n-02-72.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Changes in Annual Accounting Period

Notice 2002-72
SECTION 1. PURPOSE
This notice clarifies and modifies certain provisions in
Rev. Proc. 2002-37, 2002-22 I.R.B. 1030, Rev. Proc. 2002-38,
2002-22 I.R.B. 1037, and Rev. Proc. 2002-39, 2002-22 I.R.B. 1046,
which provide procedures for obtaining approval of an adoption,
change, or retention of an annual accounting period.
Specifically, this notice provides that:
1) certain entities with required taxable years that must
concurrently change their annual accounting period as a term and
condition for the approval of a related taxpayer’s change of
annual accounting period must do so under the applicable
automatic approval procedures notwithstanding any limitations in
those procedures to the contrary or any conflicting testing date
provisions;
2) the Internal Revenue Service will not apply the rule in
section 5.06 of Rev. Proc. 2002-38, under which less than 100%
ownership of an S corporation by a tax-exempt entity is
disregarded for purposes of determining the S corporation’s
ownership taxable year, to require any S corporation to change
its annual accounting period in any taxable year beginning before
January 1, 2003;

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3) a partnership that is allowed, under section 4.01(5) of
Rev. Proc. 2002-38, to retain its current taxable year for one
year in the case of a minor, temporary percent change in
ownership may also apply to retain its current year, or to change
to any other taxable year for which it can establish a business
purpose, under Rev. Proc. 2002-38 or Rev. Proc. 2002-39,
whichever is applicable;
4) an interest in a pass-through entity that does not meet
section 4.02(2)(c) of Rev. Proc. 2002-37 may still be disregarded
under the de minimis test in section 4.02(2)(d) of that revenue
procedure;
5) the filing instructions in section 7.02 of Rev. Proc.
2002-37 for a corporate United States shareholder completing and
filing a Form 1128, Application to Adopt, Change, or Retain a Tax
Year, on behalf of a controlled foreign corporation (CFC) or a
foreign personal holding company (FPHC) apply as well to a non-
corporate United States shareholder; and
6) the exception to the terms and conditions provided in
each of the revenue procedures respecting record keeping and book
conformity pertains to books and records kept for financial
statement, and not tax, purposes.
SECTION 2. BACKGROUND
Rev. Proc. 2002-37 provides the exclusive procedures for
certain corporations within its scope to obtain automatic
approval to change their annual accounting periods under § 442 of
the Internal Revenue Code and § 1.442-1(b) of the Income Tax

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Regulations.
Rev. Proc. 2002-38 provides the exclusive procedures for
certain partnerships, S corporations, electing S corporations,
and PSCs to obtain automatic approval to adopt, change, or retain
their annual accounting periods under § 442 and § 1.442-1(b).
Rev. Proc. 2002-39 provides the general procedures for
taxpayers not within the scope of either Rev. Proc. 2002-37 or
Rev. Proc. 2002-38 to establish a business purpose and obtain the
prior approval of the Commissioner to adopt, change, or retain an
annual accounting period.
Questions have arisen as to the scope and intent of certain
provisions of these revenue procedures. Additionally, the
Service and Treasury Department have determined that it is in the
best interest of sound tax administration that the application of
the ownership tax year rule found in section 5.06 of Rev. Proc.
2002-38 be delayed.
SECTION 3. APPLICATION
A. Concurrent Changes by Related Entities
A change in annual accounting period by an entity that must
concurrently change its annual accounting period as a term and
condition of another taxpayer’s annual accounting period change
under either section 6.10 of Rev. Proc. 2002-37 or section
5.04(8) of Rev. Proc. 2002-39, must be made under the applicable
automatic revenue procedure notwithstanding any conflicting
testing date provisions under §§ 706(b)(4)(A)(ii),
898(c)(1)(C)(ii), § 1.921-1T(b)(6), and the special provision in

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§ 706(b)(4)(b). If the entity that is required to change is a
corporation, such as a CFC, it is deemed to be within section
4.01 of Rev. Proc. 2002-37, and if it is a pass-through entity,
such as a partnership, it is deemed to be within section 4.01(1)
of Rev. Proc. 2002-38. The preceding sentence applies
notwithstanding any conflicting testing date provision under the
Code or regulations or any other limitation under section 4.02 of
Rev. Proc. 2002-37 or section 4.02 of Rev. Proc. 2002-38.
B. Ownership Taxable Year of Certain S Corporations
Section 5.06 of Rev. Proc. 2002-38 (relating to the
definition of an “ownership taxable year”) provides that, under
principles similar to the principles set forth in § 1.706-3T 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. The Service will not apply this rule to require an
S corporation to change its taxable year for any taxable year
beginning before January 1, 2003.
C. Certain changes in ownership of partnerships
Section 4.01(5)(B) of Rev. Proc. 2002-38 is modified to read
as follows:

* * *
“(B) it is reasonably foreseeable that, at the end of one
taxable year, the change in ownership will be reversed. If, at
the end of one taxable year, the partnership’s current taxable

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year does not meet section 4.01(1) of this revenue procedure,
then the partnership must change to its required taxable year
under section 4.01(1), or apply to either retain its current
taxable year or change to any other taxable year for which it can
establish a business purpose, under this revenue procedure or
Rev. Proc. 2002-39, whichever is applicable.”
D. De mimimis Test for Interest in Pass-through Entities
Section 4.02(2)(d) of Rev. Proc. 2002-37 is modified to read
as follows:

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“for pass-through entities not qualifying for the exceptions
in section 4.02(a), 4.02(b), or 4.02(c) of this revenue
procedure, the pass-through entity in which the corporation has
an interest has been in existence for at least 3 taxable years
and the interest is de minimis. For this purpose, an interest in
a pass-through entity is de minimis only if:”
* * *
E. Filing Requirements for Period Changes by CFCs and FPHCs
Any United States shareholder (including a non-corporate
United States shareholder) completing and filing a Form 1128 on
behalf of a CFC or FPHC must file the Form 1128 where the United
States shareholder files the shareholder’s federal income tax
return.
F. Record Keeping/Book Conformity
The common term and condition in Rev. Proc. 2002-37 (section

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6.04), Rev. Proc. 2002-38 (section 6.04), and Rev. Proc. 2002-39
(section 5.04(3)) relating to record keeping and book conformity
is clarified to remove any implication or inference that books
and records maintained for tax purposes need not be kept on the
basis of the requested taxable year. Taxpayers are reminded that
their books and records for United States federal income tax
purposes must in all circumstances be kept on the basis of their
approved annual accounting period, regardless of whether the
taxpayer comes within one of the two exceptions to the term and
condition pertaining to financial books and records.
SECTION 4. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-37, Rev. Proc. 2002-38, and Rev. Proc.
2002-39 are clarified and modified.
SECTION 5. EFFECTIVE DATE
The provisions of this notice are effective as if originally
included in Rev. Proc. 2002-37, Rev. Proc. 2002-38, and Rev.
Proc. 2002-39.
DRAFTING INFORMATION
The principal authors of this notice 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 on
(202) 622-4960 (not a toll-free call).