accounting period is an issue under consideration (as defined in section 5.14 of this
revenue procedure) by the area office;

November 6, 2006

(3) Before a federal court. A change
or retention in annual accounting period
if the taxpayer is before a federal court
with respect to any income tax issue and its
annual accounting period is an issue under
consideration by the federal court;
(4) Issue under consideration in connection with partner or shareholder return. A change or retention in annual accounting period by a partnership or S corporation if, on the date the taxpayer otherwise would file its application with the
Service Center, the taxpayer’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; or
(5) Prior change. A change to, or retention of, a natural business year as described
in section 4.01(2) of this revenue procedure if the taxpayer has 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. For this purpose, the following
changes are not considered prior changes
in annual accounting period:
(a) a change to a required taxable year
or ownership taxable year;
(b) a change from a 52–53-week taxable
year to a non-52–53-week taxable year that
ends with reference to the same calendar
month, and vice versa; or
(c) a change in accounting period
by an S corporation, electing S corporation, or PSC, in order to comply
with the common taxable year requirements of §§ 1.1502–75(d)(3)(v) and
1.1502–76(a)(1).
(6) Terminated S corporation. A corporation that is requesting a change in a
taxable year that is within an S termination
year (as defined in § 1362(e)(4)).
(7) Section 444 election. A partnership,
S corporation, electing S corporation, or
PSC that makes or terminates a § 444 election.
.03 Nonautomatic Changes. Any taxpayer that wants to adopt, change to, or retain an annual accounting period that cannot do so automatically under this revenue
procedure (because the requested taxable
year is not described in section 4.01 or be-

November 6, 2006

cause of any application of section 4.02) or
pursuant to a provision in the Code, regulations, or other published administrative
procedures, must obtain the approval of the
Commissioner. See § 1.442–1(b) and Rev.
Proc. 2002–39 (or any successor) for rules
relating to nonautomatic changes of annual
accounting periods by partnerships, S corporations, electing S corporations, PSCs,
and trusts.
SECTION 5. DEFINITIONS
The following definitions apply solely
for purposes of this revenue procedure:
.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 Partnership. A partnership is any
entity classified as a partnership for purposes of § 7701(a)(3) or the regulations
thereunder.
.03 Electing S Corporation. An “electing S corporation” is a corporation attempting to make an S corporation election for the short period (as defined in
section 5.11 of this revenue procedure).
See Rev. Proc. 2006–45, 2006–45 I.R.B.
851, for procedures for automatic approval to change an annual accounting
period by corporations attempting to make
an S corporation election for the taxable
year immediately following the first effective year (as defined in section 5.10 of this
revenue procedure).
.04 PSC. A PSC is a personal service
corporation as defined in § 441(i)(2). For
purposes of this revenue procedure, a PSC
does not include a corporation that has a
required taxable year under a provision
of the Code other than § 441(i) (e.g., a
specified foreign corporation as defined in
§ 898(b)(1)).
.05 Required Taxable Year. The “required taxable year” is the taxable year determined under § 706(b) in the case of a
partnership, § 644 in the case of a trust,
§ 1378 in the case of an S corporation or
an electing S corporation, or § 441(i) in
the case of a PSC, without taking into account any taxable year that is allowable by
reason of a business purpose (including a
grandfathered fiscal year as defined in sec-

864

tion 5.09 of this revenue procedure) or a
§ 444 election.
.06 Permitted Taxable Year. A “permitted taxable year” is the required taxable
year; a natural business year; the ownership taxable year; a taxable year elected
under § 444; a 52–53-week taxable year
that references the required taxable year,
natural business year, ownership taxable
year, or a taxable year elected under § 444;
or any other taxable year for which the taxpayer establishes a business purpose to the
satisfaction of the Commissioner.
.07 Natural Business Year. A “natural business year” is a year for which a
partnership, S corporation, electing S corporation, or PSC satisfies the following
“25-percent gross receipts test”:
(1) 25-percent gross receipts test. Except as provided in (2) below, the 25-percent gross receipts test is satisfied if each
of the results described in (a) and (b) below equals or exceeds 25-percent:
(a) 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.
(b) The same computation as in (1)(a)
above is made for the two preceding
12-month periods ending with the last
month of the requested annual accounting
period.
(2) Exception. The taxpayer must determine whether any annual accounting period other than the requested annual accounting period also meets the 25-percent
test described in (1). If one or more other
annual accounting periods produce higher
averages of the three percentages (rounded
to 1/100 of a percent) described in (1) than
the requested annual accounting period,
then the requested annual accounting period will not qualify as the taxpayer’s natural business year.
(3) Special rules.
(a) To apply the 25-percent gross receipts tests for any particular taxable year,
the taxpayer must compute its gross receipts from sales and services under the
method of accounting used to prepare its
federal income tax returns for such taxable
year.
(b) If a taxpayer has a predecessor organization and is continuing the same busi-

2006–45 I.R.B.

ness as its predecessor, the taxpayer must
use the gross receipts from sales and services of its predecessor for purposes of
computing the 25-percent gross receipts
test.
(c) 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 under
this revenue procedure.
(d) 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.
.08 Ownership Taxable Year. For an
S corporation or electing S corporation,
an “ownership taxable year” is the taxable year (if any) that, as of the first
day of the first effective year, constitutes the taxable year of one or more
shareholders (including any shareholder
that concurrently changes to such taxable
year) holding more than 50-percent of
the corporation’s issued and outstanding
shares of stock. Under principles similar
to § 1.706–1(b)(5) for determining the
taxable year of a partnership, a shareholder that is tax-exempt under § 501(a)
is disregarded if such shareholder is not
subject to tax on any income attributable
to the S corporation. Tax-exempt shareholders are not disregarded, however, if
the S corporation is wholly-owned by such
tax-exempt entities. A shareholder in an
S corporation or electing S corporation that
wants to concurrently change its taxable
year must follow the instructions generally
applicable to taxpayers changing their taxable years contained in § 1.442–1(b), Rev.
Proc. 2002–39 (or any successor), or any
other applicable administrative procedure
published by the Commissioner.
.09 Grandfathered Fiscal Year.
A
“grandfathered fiscal year” is a fiscal
year (other than a year that resulted in a
three-month or less deferral of income)
that a partnership or an S corporation received permission to use on or after July
1, 1974, by a letter ruling (i.e., not by
automatic approval).

2006–45 I.R.B.

.10 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. The
first effective year generally is the short
period required to effect the change. In
the case of a short period of 6 days or
less, the first effective year is the taxable
year that includes such short period under § 1.441–2(b)(2)(ii). The first effective
year is also the first taxable year for complying with all the terms and conditions set
forth in this revenue procedure necessary
to effect the adoption, change, or retention
in annual accounting period.
.11 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.
.12 Field Office, Area Office, Director.
The terms “field office,” “area office,” and
“director” have the same meaning as those
terms have in Rev. Proc. 2006–1, 2006–1
I.R.B. 1 (or any successor).
.13 Under Examination.
(1) In general.
(a) Except as provided in section
5.13(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 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,
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 area
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

865

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. 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 a partnership or
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 that the notice of the beginning
of an administrative proceeding is sent or
personally delivered to the Tax Matters
Partner/Tax Matters Person (TMP). An
examination ends:
(a) in a 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” notice of
final administrative adjustment sent to the
TMP;
(b) in a case in which no formal notice is
given, the period of limitations on assessment has expired for all partners with respect to the partnership items of the partnership;
(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, member, or shareholder) requests judicial review, or the date
on which the period for requesting judicial
review expires.
.14 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,

November 6, 2006

by examination plan, information document request (IDR), or notification of
proposed adjustments or income tax examination changes) from the examining
agent(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. 2006–2, 2006–1
I.R.B. 89 (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 the area office or is specifically
identified in writing to the taxpayer by the
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 taxpayer’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 6. TERMS AND
CONDITIONS OF CHANGE
.01 In General. An adoption, change,
or retention in annual accounting period
filed under this revenue procedure must be
made pursuant to the terms and conditions
provided in this revenue procedure.
.02 Record Keeping/Book Conformity.
(1) In general. 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. The books and
records of the taxpayer must be closed
as of the last day of the first effective
year and the taxpayer must conform the

November 6, 2006

accounting period used for financial statement purposes and reports to creditors
concurrently.
(2) Certain short periods exempt from
financial statement conformity. If the taxpayer is not required to issue financial
statements for the short period required
to effect the change, the taxpayer will be
deemed to have met the financial statement conformity requirement for the first
effective year provided the taxpayer’s
accounting period used for financial statement purposes already conforms to the
requested taxable year or the taxpayer
makes the change in accounting period
used for financial statement purposes and
reports to creditors concurrently.
(3) Certain taxpayers using required
year exempt from financial statement conformity. If the requested taxable year is the
taxpayer’s required taxable year, the taxpayer must compute its income and keep
its books and records for U.S. federal income tax purposes on the basis of the required taxable year, but is not required to
conform its financial statements and reports to creditors on the basis of the required taxable year. The books and records
of the taxpayer must be closed as of the last
day of the first effective year.
.03 First Effective Year Tax Return.
(1) When to file. The taxpayer generally
must file a federal income tax return for the
first effective year by the due date of that
return, including extensions, in accordance
with § 1.443–1(a).
(2) Annualization. If the taxpayer is a
PSC or a trust, the taxpayer’s taxable income for the short period 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.
.04 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 that
taxable year.
.05 Changes in Natural Business Year.
If a partnership, S corporation, electing

866

S corporation, or PSC changes to or retains a natural business year and that year
no longer qualifies as a permitted taxable
year, the taxpayer is using an impermissible annual accounting period and must
change to a permitted taxable year. Taxpayers qualifying under section 4 of this
revenue procedure may request automatic
approval for the change under the provisions of this revenue procedure. Other taxpayers must request approval under Rev.
Proc. 2002–39 (or any successor).
.06 Changes in Ownership Taxable
Year. An S corporation or electing S corporation that adopts, changes to, or retains an ownership taxable year under this
revenue procedure must change to a permitted taxable year, or request approval to
retain its current taxable year, if, as of the
first day of any taxable year, its ownership taxable year changes. S corporations
qualifying under section 4 of this revenue
procedure may request automatic approval
for the change or retention under the provisions of this revenue procedure. Other
taxpayers must request approval under
Rev. Proc. 2002–39 (or any successor).
.07 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 pass-through entity or
PSC ends with reference to the same calendar month as one or more of its partners,
shareholders, or employee-owners).
.08 Creation of Net Operating Loss or
Capital Loss. In the case of a PSC changing its annual accounting period, if the
PSC generates a net operating loss (NOL)
or capital loss (CL) in the short period required to effect the change in annual accounting period, the PSC 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 provided in
§ 280H and the regulations thereunder, the
short period NOL or CL must be carried
back or carried over in accordance with
§ 172 or 1212, respectively, if it is either (a)
$50,000 or less; or (b) less than the NOL
or CL, respectively, generated for the full
12-month period beginning with the first
day of the short period. The taxpayer must
wait until this 12-month period has expired

2006–45 I.R.B.

to determine whether the taxpayer qualifies for the exception in (b) above.
.09 Creation of General Business Credits. In the case of a PSC changing its annual accounting period, if there is an unused general business credit or any other
unused credit generated in the short period,
the PSC must carry that unused credit forward. An unused credit from the short period may not be carried back.
SECTION 7. GENERAL APPLICATION
PROCEDURES
.01 Approval. Approval is hereby
granted to any taxpayer within the scope
of this revenue procedure to adopt, change,
or retain its annual accounting period, provided the taxpayer complies with all the
applicable provisions of this revenue procedure. Approval is granted beginning
with the first effective year. A taxpayer
granted approval under this revenue procedure to adopt, change to, or retain an
annual accounting period other than its
required year is deemed to have established a business purpose for the adoption,
change, or retention to the satisfaction of
the Commissioner.
.02 Filing Requirements.
(1) Where to file. A taxpayer within the
scope of this revenue procedure that wants
to adopt, change, or retain its annual accounting period under this revenue procedure must complete and file an application
(i.e., a current Form 1128 or, in the case of
an electing S corporation, a current Form
2553, Election by a Small Business Corporation) with the Director, Internal Revenue
Service Center, Attention: ENTITY CONTROL, where the taxpayer files its federal
income tax return. No copies of Form 1128
(or Form 2553) should be sent to the national office. The taxpayer also must attach a copy of the Form 1128 (or Form
2553) to the federal income tax return filed
for the first effective year.
(2) When to file. The Form 1128 must
be filed no earlier than the day following
the end of the first effective year and no
later than the due date (including extensions) for filing the federal income tax return for the first effective year. For electing S corporations, the Form 2553 must be
filed when the election to be an S corporation is filed pursuant to § 1362(b) and
§ 1.1362–6. Generally, such election must

2006–45 I.R.B.

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.
(3) Label. In order to assist in the processing of the adoption, change, or retention in annual accounting period, taxpayers should write at the top of page 1 of the
Form 1128 (or Form 2553): “FILED UNDER REV. PROC. 2006–46.”
(4) Signature requirements. In the case
of a partnership, the Form 1128 must be
signed on behalf of the partnership by a
general partner. In the case of a limited
liability company that elects to be treated
as a partnership, the Form 1128 must be
signed by a member-manager who has personal knowledge of the facts set forth on
the form. In all other cases, the Form 1128
(or Form 2553) must be signed by an authorized corporate officer. If an agent is
authorized to represent the taxpayer before the Service, to receive the original or
a copy of correspondence concerning the
application, or to perform any other act(s)
regarding the application on behalf of the
taxpayer, a Form 2848, Power of Attorney and Declaration of Representative, reflecting such authorization(s) should be attached to the application. A taxpayer’s
representative without a power of attorney
to represent the taxpayer will not be given
any information about the application.
(5) No user fee. A user fee is not required for applications filed under this revenue procedure and, except as provided in
section 9.01 of this revenue procedure, the
receipt of an application filed under this
revenue procedure may not be acknowledged.
(6) Additional information. In the case
of a taxpayer changing to a natural business year that satisfies the 25-percent gross
receipts test described in section 5.07 of
this revenue procedure, the taxpayer must
supply the gross receipts from sales and
services for the most recent 47 months
for itself (or any predecessor) in compliance with the instructions to Form 1128 (or
Form 2553).

867

.03 Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court.
(1) Taxpayer under examination.
(a) A taxpayer under examination may
request approval to change or retain its annual accounting period under this revenue
procedure only if the appropriate director
consents to the change or retention. The
director will consent to the change or retention unless, in the opinion of the director, the taxpayer’s annual accounting period ordinarily would be included as an
item of adjustment in the year(s) for which
the taxpayer is under examination. For
example, the director will consent to a
change if the taxpayer is using a permissible annual accounting period. The director also will consent to a change from an
impermissible annual accounting period if
the period became impermissible (e.g., due
to a change in ownership or a change in
the taxpayer’s business) subsequent to the
years under examination. The question of
whether the taxpayer’s annual accounting
period from which the taxpayer 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 2006–2, 2006–1 I.R.B. 89 (or
any successor).
(b) A taxpayer 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 taxpayer must provide a copy of the application to the director at the same time it files
the application with the Service Center.
The application must contain the name(s)
and telephone number(s) of the examining
agent(s).
(2) Taxpayer before an area office. A
taxpayer that is before an area office must
attach to the application a separate statement signed by the taxpayer certifying
that, to the best of the taxpayer’s knowledge, the taxpayer’s annual accounting
period is not an issue under consideration
by the area office. The taxpayer must
provide a copy of the application to the
appeals officer at the same time it files the
application with the Service Center. The
application must contain the name and
telephone number of the appeals officer.

November 6, 2006

(3) Taxpayer before a federal court. A
taxpayer that is before a federal court must
attach to the application a separate statement signed by the taxpayer certifying
that, to the best of the taxpayer’s knowledge, the taxpayer’s annual accounting
period is not an issue under consideration
by the federal court. The taxpayer must
provide a copy of the application to the
government counsel at the same time it
files the application with the Service Center. The application must contain the name
and telephone number of the government
counsel.
SECTION 8. EFFECT OF APPROVAL
.01 Audit Protection.
(1) In general. Except as provided in
section 8.01(2) of this revenue procedure,
a taxpayer 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 a taxpayer’s annual accounting
period for a prior taxable year if:
(a) the taxpayer fails to implement the
change;
(b) the taxpayer implements the change
but does not comply with all the applicable
provisions of this revenue procedure; or
(c) there was a misstatement or omission of material facts.
.02 Subsequently Required Changes.
(1) In general. A taxpayer that adopts,
changes, or retains its annual accounting
period pursuant to this revenue procedure
may be required to 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 annual
accounting period was not in compliance
with all the applicable provisions of this
revenue procedure or is not in accord with
the current view of the Service; or

November 6, 2006

(f) a change in the material facts on
which the approval was granted.
(2) Retroactive change. Except in rare
circumstances, if a taxpayer that adopts,
changes, or retains its annual accounting
period under this revenue procedure is subsequently required under section 8.02(1)
of this revenue procedure to change that
annual accounting period, the required
change will not be applied retroactively,
provided that:
(a) the taxpayer complied with the applicable provisions of 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 which the 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 OF
APPLICATION
.01 Service Center Review. A Service
Center may deny an adoption, change, or
retention of an annual accounting period
under this revenue procedure only if: (1)
the Form 1128 (or Form 2553) is not filed
timely, or (2) the taxpayer fails to meet the
scope or any term and condition of this revenue procedure. If the application is denied, the Service Center will return the application with an explanation for the denial. In the case of a denial of an accounting period request filed on Form 2553, the
taxpayer will be required to use the calendar year or, if applicable, make a § 444
election, if it chooses to be an S corporation.
.02 Review of Director. The appropriate director may ascertain if the adoption,
change, or retention of annual accounting
period was made in compliance with all
the applicable provisions of this revenue
procedure. Taxpayers adopting, changing,
or retaining their annual accounting period
pursuant to this revenue procedure without
complying with all the provisions (including the terms and conditions) of this revenue procedure ordinarily will be deemed

868

to have initiated the adoption, change,
or retention of annual accounting period
without the approval of the Commissioner.
Upon examination, a taxpayer that has initiated an unauthorized adoption, change,
or retention of annual accounting 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.
For a taxpayer that must change to a required year, failure to comply with all the
applicable provisions of this revenue procedure does not relieve the taxpayer from
the requirement to change to the required
year and, if the taxpayer does not change
to the required year, does not prevent the
imposition of any applicable penalty or
addition of any amount to tax.
SECTION 10. EFFECTIVE DATE
This revenue procedure generally is
effective for adoptions, changes, or retentions of annual accounting periods for
which the first effective year ends on or
after October 18, 2006. However, if the
time period for filing Form 1128 (or Form
2553) with respect to a taxable year set
forth in section 7.02(2) of this revenue
procedure has not yet expired, a taxpayer
within the scope of this revenue procedure
may elect early application of the revenue
procedure by providing the notification
set forth in section 7.02(3) on the top of
page 1 of Form 1128 (or Form 2553) and
by satisfying the other procedural requirements of section 7.
SECTION 11. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–38 is clarified, modified, amplified, and superseded.
SECTION 12. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has 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

2006–45 I.R.B.

respond to, a collection of information unless the collection of information displays
a valid OMB control number.
The collection of information in this
revenue procedure is found in section 7.
The information in section 7 is required
in order to determine whether the taxpayer
properly obtained automatic approval to
adopt, change, or retain its annual accounting period. The likely respondents are the
following: partnerships, S corporations,
electing S corporations, PSCs, and trusts.
The estimated total annual burden for the
requirements contained in section 7 of this
revenue procedure is reflected in the burden estimates for Forms 1128 and 2553.
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 Jeffrey S. Marshall and
Roy A. Hirschhorn of the Office of Associate Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue procedure, contact
Mr. Marshall at (202) 622–4960 (not a
toll-free call).

26 CFR 1.199–2: Wage Limitation.
(Also: 26 CFR 1.199–2T.)

Methods of Determining
Paragraph (e)(1) Wages for
Purposes of the § 199(b)(1)
Wage Limitation on the § 199
Deduction
Rev. Proc. 2006–47
SECTION 1. PURPOSE
This revenue procedure provides methods used as part of calculating W–2 wages
for purposes of § 199(b)(1) of the Internal
Revenue Code, which limits the amount of
the § 199 deduction for income attributable
to domestic production activities to 50 percent of the W–2 wages of the taxpayer for
the taxable year.

2006–45 I.R.B.

Section 514(a) of the Tax Increase Prevention and Reconciliation Act of 2005
(Public Law 109–222) (TIPRA) imposes
a new limitation on W–2 wages for purposes of § 199 for taxable years beginning
after May 17, 2006. Under the change
made by TIPRA, W–2 wages, for purposes of § 199, include only amounts that
are properly allocable to domestic production gross receipts (DPGR) for purposes
of § 199(c)(1). Thus, to determine such
W–2 wages for taxable years beginning after May 17, 2006, it is necessary to determine the amount that would have been
W–2 wages for purposes of § 199 before
the amendment by TIPRA and then to determine the portion of that amount properly allocable to DPGR.
This revenue procedure provides methods for calculating the amount of wages
described in § 1.199–2(e)(1) of the Income Tax Regulations (“paragraph (e)(1)
wages”). Section 1.199–2T(e)(2) of the
temporary Income Tax Regulations provides that the term W–2 wages includes
only paragraph (e)(1) wages that are properly allocable to DPGR for purposes of
§ 199(c)(1). Thus, for taxable years covered by this revenue procedure, a taxpayer
first determines the amount of paragraph
(e)(1) wages under this revenue procedure
and then applies § 1.199–2T(e)(2) to determine the amount of W–2 wages.
Section 1.199–2(e)(3) of the regulations provides the Internal Revenue
Service with authority to issue guidance providing the methods that may
be used to calculate W–2 wages. Section 1.199–2(e)(3) is effective for taxable
years beginning on or after June 1, 2006.
In Rev. Proc. 2006–22, 2006–23 I.R.B.
1033, the Internal Revenue Service provided methods for calculating W–2 wages
for taxpayers who choose to apply the final regulations to taxable years beginning
before June 1, 2006, but only for taxable
years beginning on or after January 1,
2005, and on or before May 17, 2006. For
taxable years covered by this revenue procedure, this revenue procedure provides
methods to determine paragraph (e)(1)
wages, but taxpayers must then subject
such wages to the limitation contained in
§ 1.199–2T(e)(2) of the temporary regulations to determine W–2 wages.

869

SECTION 2. BACKGROUND
Section 199(a) provides a deduction for
an amount equal to a percentage of the
lesser of (A) the qualified production activities income of the taxpayer for the taxable year, or (B) taxable income (determined without regard to § 199) for the taxable year (or, in the case of an individual,
adjusted gross income).
Section 199(b)(1) provides that the
amount of the deduction allowable under
§ 199(a) for any taxable year shall not
exceed 50 percent of the W–2 wages of
the taxpayer for the taxable year. For this
purpose, § 199(b)(2)(A) defines the term
“W–2 wages” to mean, with respect to any
person for any taxable year of such person, the sum of the amounts described in
§ 6051(a)(3) and (8) paid by such person
with respect to employment of employees
by such person during the calendar year
ending during such taxable year. Section
199(b)(2)(C) provides that W–2 wages
shall not include any amount that is not
properly included in a return filed with the
Social Security Administration (SSA) on
or before the 60th day after the due date
(including extensions) for such return.
Section 514(a) of TIPRA added
§ 199(b)(2)(B) to exclude from the term
W–2 wages any amount that is not properly allocable to domestic production
gross receipts for purposes of § 199(c)(1).
Section 199(b)(2)(B) is effective with respect to taxable years beginning after the
date of enactment, May 17, 2006. Temporary and final regulations have been
issued to reflect the changes in the definition of W–2 wages made by TIPRA.
Section 1.199–2T(e)(2) of the temporary
regulations provides rules for applying the
TIPRA limitation on W–2 wages under
§ 199(b)(2)(B).
This revenue procedure provides three
methods for calculating paragraph (e)(1)
wages. These methods for calculating
paragraph (e)(1) wages are generally similar to the methods used to calculate W–2
wages before the amendment made by
TIPRA as set forth in Rev. Proc. 2006–22,
§ 1.199–2 of the proposed regulations that
were published in the Federal Register
on November 4, 2005 (REG–105847–05,
2005–47 I.R.B. 987 [70 FR 67220]), and
section 4.02 of Notice 2005–14, 2005–1
C.B. 498, 514. The first method (the
unmodified Box method) allows for a sim-

November 6, 2006