Final Regulation for Reg-106917-99

Federal Register / Vnl. 6 7, Nn 96 /Friday, May 1 7,2002 I Rules and Regulations

-

DEPARTMENT OF THE TREASURY

Internal Revenue Service
26 CFR Parts 1,5c,

FD

sf, 18, and 602,.

lls A :'{, fib q/ 7 - $'

li

RIM 1545-AX15

Changes in Accounting Periods
A ~ E N Internal
~ ~ :

Revenue Service (IRSj,
Treasury.
ACT,ON: Final regulations and removal of
temporary regulations.
SUMMARY: This document contains final
regulations relating 10 certain adoptions,

changes, and relentions of annual
accnunt~ngperiods. The E~nal
regulations are necessary t o update,
and reorganize the
proctdurcs for adnpting, changing, and
retaining a laxpayerbs
accounting
find
primaril
affecl taxpayers that want
=doloptan
annrld
aceaunling period under
441 or %at must receive approvd horn
the Commissioner to adopt, c h a n g ~or
,
retain their annual accounting
under section 432
DATES: Effective Date:These regulations
are effective May 17,2002.
Applicobdlty Dote: These regulations
are applicable f ~ taxabIe
r
yaars ending
on or after M a y 1;. 2002.

--

R e p ~ r t sClearance OFficer,
W:CAR:MP:FP:S, Washington, DC
20224, aad 10 the Office of Mmagement
and Budget, A t t n Desk Officer For the
Department of the Treasury, Office of
I n f ~ m a i i u nand Reguiatory Affairs.
Washington, DC 20503
Books or records relating to this
collection of information must be
retained as long as their contmts may
become material in the administration
of any internal revenue law Generally,
tax returns and t a x return informatian
arc confidential, as required by ZF

U.S.C.61W
~
~

~

k

nn June1.2, znol, t h e IR5 and

Tredury Department published in t h e
Federal Rgister proposed amendments
'eg'Jlati"ns under section 441 (period
for computing taxable income), a n d
sections 4 4 2 , 706, 498, and 1378
me
(regarding the requirement ta obtain the
approval of lhe Commissi~nerto adopt,
change, or retain an annual accounting
period) iREG1D691'-99
(66 FR
31R30)1. Written and
comments were solicited, and a public
hearing was scheduled for October 2 ,
2 0 0 1 . Several comments were received,
and are discussed below. Because no
t o 'peak were received, the
public hearing was cancelled. Aftor
consideration of all comments, the
prop~~d~egdationsundersections
FOR FURTHER INFORMATION COMACT:
441,442,706,and 1378 a r e adopted as
Michael Schmit or ROYHirscbhorn at
by ,his T~~~~~~~decision( 2 0 2 )6 2 2 4 8 6 0 (not a tull-free n ~ ~ n t b e r ) .
Summa
y
of Comments and
SUPPLEMENTARY INFORMATION:
Explanalinn of Revisions
Paperwork Redudion Act
?.CommentsmdChnngesRelotingfo
The collections of informaticn
9 1 . 4 4 1 of the Proposed KeguIat~ons
contamed in tbese final regulations have
A. Dcfinitiorl of 52-53-Week Taxnble
heen reviewed and approved hy h e

,,

OfficaofManagementandBudgotin
accordance wiih tho Paperwork
Reduction Act of j995 (44 U.S.C.
3 5 0 i l d l ) under colltrol number 15451748. Responses to these col~ectionsnf
~nformationare required for certain
taxpayers to adopt, change, or retain an
annual accounting period.
An ycncy may not conduct or
sponsor, and a person is no! required to
respond to, a c~llectionof information
unless (he collection of informa~rorl
dlsplays a valid contro! number
assigned the Office of Management

and Budget.
The estimated dllnual hurden per
respondent varies horn 20 minutes lo
one hour, depending on individual.
circumstances, with a n estimated
avcrage of 3 0 minutes.
Comments conrerning the accuracy of
this burden estimate and suggestions for
reducing this biirden should be sent 10
the Internal Revenue Service, Attn. IRS

Y~ar
The proposed regulations both d e h e
the t e r n taxable yeor consisling of ,5253-n-eeisand provide m E~rample
illustrating a 5 > 5 3 - w s ~ k laxable gear
that ends on a particillar day cf the
week that last occurs in a calendar
month nr chat is nparest to the last day
of that calendar month. A cornmcntator
observed that many taxpayers have
difficulty correctly applving thp rules
for 52-53-week taxable years, and
suggested that certain explanatory text
contained in the Exornple be moved to
the regulations text itself where it would

be more apparent and helpful. T b ~ s
suggestion has been adopted in t h ~final
?
regulations.

''
Tax"hi"ear

35009

to or Froma 52-53-Week

The proposed reguIation~generally
prnrfide that changes to or horn a 52-53week taxablc year arc treated as r,hanges

in annual accounting periods that
require the approval of the

Commissione~,and describe same
s p o c 5 c instances i n which such
approval may be obtained automatically
under administrative procedures to be
published by the Commissioner.
Consistent with the general €ramswork
of t h ~
regulations. the descrip lions of
these specific changes have been
removed fron the final regdations.
Taxpayers shnu!d see Rev. Proc. 200237 and Rev. Proc. 2002--38,
2002-22
I.R.B., for situations in c-hich autom&tic
approval for changes to or from a 52-53week
~ taxable~year will be
~ granted. ~The
final regulations c!ari@ that a taxpayer
will no! be granted automatic approval
for change from one 52-53-week
laxable year to another 52-s3-wcek
taxable year, even if both years rsfcrence
the same calendar month.
P8riodsof OaysOr Less
CThe proposed regulations provide
special rules for certain short pariods
required to effect a change in annual
accounting period to (or horn) a 52-53.
week taxable year. The proposed
rgulations provide that if the short
period is 6 days or less, such short
period is not a separatc taxable year bur
is instead added to and deemed a part
of the following taxable year.
One commentat or suggested that
taxpayersbepermittedtheoptionof
adding such a short period to either: (1)
the following taxable year [as the
proposed regulations would require); or
(2) the prior taxable year, whichever
convention is used by the laxpayer for
financialaccoi~ntingpurposes.
The 1RS and Treasury Department
believe that adopting the cornmentalor's
this case would present
certain administrative difficulties,
complicate tax administration, and
possih1y encourage the use of hindsight
in taw reporting. After rueful
consideration, the IRS and Treasury
have concluded that it is in t h ~best
:
interests of sound ).administracinn
a
to
have a uniform and cortain rule
applicable in all such situatiorls. Thus,
the Final regulations do n n t adopt this
suggestion.
D. Application of Effertive Datc Rules :O
52-53-Week-Taxable Years
The proposed regulations provide a
genera! rule collcerning the application
of certain efhctive dates as they apply
t o taxpayers employing 52-53-week
taxable years. In response to comments,
the final regulati~nsclarify that this rule
also applies to administ rat ive guidanc~
published by the Commissioner.
A comment was received suggesting
i h a ~additional Examples he provided

~

35010

F e d e r a l Register /Val. 6 7 , No. 961 Fnday, May 17, 2002 / Rules and Regulations

illusrrat~nghow particular teTms other
F. Accrual of Foreign Taxes
advantage of earlv Lling, even knowing
than those "expressed in terms of
~
~ lackladeq 'ate
i
~
~
The [RS recognizes that changes to h e jhat their a
taxable years beginning, including, or
taxable yea of a tarpaver may
\ h e Lnformation, in an effort to obtain
ending with reference to the f i r 5 1 or lasi tawable year in which foreigntaxes ar,:
priority over other applications
day of a specified calendar month,"
treated as accruing for U.S. purposes.
processed
the
However, the lack of adequate financial
apply t o 52-53-week fiscal- ear
The rRsalso recognizes that
and other required information common
tapayers. Laresponse to tbds comment, results may occur in
case Of
to such eady applications requires lhat
clarifviag language and an additional
hatuse a 52-53.week
Example have been provided in t h ~ :
not dwaysinclude the the IRS devote additional resources to
which
final regulations.
last day of Ihe tax~ay-er'stz-mble year in properly
and process the
applications. Ulurnately, this causes a
E ~ ~ f i fof i-pass-~hrough
~ i ~ ~ ~ ~~~j~~~
a foreign jurisdiction The [RS i s
the
thai it expods will d'iay inprocerSing
and . . oof a~Pais+houEh
~ ~ ~ ~ ~ ~ working
i ~ ~on guidance
, .
applications. and other applica!ions as
be issued this year to e n s u r ~h a t
For
reason, the adm'nls'rative
changes in U.S. t a x a l h years, or the use
The proposed regulations prurtde
guidancp jssued concurrent'y with these
of a 52-53-week taxable year, do not
rules for certain pass-through entities
result in unintended and inappr~priaie final regulations do not ado^ this
and owners of pass-through entities
suggestion. However, the IRS and
consequences for foreign tax c r ~ d i t
relating to the treatment of certain
taxable years ending with reference to
purposes. Comments are requested on
T'easucy
to
the same calendar rnontk1. These mles
the changes necessary and appropriate
patterns under
new
and
are designed to prevent substantial
to address the accmal of foreign taxes in
the
time
hams
for
filing
applications
deferral and distortion of income
these situations.
with the national office if circt~mstancos
reporting.
2. Conlmenfs and Changes Relating to
The IRS a n d 'Treasury have her-ome
9 1.412 of the Pmposcd Regulntions
One commentator recommended that
aware of a yntentidly abusive situation
instead
of requiring all taxpayers to file
Time and Mmmkrfor Filing an
involving the deferral of income
the application by the 15th day of the
Application
reporting In the case of clnsely-held
third calendar month following the
T h e ~ r o ~ o regulations
s~d
provide
Real Estate Investment Trusts (REITS)
close of the first taxable year in which
spocific rules for the time and manner
(wiihin the meaning of section
lapayer wants [he adoption,
6655(e){5)[B))and certain owners of
an
t o adopt,
change, or retentinn to be effective [the
interests in clos~iy-heldR E R s (within
or retain an anual accourltingperiod.
Erst effective year), as the proposed
Consistent with the gwpraL framework
the meaning of sectian 6655[e)(5)[A)).
regulations pmvide, the due datr:for the
of the regulations, the LRS and Treasury
application should be the due date of
For estimated tax purposes, c ~ r t a i n
hare concluded that ~t is mom
the taxpayer's return for the short
owners of interests in closelv-held
R ~ areT ~
to recognize income
a~ProPria'%toremove the
Lime
period, without extensions. The IRS and
and manner requirements for filing
Treasury believe that such a rule will be
from
'IZiT in amannnrimi'arLo
applications for adoptions, changes, and
fortaxpaYnr
partners in a partnership. Unlike a
retentions
in
annual
accounting
period
individuals
and
and the
however, REITs are not
from the final regulations, and provide
IRS. Accordingly, this change is adopted
required to use a taxable year that
them instrad in administrative
co~:Foms to the taxable year of their
procrdures published
Ihc!
in the administrative guidanc~issued
concurrently with these h a 1
but rather are rcquirPd use a
Commirrionsr. See Rw Proc 2001-37, regulations,
taxable year snding December 31
Rev. Proc. 2002-38, and Rev. Proc,
pursuant to spction 8 5 9 . Thus, l h c
Blo Required Taxab1e Years
2002-39, The ]RS and Treasury believe
potentid for deferral of estimated taxes
by Pass-Through Entities
that providing these rules in
exists with
to
Of
administrative guidance, rather than in
One commentator suggested that the
interests in closely-held REITs,
proposed regulations be modified to
regulations, allows the IRS more
includiag owners with 52-53-week
flexibility to respond in the f u t u r e to the waive the Form 1128,"Application to
twable scarsthat
December
Adopt, Change, or Retain a Tax Ycar."
changing ,)eeds of taxpayers and the
31, as wcll as fiscal-year owners.
filing requiremsnt in the case of
IRS .
In an attempl lo reduce the potentia:
The proposed regulations provide thal partnerships, S corporations, and
lor deferral of ~stlmatedtaxes in the
an application for non-automatic
personal scrvice c~rporations(FSCs)
case o f certain owners of interests in
approval of an annual accounting period changing to a "required taxable pear"
clcsely-held REITS, the final regulations change may be filed no earlier than t h e
for the first taxable year for which such
have been modified to add: (1 a closely- day following the close of the first
change is required. Alternatively, the
held REJT (w~thinthe meamng of
effective year a n d no later than t ha 3 5 th commentator recommended use of a n
s e c t i o ~~~6 5 5 ( e ) [ 5 ) ( B )to
) [he definition
day of the t h d calendar month
"a~~tomatic
consent" proced~iresimilar
of a pass-through entrh: and ( 2 ) an
followiq the close of the first effective
t o the procedure o u ~ l i n s din Lhe
owner of an interpst (within the
year. One commentator suggested that
proposed regulations for subsidiaries
m~aningof section ti6551ej(5)(A)) i n a
such applications be p~rmittedto b e
hanging tax years to conform tn the
closely-held REIT to the de6nition of an filed n o earlier than the laier of: (1) The poriods of their affiliated groups. The
owner cf a poss-lhroughentit)..Thus,
first day of the short period resulling
commentator reasoned that changes ti,
these owners nf interests in a closelpfrom the proposed t x ~
year c h a n g ~ or
:
statutorily required taxablr years should
held KHT wiih 51-53-week taxable
(21 6 0 days prior lo the end of the short
not require the Cnmmissioner's prior
years that reference D~cember31 will be period.
approval t h o u g h an? filing or
required under the final regulations t o
The IRS currcn~lyallows taxpayers to application process.
recognise income from thr closely-held
file applications with [he national office
Exuept in vary limited circurr.stanrrs
RElT as if their taxable year ends on
within the referenced 60-clay period and ( e.g., adoptions ot required years,
December 3 1 .
heli~ves!ha: many taxpayers take
certain section 444 terminations, and

~

~

Federal Re~ister/Vol. 6 7 ,No. 96 1Fridav, May 17. 2002 1 Rules and Regulations
certain section 859 changes)
applications historically have been
required for changes to a required
taxable year by a pass-through entity.
The IRS and Treasury Department
believe that the statutes that require
such entities to use or change to a
particular taxable year must b e read in
conjunction with the general
requirement under section 442 to obtain
the prior approval of the Commissioner
to change an existing taxable year.
Moreover, the applications serve to
provide the IRS with necessary
information about the entity's annual
accounting period. Accordingly, this
comment was not adopted in the final
regulat~onsor the administrative
guidance issued concurrently with these
regulations.
C.Book Conformity Requirements
The proposed regulations conform the
record keeping requirement for
taxpayers using a fiscal year lo that oC
5 1 446-1 (a)(4), which allows for a
reconcil~ationbeiween the taxpayer's
books and return. Howevrr, the
preamble to the proposed regulations
noted that, as a term and condition of
obtaining approval to adopt, c b a n g ~to,
or retain an annual accounting p ~ r i o d
under section 442, certain taxpayers
nevertheless may be required, under
administrative procedures pubLished by
the Commissioner, to compute income
and keep their books (including
financial statements and reports to
creditors) on the basis of the requested
annual accounting period. In fact, strict
book conformity is a goneral
requirement in the adminishalive
procedures for approval to make many
changes. See, e.g., Rev. Proc. 2002-37.
One commentator objected to hs
proposed elimination of procedures
contained in the exisling regulations
under section 442 under which certain
corporations arc! granted automatic
approval to cbange their taxable year
without a strict book conformity
requirement (i.e.,by satisfying the
general book confnrmity rules of section
446). The commentator recommended
that either the final regulations retain
these automatic consent rules or.
alternatively, that the administrative
procedures eliminate the strict book
conformity re uir~ment.
I h e IRS a n l ~ r ~ s Departu~rnr
u r ~
believe it is appropriate to apply the
more lenient book conformity rule of
section 446 in the case of a tapaver
adopting, changing to, or rrtaimng a
req~iircdar ownership taxable year and
in the case of a f o r e ~ g ncorporation that
is raquired by foreiqrl law to use a
pzrticular v e x fcr financial accounting
purpo5es. See, e.g., Rev. Froc. 2002-39

However, for all other changes under
the administrative procedures, the IRS
and Treasury Department continue tcr
believe that strict hook conformity i s an
appropriate term and condition of a
voluntary change in annual accounting
period, as it provides assurance that the
change is m o t i ~ a t e dby business, as
opposed to tax, considerations. In
addition, the IRS and Treasurq-belime,
for reasons stated in the preamble to the
proposed regulations, that tax
administration and taxpayers are better
served by providing the specific, rules
for adoptions, changes, and retentions of
annual accounting periods in
administrative pronouncements, rather
than regulations. Accordingly, the
comment has not been adopted.

Relating to
Partnerships, S Corporations, ond
Personal Service Corpomtions [PSCsJ
3. Comments and Changes

A comment was received
recommending that the limitation o n
additional required taxable year changes
in t h e proposed regulations for
partnerships using a majority-interest
iaxable
be &tended to
partnerships using o t h ~ required
r
taxable years [e.g., to p~incipalpartners'
taxable years and to least-aggregatedef~rrallaxable years). The limitation
for changes to a rnajoritv interest t a s b l e
year is specifically provided in section
706(b)(4)[B).No s u c h statutory authority
exists for provirljng similar linutations
in I ~ case
F
of other required layable vear
changes by partn~rships.Accordingly,
this comment was not adopted in the
h a 1 r~gulations.However, h e Treasury
~e~artmen
isiconsidering Chis comment
in connection wiih a Iegisla~ive

35011

tilthough some comments were
recelv~dcommending a generst 3-year
tasting period for both PSCs and S
corporations, the suggestions were not
directed to particular taxpayer burdens
stemming from the 1 -year testing period
for a PSC or the onginal concern about
taxpayers becomrng a PSC because of
lemporarv or aberrational conditions
Rather. commentators suggested that a
general 3-year testing period rule would
reduce repetitive "required tax year"
changes, and romote lax-year certainty.
TLEIRS an Treasury Department
bclievr that tbess reasons do not
warrdnt extending the 1-year testing
peri nd for PSCs and S corporations
because the current required taxable
year framework for PSCs and S
corporations should not result in
repetitive required taxable year changes.
Once a PSC or S corporation has
changed to its required taxable year (i.e.,
a calsndar year], any further changes
would be voluntary rather than
required. Accordingly, this suggestion
has not been adopted in the final
regulations.

$

Effect on Other Documents
Rev. Rul. 57-589 is obsolete.
Rev. Rut. 65-316 (1965-2 C.B. 149) is
obsolete.
Rev. Rul. 68-125 I1968-1 C.B.189) is
ohsolete.
Rev. Rul. 69-563 is obsolete.
Rev. R u ~ .74-326 (1974-2 C.B. 142) is
obsolete.
Rev. Rul. 78-179 (1978-1 C.B. 132) is
obsolete.

Special Analyses
It has been determined that this
Treasury decision is not a significant
simplificatjon study.
regulatory action as defined in
The proposed regulations (consistsnl
Executive Order 12866. Therefore, a
with ihe exlstlng temporary regblations) regulatory assessment is not required. It
generally provide for a 1-yeartesting
also has been determined that section
period for delermining whether a
553(h) of ths Administrative Procedure
laxpayer 1s a PSC. In t h e preamble to the Act (5 U.S.C. chapter 5) does no1 apply
proposed regulations, the IRS and
to these regulations. It is berehv
Treasury Department responded to a
certified that the collections of
comment received in connection with
information in these regulations trill not
the original notice of proposed
have a significant economic impact on
rulemaking cross-ref~rsncedby the
a substantial number o f small entilies.
temporary r~gulalions.The original
This certification is based upon the fact
commentator suggested that the testing
that few smalI entities are expected l o
period be expanded to the three
adopt a 52-53-week taxable year,
preceding taxable years in order to
triggering the collection of information.
minimize instances in which taxpayers
and that foi those who do, the burden
become PSCs due to temporary or
imposed under 5 1-441-2b)(l)(ii) will
aberrational conditions. In response, the be minimal. Therefore, a Regulatory
IRS and Treasury Department indicated Flexibility Analysis under the
that they would consider alternatives to Regulatory Flexibility Act (5 U.S.C.
the current 1-year period if similar
chapter 61 is not required. Pursuant to
requests were received in comments to
section 7805(fl of the Lnternal Revenue
the proposed regulations now that
Code, the notice of proposed rulemaking
taxpayers have significantly more
preceding these regulations was
experience with the 1-yearrule.
submitted to the Chief Counsel for

35012

Federal Register / Vol. 6 7 , No. 96 / Fridav, Mav 17, 2002 1Rules and Regulations

Advocacy of the Small Business
Administration for comment on its
impact on small business.

List of Subjects

Drafting Information

Income taxes, Reporting and
recordkeeping requirements.

The principal authors of these
regulations are Roy A. Hirschhorn and
Michael F. Schmit of the Office of
Associate Chief Counsel (Income Tax
and Accounting). However, other
personnel from the IRS and Treasury
Department participated in their
development.

Adoption of Amendments to the
Regulations

26 CFR Parts I , 5f, oand 1 8 ,

Accordingly, 26 CFR parts 1, 5 c , Sf,
18,and 602 are amended as fol1ows:

PART I-INCOME TAXES

26 CFR Part 5c

Accounting, Lncome taxes, Reporting
and recordkeeping requirements.

follows:
Authority: 26 U.S.C. 7805 " *

26 CFR Part 6 M

Par. 2. In the list below, for each
section indicated in the left column,
remove the old language in the middle
column and add the new language in
the right column.

Reporting and recordkeeping
requirements.

Affected sect~on

Paragraph 1. The authority citation
Lor part I continues to read in part as

Add

Remove

1 46-l(p)(Z)(iv) .......................................................................
paragraph (b)(l) of 5 1.441-2 .................................................. 51.441-2
1.4L3(d)(l)(iii) ........................................................................... paragraph ( h ) ( l ) of 3 1.441-2 ................................................... 5 1.441-2
1.2BOH-lT(a), last ssntsnm ...................................................... 3 1.441-4T(d) ...........................................................................
5 1.441-3(c)
1.44%1(b)(l)(ii) ...........................................................................
and paragraph (c)(5) of 5 1.441-2 .............................................
and 5 1.4412(b)(2)(ii)
1 444-1T(a)(l), first sentence ..................................................... 5 1.4414 T ( d ) ........................ ................................................ 3 1.441-3(c)
1.444-2T(a), last sentence .........................................................
3 1.4414T(d) .......................................................................... 3 1.447-3{c)
I. 4 4 a i (h)(2)(ii)(0)(1) .............................
......
......................... 5 1.441-2T(b)(l) ....................................................................
1.441-2(c)
1.46+1 (h)(4)(ii)(D) ....................
..... . . . .
................................5 7.4414T(f) ..............................................................................
9 1.4413 ( e )
1.46%1T(g)(Z)(i) .........................................................
.... ........ 5 1.4414 T (d) ................................... ......................................§ 1.441-3(c)
1,1561-1 (cj(2) .............................................................................See paragraph (b)(f) of 5 1.441-2 ...........................................
See 9 1.441-2
1.66%2(a), concluding text ....................................................
paragmph (b) of 5 1.441-2 .........................
.
.
.......................... 5 1.441-2{c)
1.6655-2(a)(4), first sentence .................................................... paragraph (b) of 5 1.441-2 ................................
.
................... 5 1.441-2(c)
301 7701 (b)-6(a), third sentence .............................................. $1,441-l(e) ..............................................
............ § 1.441-1 (b)

Par.3. Sections 1.441-0, 1.441-1,
1.443-2,1.441-3, and 1 . 4 4 1 4 are
added to read as follows:

5 t . 4 4 t 4 Tabla of contents.
This section lists tho captions
contained i n
4 as follows:

55 1.441-1

through 1.441-

5 1.441-1

Period for computation of
taxable income.

(a) Computation ~f taxable income.
(I] ln generat.
(2) Length of taxable year.

(b) General rules and definitions.

year.
(1)Required taxable year.
(i) In gvncral.
[iiJExceptions.
(A] 52-53-week taxable years.
(B) Partnerships, S corporations, and PSCs.
(C)Specified foreign corporatians.
(3) Annual accounting period.
(4) Calendar year.
(51 Fiscal gear.
(i)Definition.
(iij Recognition.
16) Grandfathercd fscal year.
(71 Books.
( 8 ) Taxpayer.
(c) Adoption of taxable year.
( I ) In general.
{2) Approval required.
(i) Taxpayers with required taxable years.
(ii] Taxpayers without books.
(d)Retenlion of taxable year.
(el Change of taxable year.
(1)Taxable

(flObtaining approval of the Commissioner
or making a section 444 election.

Election of taxable yeor consisting
of 52-53 weeks
(a] In general.
(1) Election.
(2) Effect.
(3) Eligible taxpayer.
(4) Example.
@I Procedures to elect a 52-53-week taxable
year.
,
(1) Adoptiun uf a 52-53-wssk taxable year.
(i]h general.
(ii) Filing requirement.
(2) Change to (or from) a 52-53-week taxable
year.
[i) In general(ii) Special rules for short period required t o
effect the change.
(3) Examples.
(cJ Application of effe.ctive dates.
( I ) In general.
(2) Examples.
(3) Changes in tax rates.
(41 Examples.
(d) Computation of taxable income.
(e) Treatment of taxable years ending with
reference to the same calendar month.
(1) Pass-through entities.
(2) Persunal service corpnrations and
emplnyea-owners.
(3) Definitions.
(i) Pass-through entity.
[ii] Owncr o f a pass through entity.
(4) Examples.
(51 Transition rule.
$ 1 . 4 4 1 -2

5 1.441-3

Taxable year of a personal service
corporation
(a] Taxable year.
(1) Required taxable year.
(2) Exceptions.
@) Adoption, change, or retention of taxable

year.
(1) Adoption of taxable year.
(2) Change in taxable year.
(3) Retention of taxable year.
(4) Procedures for obtaining approval or
making a section 444 election.
(5) Examples.
(c) Personal service corporation defined.
[ l )In general.

(2) Testing period.

(i] In general.
(ii)
New corporations.
(3) Examples.

(d)Performance of personal services.

111 Activities described in section

448(dl(Z)(A).
(2)Activities not described in section
44a(d)(Zl(A).
[el Principal activity.

(11 General rule.
(2) Compensation cost.
(i) Amounts included.
(ii)Amounts excluded.
[3) Attribution of cumpensation cost to
personal service activity.
(i) Employess involved only in the
psrfonnance of personal services.
(ii) Employees involved only in activities that
are not heated as the performance of
personal services.
(iii) Other employees.

Federal Regist~rlVol.67, No. %/Friday, May 1 7 , 2002 /Rules and Regulations
( A ) Cornpsnsaiion cost attributable to

personal service activity.
IB) Compensation cost not attributable to
personal service activity.
If) Services substantially pe~forrnedby
employee-owners.
(1) General rule.
( 2 ) Compensation cost attributable to
personal services.
(3) Examples.
( g ) Employee-owner defined.
[I] General rule.
{ 2 ] Special rule for independent contractors
who are owners.
Ih) Special rules for
groups filing

consolidated returns.
( I ) l n general.
( 2 ) Examples.

51,4414
5 1.441-1

Effective dote
Period for computation of

taxable income.

(a) Computation of taxable income-(I) In generol. Taxable income must be

computed and a return must be made
for a period known as the taxable year.
For rules relaling to methods of
accounting, the taxable year for which
items of gross income are included and
deductions are taken, invenlorier;, and
adjustments, see parts 11 and IU, lsection
446 and following). subchapter E,
chapter 1 of the Internal R ~ v ~ n ucod^.
e
and the regulations I hereunde~.
( 2 ) Length of ioxoble y e n . Excepl a s
otherwise provided in the Internal
Revenue Code and the regulations
thereunder le.g., 5 I -441-2regarding 5253-week taxable years). a taxable year
may not cover a period of more than 1 2
calendar months
(b) General rules and dpfmilions. Thc
general rules and definitions in rhjs
paragraph [b) apply for purposes of
sections 4 4 1 and 442 and the
regulations therei~nder.
[I)Taxohle ycor Taxohle year
means(i)The p~rjodfor which a return is
made, if a return is made for a period
of less than 12 months (short period)
See section 443 and the regulations
thereunder;
(ii) h c e p t as p r o v ~ d a din paragraph
(b)[])[l)of this section, the taxpayer's
required taxable year (as defined in
paragraph [b)(2)of this section), if
applicable;
(iii) Except as provided i n paragraphs
{b)(l)(i)and {ii] of this section, the
taxpayer's annual accounting period (as
defined in paragraph [b)[3) of this
section), if it is a calendar year or a
fiscal year; or
(iv) Except as provided in paragraphs
(b)(l)(i)and [ii) of this section, the
calendar year, if the taxpayer keeps no
books, does not have an annual
accounting period, or has an annual
accounting period that does not qualify
as a fiscal year.

[z) Required taxable year-[i) h
i
geneml. Certain taxpayers must use the
particular taxable year that is required
under the Internal Revenue Code and
the regulations thereunder (the required
taxable year). For example, the required
taxable year is[A) In the case of a foreign sales
corporation or domestic international
sales corporation, the taxable year
determined under section 441 (h) and
5 1-921-1Tla)Ill), IbII4),and Ib)t6);
In the case of a personal service
corporation [PSC),the taxable year
determined under section 441[i) and
$1.441-3;
(C)In h e case of a nuclear

decommissioning fund, the taxable year
determined under 1.468A+(c)[l);
[DlIn the case of a designated
settlement fund or a qualified settlement
fund, the taxable year determined under
5 1.468B-2Ij);
(El In the case of a common trust
fund, the taxable Year determined under
section 584(i);
(F) In the case of certain trusts, the
txxable pear determined under section
644:
IG) In the rasp of a partnership, the
laxable year determined under section
706 and 5 1.706-1 ;
IH) In t11p case of an insurance
company, I h e taxable year determined
under section 843 and 5 1.1502-76[a][2);
11) In I h e case of a real estate
i n r ~ ~ t m e trust,
n t the taxable year
determined under scction 859;

[I) In the case of a real estale mortgage
~cvestmentconduit, the taxable year
determined under section 8GOU(a)[5)
and 5 1.860&lfil(6);
of a specified foreign
(K)
corporation, the taxable year determined
under section 898(cl(lI(A);
ILl In the case of an S corporation, the
taxahle year determined under section
1378 and 5 1.1378-I: or
( M ) [TIthe case of a member of an
atfiliated group that makes a
consolidat~dreturn, the taxah[u year

drterm~nedunder 5 1.1502-76.
(ii) E.wept~ons.Notwithstand~ng
paragraph (b)[z][i)of this section, the
folliln-ing taxpay~rsmay have a taxable
year other than their required taxable
year:
(A] 52-53-week taxable years. Certain
taxpayers may elect t o use a 52-53-week
taxahl~:year that ends with reference to
their reqiiircd taxable year. See, For
example, $5 1.441-3 (PSCs), 1.706-1
[partnerships), 1.1378-1 (S
corporations), and 3 .I 502-76{a)(l)
(members of a consolidated group).
[B)Partnerships, S corporations, and
PSCs. A partnership, S corporation, or
PSC may use a taxable year other than
its required taxable year if the taxpayer

35013

elects to use a taxable year other ihan
its required taxable year u n d e r section
444, elects a 52-33-wceb laxable y ~ a r
that snds with reference Ir, ils required
taxable year as provided in paragraph
@)[2]{ii){A)of this section or to a taxable
year elected under sect~nn444,or
establishes a business purpose im the
satisfaction of the Cornmissloner nuder
section 442 [such as a grandfathered
fiscal year).
[C) Specrfied foreign corpornlions. A
specified foreign corporalion (as defined
in sectiu~laY8(b)) inay use a taxakds yhar
other than its required taxable year if ~t
elects a 52-53-week taxable year that
ends wilh reference to its required
taxable y e a as provided in paragraph
(b)[Z)[ii)lA)of this section or makes a
one-month deferral election under
section BQa(c)[;)(R).
( 3 ) ~~~~~i
~ ~ ~
accounting period means the annual
p e r ~ o d(calendar year or fiscal year] on
the hdsis of which the taxpayer reg"larly
computes its income in keeping its
books,
(4) Calendar yeor. Calendor year
means a period of 1 2 consecutive
monhsending on December 31, A
taxpayerwho has not
a
fiscal year must make its return on the
basis of a calendar year.
(5) Fiscal yeor-[i ) Definition. Fiscal
mearE[A) A period of 12 consecutive
months ending on the last day of any
month other than
Or
(B) A 52-5 3-week taxable year,
if such

pmiod has been elected
See 5 3.441-2.

the taxpayer.

(ii] Recognition. A fiscal year will be
if the books the
taxpayer are kept in accordance with
such fiscal Ye=[6) G r a n d f ~ f i e r e d f i s c ~ l ~ e m .
Erandfalheredfiscal year means 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 o n or after
July 1, 1974, by a letter ruling (i.e., not
by automatic approval).
(7) Books. Books include the
taxpayer's regular books of account and
such o t h e r records and data as may be
necessary to suppori the entries o n the
taxpayer's books and on the taxpayer's
return, as for example, a reconciliation
of any difference between such books
and ihe taxpayer's return. Records that
R T P ~ u 6 c i e n tto reflect income
a d ~ q u a t e l ya n d clearly n n the basis of an
annual accounling penod will be
regarded as the kwping of books. See
secrion 600 1 and the re~ulations
thereunder for rules r ~ l a l i n gt~ the
keeping of bonks and r ~ c o r d s .

,

,

~

35014

Federal Register / Vol. 6 7 . No. 96 1Friday, May 1 7 , 2002 /Rules and Regulations

[a) Taxpayer.Tuxpayer has the same
meaning as the term person as defined
in section 7703(a)[1) (e.g., an individual,
trust, estate, partnership, association, or
corporation) rather than the meaning of
the term taxpayer as defined in section
7701{a)[14][any erson subject to tax).
[r)Adoptian oftaxabie yeor--11)
gene&. Except as provided in
paragraph
of this
a new
taxPaYeTma~ado~tanytaxableyEar
that satisfies the requirements o f section
4 4 1 and the regulations thereunder
without the approval of the
A
year of a new
taxpayer is adopted by filing its first
Federal income tax return using that
taxable year. The filing of an application
for automatic extension of time to file a
Federal income tax return [e.g.,Form
7004, "Application for Automatic
Extsnsion of Time to File Corporation
Income T= Return"), the filing of an
application for an employer
identification number (i.e., Form SS-4,
"Application for Employer
Identification NumberM),or tha payment
of estimated taxes, for a particular
taxable year do not constitute an
ado tion of that taxable year.
(25 Appmvai require-(i) Toxpoyei-r
with required taxable years. A newlyformed partnership, S corporation, or
PSC that wants to adopt a taxable year
other than its required taxable year, a
taxable year elected under section 444,
or a 52-53-week taable year hat
ends
with reference to its required taxable
year or a taxable year elected under
section 444 must establish a business
purpose and obtain the approval of the
Commissioner under section 442.
(ii) Taxpayers without books. A
Year
taxpayer that must use a
under section 441 [g)and paragraph [fl
of this section may not adopt a f i s c a l
year without obtaining the approval of
the Commissioner.
[d) Retention of taxable yeor. In
certain cases, a partnership, S
corporation, electing S corporation, or
PSC wiH be required to change its
taxable year unless it obtains the
approval of the Commissioner under
section 442, or makes an election under
section 444, to retain its current taxable
year. For example, a corporation using
a June 30 fiscal year that either becomes
a PSC or sleas to be an S corporation
and, as a result, i s required to use h e
calendar year under section 441 (i) or
1 3 7 8 , respectively, must obtain the
approval of the Commissioner to retain
its current fiscal year. Similarly, a
~ a r t n e r s h i pusing a taxable year that
corresp~ndsto its required taxable year
must obtain the approval of the
Commissioner to retain such taxable
year if its required laxable year changes

(4) Example. The provisions of this
paragraph [a) are illustrated by the
following example:

as a result of a change in ownsrship.
However, a partnership that previously
established a business purpose to the
satisfaction of the Commissioner to use
a taxable ysar i s not required to obtain
the approval of the Commissioner if its
required taxable year changes as a result
of a change in ownership.
yeor. Once a
le)
Change f'
taxpayer has adopted a taxable year,
suchtaxableyearmustbeusedin
computing
income and

Example, ~fthe t q a y e r elects a taxable
ending always on the last Saturday in
Nnvsmber, then for the year 2001, the taxable
year would end on November 24, 2001. On
the other hand, if the taxpayer had elected a
taxable year ending always on the Saturday
nearest to the end of November. then for the
year 2001, the taxable year would ~ n on
d
December 1 , z o o l .

for
subsequent years
thetaxPaYerobtainsa~~roval~Omhe
Commissioner to makr a change or the
t a p aye, is ohenvise
authorized to
change without the approvd
of the
heIntEmal
Revenue Code le+,,,section444 or 859)
or the regulations thereunder,
Ifl Obtainingapproval' f the
Or making a section 444
election.See 5 1.412-1(b)for procsdu~es
for obtainingapproVal of the
Commissioner {automatically or
change, Or retain an
Othemise)
annual accounting period. See 55 1.4441 T and 1.444-2T for qudifications, and
1.444-3T for procedures, for making an
election under section 444.
,,,,isting

taxable year
of 52-53 w ~ k .

[a) In geneml-41) Election. An
Iaxpayer map 'lact to compute
i t s taxable income on the basis of a

fiscal year thatti) Varies from 52 to 53 weeks;
(ii) Ends always on the same day of
the week; and
(iii) Ends always on(A) Whatever date this same day of
the week last occurs in a calendar
month; or
(B) Whatever date this same day of the
week falls that is the nearest to the last
day of the calendar month.
( 2 ) Eflect. in the case of a taxable Yea
described in paragraph (a)[l)Iiii)(A) of
this section, the year will always end
within the month and may and on t h e
last day of the-month, or as many a s six
days before the end ofthe month. In the
c=c of a taxable year described in
paragraph la)[l)(iii)(BJof this section,
the Year may end on the last day of the
month, or as many as three days before
or ~ ~ T E days
F :
after the last day of the
month.
(3) Eligible taxpayer. A taxpayer is
eligible to elect a 52-53-week taxable
year if such fiscal year would otherwise
satisfy the requirements o f ssction 441
and the regulations thereunder. For
example, a taxpayer that is required t o
use a calendar year under 5 1.4411 (b)[Z)[i)(D) is not an eligible taxpayer.

(b] Procedures to elect o 52-53-week
tarable yeor-[l)Adoption nf a 32-,53.

weektoxableyear-(i)Inge~erol,Antirpayer

a 52-53-week

taxable ysar by adopting such year in
accordance with 5 1.441-l(c). A newlyformed partnership, S corporation or
personal service corporation (PSC) may
adopt a 52-53-week taxable year
without the approval of the
Commissioner if such yanr ends with
reference to either the
required taxable y e a (as defined in
5 1.441-1 (b)(2)) or the taxable year
elected under section 444. S e e 55 1.4413,1.70+l, and 1.1378-1. Similarly, a
ne.wly-formed specified foreign
(as defined in section
898(b]) may adopt a 52-53-week taxable
ynar if such year ends with reference to
the taxpayer's required taxable year, or,
if the one-month deferral election under
section BgB(c)(l)[B)is made, with
reference to the month immediately
preceding the required taxable year. See
§ 1.1502-76(a)(1) for special mles
regarding subsidiaries adop Eng 52-53week taxable years.
(ii) Filing requirement. A taxpaver
adopting a 52-53-week taxable year
must file with its Federal income tax
return for its first taxable year a
statement containing the following
information(*) The ''Iendar month with
reference to which the 52-53-week
taxable year ends;
week on which the
(B) The day of
52-53-week taxable year always will

end; and
(C)Whether the 52-53-week taxable
year will always end o n the date on
which that day of the week last o c c u ~ s
in the calendar month, or on the date on
which that day of the week falls that is
,ca,~st t o the last day of that calendar
month.
(2) Change to [orfrom1 o 52-53-week
taxabIe year-(i) In general. An election
of a 52-53-week taxable year by an
existing eligible taxpayer with an
established taxable year is treated as a
change in annual accounting period that
requires the approval of the
Commissioner in accordmce with
5 1.442-1.Thus, a taxpayer must obtain
approval to change from its cun-ent

Federal R e s t e r lVol. 67, No. 96 /Friday, May 17, 2 ~ 0 2/Rules and Regulations
taxable
to a 52-53-week taxable
year, even if such 52-53.week taxable
year ends w i h reference to the same
"lendar
a laxpayer
obtain
to change from a
52-53-week
Year, Or to change
from one 52-53-week taxable year to
another 52-53-week taxable year.
However, a taxpayer may obtain
approval for 52-53-week taxable year
changes automatically to the extent
provided in administrativeprocedures
published by the ,-ommissioner, see
,442-1 fi)fur pn,cedlu.es for ohtaining
such approval.
(ii) Special rules for the short period
required to effect h e change. If a change
to ox from a 52-53-week taxable year
results in a short period (within the
meaning
of 5 1,443-1ia)) of 3 5 9 days or
more, or six days or less, the tax
canlputation under 5 1.443-1 @) does
not apply. If the short period is 359 days
or more, it is treated as a full taxable
year. If the short period is six days or
less, such short period is not a separate
tarable year hut instead is added to and
deenled a part of the following taxable
rear. (Inthe case of a change to or from
52-53-week taxable year not involving
a change of the month with reference to
which the taxable year ends, the tax
computation under 1.443-l(b) does
not apply because the short period will
always be 359 days or more, or six days
or IESS.) In the case of a short period
which is more than six days and less
e the
than 359 days, taxable i n c ~ m for
short period is placed on an annual
basis for purposes of 5 1.143-1 b)h~
multiplying such income by 3b5 and
dividingthe result by the numberof
days in the short period. In s t ~ c hc a w .
the tax for ,he short periodis \ h e same
part of the tax computed on such
income placed on an ann~ralbasis as the
number of days in the short period is of
365 days (unless 5 'I,443-l(b)(2),
relating to the alternative tax
computation, applies). For an
adjustment in deduction for personal
exemption, see 1.443-1 (b)(l)(v).
(31 Examples, The following examples
illustrate paragraph (b)(Z)[ii)of this
section:

a

Exomple I . A taxpayerhaving a fiscal p a r
ending April 30, obtains approval io c h a n ~ c
to a cj2-53.wesk taxable year endinghelast
Saturday in April for taxable years beginning
after April 30, 2001. This change involvps a
shorl penod of362 days, from May 1 , 2001,
to April 27,2002, inclusive. Because the
change results in a short period of 359 days
or more, it i s n n t placed on an annual basis
and is treated as a full taxable year.
Exomple 2. Assume the sama conditions as
Example I , except that the taxpayer changes
for taxable years hoglonlng eftw April 3 0 ,
2 0 0 2 . to a taxahlr ypar ending o n the
Thi~rsdaynearest ro A p n l 30 This change

results in a short period of two days. May 1
to May 2, 2002. Because the shorl p e r ~ o dis
less than seven days. tax is not separale!y

computed. This short period is added t~ and
deemed part o f tbe follnwing 52-53-w~ek
taxable year, which would otherwise b ~ p n
on May 3. 2002, and end on May 1.2003

~ ~ ~ of
l e#ective
j ~ dateS-[lj
~ t i
In general. Except as provided in
paragraph [c)(3) of this section, for
purposes of determining the effective
date Ie.g., of legislative, regulatory, or
administrative changes) or the
applicability nf any provision of the
internal revenue laws that is expressed
in terms of taxable years beginning,
Or ending with reference l o
the first or last day of a specified
calendar month, a 52-53-week taxable
yea' i s deemed to begin on the first day
of the calendar month nearest to the first
day o f the 52-53-week taxable year, and
is deemed t o end or close on the last day
of the calendar month nearest to the last
day of the 52-53-week taxable Year. as
the case may he. Examples of provisions
of this title, the applicability of which
i s expressed in terms referred to in the
preceding sentence, include the
provisions relating lo the lime for filing
returns and other documents, paying
tax, or performing other acts, and the
provisions of part II. subchapter B.
chapter 6 (section 1561 and follotxingl
relating t o surtax exemptions of certain
controlled corporations.
( 2 ) Examples. The provisions of

paragraph Icj(ll o f t h i s section mav be
illustrated by the following examples:
Example

1 . Assume Chat an

income tax

applicable to taxable years
b ~ ~ i n n iw
w or after ~ Z U U ~ 1Y. 2 0 0 1. Fnr
Ihal P W o s e , a 52-53-wrek
Year
beg~nningon any day within thc punod
Dtluernber 16, 2000, to lanuark 4.2001,
~ncluslve.is m a l e d as bc.clnning un Ianuzy
provision i s

2 p,ss"me thal an income thk
provision rsquirtrs that a return must be filed
On Or before Ibe 15'
d e ~
tbkd
iollnwing lhe close of the i m b l e year. For
tha' P'Vow, a 52-53-waeL laxable yew
On any
during
period
l5
10 1i1ne 3 . inclusive. is menled as onding un
hlav 31. h e last day of thc month e n d ~ n g
ne&Ll l o the lap, d a y of helamhle year, and
Ihp return, thmeinrt., nluqt Lr. made un or
before August 15E x o m ~ l3.
t Assljme h l a revenue
p r ~ c t d u r brequjres the performance of an act
LY the l a p a y e r witbin "the first 90 days of
the taxable year," by "the 75th day of the

taxable year,"or, alternately, by "the last day
of the taxable year," The taxpayer employs a
52-53-week taxable year that ends always on
the Saturday closesl lo thcl last day uf
December. These requirements are not
expressed in terms uf taxable years
beginning, including, or ending with
refersnce to the fmst nr last day oi a specified
calendar month, and are accordingly outside
the scnpc uf the rule stated in 5 1.441-2(~1(1).

35015

Accordingly. the tarpayer must perForm the
r e l u u e d act by the gOtb, 75th. or last day.
respective1 y. ot its taxable year.
Example 4 . X: a corporation created on
jaouacy 1,2001,elects a SZ-53-week taxable
war ending on the Fnday nearest thc cod of
~ e r s m b e rThus. X's first taxable year begins
.
1. 2001, and ends
~O n M~~ n d a yIuuary
Friday. D e c m b e r 2 6 . 2001: i t s next taxable
year begns on S a l ~ r d a y December
.
29.200 1.
and ends on Friday. Jacuary 3 . 2003,and 11s
n ~ x taxable
t
year begins nn Sattuday, lanuary
4. 2003, and ends on Friday, January 2 . 200.1.
For purposes of applying Ibs provisions of
Part 11. ~nbcbaplerB ,chapter h of the 1n:~rual
C@dw.X's fisl laxable ytar
deemed to end on December 31.2001, i l k
next laxable vear i s deemed In b ~ g i uon
l a n u q 1 . 2 ~ ~a2n d, end on December 3 3 ,
2002,and i!s next iaxablt year is deemed 10
bepin Do lanuary I , 2003, aad end on
December 31.2D03. Accord~ngly,each m c h
taxable year I S hested x mcludjng onc a n d
only one ~ r u e m b e r3131.

131 Chnnges in lox roles. If a change
in ~ h rate
, of tax is effective during a
52-53-week taxable year (other than on
the first day of such year as determined
under paragraph {c){l)of this section),
the tax for the 52-53-week taxable year
must be computed in accordance with
section 15, relating to effect of changes,
and the regulations thereunder. For the
purpose of the computation under
section 15, the determination of the
number of days in the period before the
change, and in the period on and after
the change, is to be made without regard
to the p~ovisionsof p a r w a p h (b)[ll of
this pangraph.
(4) Examples. The provisions uf
paragraph [c)(3)of this section may be
illustrated b y the following examples:
Example 1. Assume a change in fhe rate of
tax is effective for taxable years beginning
after 1uno 30.2002. For a 52-53-week taxabIe
year beginning on Friday, November 2.2001,
hetax must be computed on &a basis of the
old rates for the actual number of days from
Nove~nber2, 2001, to June 30, 2002,
l n C I I L S i L R , and on the basis of the new
for hL>
actualnumbcr of dayshorn~~l~I,
to
October 3 3 , 2002,
ioclusir*e.

~

~ Z,A~~~~
~ a ,
in ~ rate ~of
effective for taxable years beginning
June 30. ?Ool. For
p l q o s e , a 52days
53-week
taxabte25year
lo beginning
4,inclusive,
on anyisof the
tax

15

treated as bcrginnlng on July 1. Therefore, no
cDmputation
undsr section l 5
required for such year becaqse o i the change

'"

(d) Computation of taxable income.
The principles of section 4 5 1 , relaling to
the taxable year for inclusion of itPms of
gross income, and section 461. relating
to the laxable year for taking
deductions, generally arc a p p l ~ c a hto
l~
52-53-w~ektaxable years. Thus. excepl
as otherwise provided, all itcms of
income and deduction must be

l

~

35016

of,

Federal Register 1Vol. 6 7 . No. g6 I Friday. May 1 7 : 2002 1Rdes and Regulations

determined on t h e basis of a 52-53week taxable year. However, a taxpayer
may determine particular items as
though the 52-53-week taxable year
were a taxable year consisting of 12
calendar months, provided that practice
is consistently followed by the taxpayer
and clearly reflects income. For
example, an allowance for depreciation
or amortization may be determined on
the basis of a 52-53-week taxable year,
or as though the 52-53-week taxable
year is a taxable year consisting of 12
calendar months, provided the taxpayer
consistently f o l l ~ w that
s practice with
respect to all depreciable or amortizable
items.
(e) Treatment of taxable years ending
with reference to t h e same calendar
month-(1) Pass-through entities. If a
pass-through entity [as defined in
paragraph [e][s){il of this section] or an
owner of a pass-through sntity (as
defmed in paragraph [e)(s)(ii)of this
section), or both, use a 52-53-week
taxable year md the taxable year of the
pass-through entity and heolmer end
with reference to the same calendar
month, then, for purposes of
determining the taxable year in which
itams of income, gain,loss, deductions,
or credits from the pass-through entity
are taken into account by the owner of
the pss-through, the ownerTstaxable
year will be deemed to end on the last
day of the pass-th~ough'staxable year.
Thus, if the taxable year o f a partnership
and a p a h e r end with reference to the
same calendar month, then for purposes
of determining the taxable year in which
that partner takes
account items
described in
702 and itcms that
are deductible by the partnership
[including items described in section
707(c)) and hcludible in the income of
that partner, that pafinor's tavabls year
will be deemed to end on the last day
of the partnership's taxable year.
Similarly, if the taxable year of an S
corporation and a shareholder end with
reference lo the s a m e calendar month,
then for purposos of determining the
taxable year in which that shareholder
takes into account items described in
section 1366ta) and items that are
dsductible by the S corporation and
includible in the incornc of that
shareholder, that shareholder's taxable
vear will be deemed to end on the last
day of the S corporation's taxable year.
(2) Personal service corporations and
ernpjo-vee-owners. If the taxable year of
a PSC [within the meaning of 1.4413(cjl and an employee-owner
the meaning of 5 1.441-3(g)) ~ n with
d
reference to t h e same calendar month,
then for purposes of determining the
taxable year in which an employeeowner takes into account items that are

deductible by the pSC and includible in
the income of the empIoyee-owner, the
employee-owner's taxable year will be
deemed to end on the last day o f the
PSC's taxable year.
(3) Definirions-(i) p o ~ s - t h r o u ~ h
entify. For purposes nf this saction, a
pass-through entity means a
patnorship, S corporation, trust, estate,
closely-held real estate investment m s t
( ~ t f i nthe
of
6655[e)[5)(B)), ,-~-on
trust fund
(within the meaning of sectin11 584(i)),
controlled foreign corporation (within
the ,,ing
of section 9571,foreign
pHs,ndholding company (%%rithin
the
meaning of section 552), or passive
foreigninvestment company that is a
the
qualified electing fund
of section 12g5),
{ii)owner of a poss-thraugh entity.
For p " ~ o s a sof this section, an Owner

of a pass-through entity generally means
a taxpayer that owns an interest in, or
a~ass-through
For
an Owner
pass-though
entity includes a partner in a
partnership, a shareholder of an S
of a trust Or
co'~oration*a
a" estate, an owner of a closely-held real
estate investment trust (within the
meaning of section 665j(e)I5)[AlI,a
pdicipant in a
trust fund, a
shar@holde~
Ias dafined in section
951(b)) of a
foreign
corporation, a Us.shareholder (as
in
551(a)) a foreign
P
~ holding
T
~
Or a
~ U.S- ~
PerSon that holds stock in a passive
foreign h v e s m e n t compmy
is a
qualified electing fund with respect to
that shareholder.
(4) Examples. Tha provisions of
paragraph (eI(2) of this section may be
illustrated by the following examples:
Example I . ABC Partnership rises a 52-53week taxable year that ends on the
Wednssday usarest t o December 3 1 , and its

partners, A, L a n d C. are individual calendar
Year taxpayers. Assume that, for ABC's
yeareading January 3 , 2001, tach

fp-apb~

~

~of this
' ~

,for the"

~

~

include ik bonus in income for the taxable
31. Zooo.
Year ending
[j]
Tmnsition rule. In the case of an
owner of a pass-through entity (othm
than the owner of a pa~tnershipor S
corporation) that is required by this
paragraph (el to indude in income for
its first taxable year ending on or aher
May 17, 2002 amounts attribulable to
two taxable years of a pass-through
entity, the amount that otherwise would
b~ required to be included in income f o r
such first taxable year by reason of this
paragraph (el should be included in
income ratably over the four-taxableyear period heginning with such first
taxable year under principles similar to
5 1.702-3T, unless the owner of the
pass-through entity elects to include all
such income in its first taxable year
ending on or after May 179 2002-

5 1.441-3

Taxable year of a personal
corporation,

(a) Taxable year-(1) Required taxobIe
year. Except as provided in paragraph
(a)(2) of this section, the taxable year of
a personal service corporation (PSC) (as
defined in paragraph [c) of this section)
must be the calendar year.
( 2 ) ficept;ons. A PSC may have a
taxable year other than its required
taxable year (i.e.,a fiscal year) if i t
makes an election under section 444,
elects to use a 52-53-week taxable year
that ends with reference to the calendar
year or a taxable year elected under
section 444, or establishes a business
~
purpose
for~ such fiscal year and obtains
the approval of the Commissioner under
section 442.
[b)Adoption, change, OT retention of
tuxable year--(l) Adoption oJ taxable
year. A PSC may adopt, in accordance
with § 1.441-1 [c), the calendar year, a
taxable year elected under section 444,
Or a 52-53-week
Year ending
with reference to the calendar year or a
taxable year elected under sectioil 444
without the approval of the
Commissioner. See 5 1.441-1. A PSC
that wants to adopt any other taxable

;~o;;~;;;~~~r~v~',i;;;;
~ ~ ~ ~ ~ ~ ~purpose
~ ~

under section 442.
f a a b l e year ending December 37 2000. A. B.
( 2 ) Change in t o x ~ b l year.
e
A PSC that
must include $10.000 in income
and c
wants to changeits taxable Year must
with respect to the ABC year ending January
obtain the approval of the
3,2001. Similarly, if ABC makes a
guaranieed payment t o A on January 2.2001. Commissioner under sscction 442 or
A must include the payment in income for
make an election under ssction 444.
A's taxable year ending December 31. 2000.
However, a PSC may obtain automatic
Example 2. X,a PSC* usesa 52-53-week
approval for certain changes, including
year that ends nn the Wednesday
a change to the calendar year or to a 52nearest to December 3 1 , and all nf the
53-week taxable year ending with
employee-owners 01 X are individual
reference
to the calendar year, pursuant
calendar year taxpayers, Assume that, for its
to admini~t~ative
procedures puhlished
laxable year ending January 3 , 20n1, x pays
bo,,,,
$1 0,000 to each employee-on,ner
by t h e Commissioner.
(3) Retention of taxahle year. In
on January2. ZDOI. Under paragraph ( e ) ( 2 )of
this section, each employee-uwnur must
certain cases, a FSC will be required to
1.

~

~

t

Federal Register 1Vol. 6 7 . Nu. 96 / Fridav, Mav 1 7 , 2002 1Rules an d Regulations

35017

any testing period will be the
performance of personal senices if the
cost of the corporation's campensati on
(the compensation cost) for such tesling
period that is at!ributable to its activities
that are treated a s the performance of
personal sorvices within the meaning of
paragraph (d) of this section (i.e.. the
total compensation for personal service
activltiesj exceeds 50 percent of the
corporation's total cornperisation cost
for such testing pen od.
(2) Cornpansofion cosf-[i) Amounts
included. For purposes of t h i s section,
the compensation cost of a corporalion
for a taxable year is equal to the s u n of
thc following amounts allowable as a
deduction, allocated lo a long-tcrm
contract, or otherwise chargeable to a
capital account by the corporation
during such taxable year(A] Wagas and salaries; and
(Bj Any olher amounts, a t t r i b u ~ a b lo
l~
services performed for or on behalf of
the corporation by a person who is an
employee of the corporation [including
a n owner of h e corporation who is
treated as an employee under pmagraph
(g)[2) of this section) during the testing
Seplember 30,2001. Thus, if,based upon
200 I , this section does nni appty with
period. Such amowlts include, but are
such lcslng period. A is a p~rsonalservlce
fespect t o X . For ~ t taxable
s
year beginning
corporaton. A must obtain ihe
not Iimited to, amounts attributable to
on February 1,2D01, bnwever. ?c will be
deferred compensation, commissions,
required !D comply with p a r a p p h (a) of this Comru~ssioner'spermission to U S P A
September 30 t a w t i l e year.
section. Thlls, uniess X obtains approval of
bonuses, compsnsation includible in
Exomple 2 The fads a r b the same as i n
the Cornmis~iunerto use a January31 taxable
income under section 83, compensation
Example 1, except thal A desires to u s e a
year, or makes a section 444 election. X will
for services based on a percen!age of
March 31 taxable year Pursuant t~ paragraph
be requinld to change its taxable year lo the
profits, and the cost of providing fringe
(c)(Z)(ii) of tbis sectiun. A's testing period for
calendar year under paragraph (b) 3 f this
benefits that are includible in income.
~ t frst
s
taxable year beginning June 1.2Uu1,
section by using a short laxable year that
[ii]Amounts excluded.
is tbe p e r i d June I , IUUI, through Dscenbcr
bcglns on February I . 200 1. and ends o n
Notwithstanding paragraph [e](zl[i)of
De~tlmber31. 2001. Undcr paragraph @)(l)of 3 1 . ZOOf Thus, if, based upon such testing
period. A is a personal s e n ice c~rporabon,
h i s section, Xmay obtain automatic
tbis section, compsnsation cost does not
A must obtan the C o m s s ~ o ~ e r ' s
appro+al to changelts taxable year tn a
i n c l u d ~amounts attributable to a plan
pemtssion to use a March 31 taxable vear.
calendar war. See 6 1 442-3 fb).
.qunlified under section 40l(a)or 403(a),
Exomple 2 Assume the same lad 5 a s in
or l o a simplified employee pension
[dl Performance ofpersand
Exomple 1 , except that X desires to change
plan defined in section 4D8Ikl.
service+( 1) A chi-lties described in
to a 52-53-week taxable year ending with
(3) Attribution of compef~sntlon
cost
section 4481dl[~)(A). For purposus of
mfemnce to the month of December. Clnder
this section, any activity of the laxpayer to person a1 senice activity--(i)
paragraph (b)(l) of this section S may obtain
Employees involved only in the
described UI section 448[d)(2)[A)or the
automatic approval to make the change. See
repulalions thercundcr will b e t r ~ a t e das performance of personal services. T h e
!j 1.442-l(b).
compensation cost for employees
the performance of personal services.
( c ) Person a1 senice corporalion
involved only in the performance of
defined-(I) In gef~eral.For purposes o f Therefurn, any activity of the taxpayer
acliritias that are treated as personal
that involves the performance of
this s p c t i ~ nand section 442, a taxpayer
services under paragraph Id] of this
scrvices
in
the
fields
o
f
hcalth,
law,
is a PSI: for a taxable year only ifswtion, or employees involved only i n
t i ) T~F:
taxpayer is a C corporation [as engineering, architecture . accounting,
supporting the work of such employees,
actuarial science, performing arts, or
defined in section 1361(a)(2)) for the
consull~ng[as such fields are d ~ f i n c di n are considered to be attr~butahleto the
taxable year:
corporation's persoilal service activity.
§ 1.448-IT) will hc: treated as the
(ii] The principal activity of the
( ii) Emplo~.eesinvolved only in
services far
taxpayer during the iesting period is the perforn~anceof
pllrposes of this section.
nctivities !hut are n o t treated as !he
p o r f o t m a n c ~of psrsonal services;
( 2 )Activities not described in sectron
peq%rmance oj personal services. The
(iii) During the testing period, those
448(d)(~](A].
For purposes of this
cornpensatinn cost for employees
services are substantially performed by
section, any activity o f the taxpayer not
invnIvod only in the p~rformanceof
e m ~ l o ~ e e - o w n e(as
r s defined in
described in section 44R{d)(Z)[A)QT the
activities that are not tr~atedas personal
par,a~;raph(g] of this seciicrn), and
!tv) Employee-owners own [as
regulations thereunder will not be
services under paragraph [dl of this
determined under the altributic~nrules
trealed as [he performance of personal
section, or for employees involved only
of section 31 8, except (hat the language
s~!TV~CP<
i n supporting the work ot' such
(e) Principal activity--(l) Ge?lera1
"any" applies instcad of "5U percent" in
employees, are not considered tn h ~ !
section 318[a)(?l[C)) more than 10
rule. For purposes of this section, the
attrihutabl E to the corporation's
principal activity of a corporatiu~llor
percent nFthe fair market value of h e
personal service activity.

c h a n g ~ils taxable year unless i t nhtains outstanding stock in the taxpaycr on the
the approval of the Commissioncr under last day of the testing period.
[ Z ) Testing period-(i) In general.
section 442, or makes an ~lectionunder
section 444, to r ~ t a i nits current taxabl~: Except as otherwise provided in
paragraph [c)[z)(ii)of this section, the
year. For example, a corporation using
a June 30 fiscal year that becomes a PSC testingperiod for any laxable year is the
immediately preceding laxable year.
and, as a result, is required to use the
( i i l New corpomtionr. The t sting
calendar year must obtain the approva!
t
year
of the Commissioner to retain its current period for a taxpayer's f ~ r s taxable
is the period beginning n n the first day
fiscal year.
[ A ] Prdceduresfor obtoinin~approval
of that t a a b l e year and ending on the
or moking a section 444 electlun. See
earlier of5 1.442-l(bJ for procedures to obtain the
[A] The last day of that taxable !ear:
approval of the C~mrnissioner
07
[B] The last day of the calendar vear
(automatically or otherwise] to adopt.
in which that taxable r e a r begins.
change, or reiain a taxahle year. See
(31 Examples. The provisions of
4 5 1.4461T and 1.14+2T for
paragraph (c)[Z)(ii)o f t his section may
qualifications, and 1.444-3T for
be illustrated by the fol luwing
procedures, for making a n election
examples:
mdt:r section 444.
(5) E.uarnples. The provisions of
lixurnple 1 Corpomtion A's i i r ~ taxabis
t
paragraph (h)(4)of this section may be
year b g ~ n son J u n e 1 , 2 0 0 1 , and A desires
illustrated by the fo2Iowing examples:
to ltse 9 September 3 0 t m b l e . year. Iiowever.
~f A is a personal service corporatian, LImust
Exomple 1 X , whose taxable year ends on
obtain the Commis~iondsapproval l o use a
January31, 200 1, hecomes a PSC for ils
taxable year h r p n n m g February 1 . 2 0 0 1 , and September 30 taxable yrar. Pursuant to
paragraph (c)(Z)[ii) of this section, A's teshng
does no! obtain !he approval of the
period for its first taxable y ~ a beginning
r
June
Cornmissioner for using a fiscal year. Thus.
~ . 2 0 0 1 is
, the period Juns 1, 2001 through
for taxable years e n d i n g h f o ~ eFebruary 1,

Federal Regisker / Vcj1. 6 7 , No. 96/Friday, Mav 1 7 ,

35018
-

[ i l l ) Other employees. The
compensation cost for any employee
w h o is not described in either paragraph
(e)(3)(i)
or ( i i l o f this section (a mixedactivity ~mployeelis allocated as
follows(A) Compensation cosi at!ributable to
personal service activjb-.That portj on of
the compensation cost for a mixed
activity employee that is a ~ t r i h u t a b l to
e
the corporation's pcrsonal service
activity equals the compensation cost
for that employee multiplied hy the
percentage of the total time worked for
the corpora!ion by that employee during
i h e ypar that is attributable to activities
of the corporation that are treated as the
performance of personal services under
paragraph (d) of this section. That
percentage is to be determined by the
taxpayer in a n y reasonable and
consistent manner. Time logs are no!
required unless maintained for other
purposes;
[B) Cornpensotrun cosf not
attrjbutable in personal service activity.
That portion of the compensation cost
for a mixed activlty employee that i s not
considered t o h attributable to the
corporation's persocal service activity is
the compensation cost for that employee
less the amount determined in
paragraph (e)(S)(iii)(A)of this section.
(0 Services substantially performed by
employee-owners-(1 ) General rule.
Psrsond services are substantially
performed during t h e testing period hy
employee-owners of the corporation i f
more than 20 percent of the
corporation's compensation cost for that
period attrihutabls t o its activities that
are treahed ns thc performance of
personal srnrices lvi t hin the meaning of
paragraph [dl of this soction (j.e., t h e
total cnmpansation for personal senicc
activities) is attributable to personal
services perfcl~mcdby employeeo\Vners.
( 2 ) Compensation cost attributable to
personol services. For purposes o f
paragraph (f)[l] of this section(i) The corporation's compcnsatjon
cost attributable to its activities hat are
treated as the performancr: of personal
services is determined undm paragraph
( e ) ( 3 of
) this section; and
{ii] The portion of the amount
determined under paragraph [fJ(z)[i)
of
this s e c l i ~ ntha! is attributable to
personal services perfnrmed by
emplnyee-owners is to be determined by
thn taxpayer in any reasonahla and
consistent manner.
( 3 ) Examples. The provisions of t h ~ s
pamgaph (0 may be illustratsd by the
following examples:

Exomple 1 . Fnr its taxable year beginn~ng
February 2, 200 I . Corp .4's testing penod is

2a02/

Rules and Regulations

--

the laxablr pear ending January 31, 2UMl

During ihat lestlng period, A's only activity
W A S ihe performance of personal services.
Thp l o ~ dc~mpensationcost of A {jncluding
compensation cost attributable to employeenwners) fur the lsstlng period was
$1,000,000.The total comp~nsationcost
attributable to employee-owosrs of A for the
testing perlod was $210,000. Pursuant to
paragraph (fl(1)of this section, the ernployeeowners of A s u b s t a n ~ i a lperformed
l~
the
personal services of A during the testing
period because the compensali~ncost of A's
employee-owners was mnrP than 7 D perccnt
of the total compensation oss! fur ALL of A's
employees (including employes-owners).
Exomple 2 . Corp B h&sthl: same facts a s
corporation A in Example 1, ehcspt that
during thtl taxable year ending fanuary 31,
2001. B also participated m a n azhviry that
would not be characterized as the
performance of personal services under this
secllon. The total compensation cost of I3
[including compensation cost attributable lo
emptcryse-owners) for the testing period waq
5 1,500,000($1+000,0DDatbibutable to B';
pcrsonal service activity and $500,000
attributable to B's other activity). The lotdl
compensation cost atbibutable to smployetowners of B for the t e s h g period was
$250,000 (S210.000attributable to 0's
persond service aulivil~and S40,000
attributable l o 0 ' 5 nthw a c h i l y ) . Pursuant to
paragraph Ifill) nf this section, ths ernployeeowners of B substaniiaily performed the
personal serviceb n i 8 during the testing
period because more than 20 percent of B's
cornpen~ationC d 4 1 during the testing psriod
attributable to its psrsonal service activities
was atbibutable to personal services
performed by employee-owners ($2 10.000).

(ii)The employees of the members of
the affiliated group are treated as
employees of such single corpilration;
and
liii) All of the stock of the members
o f the affilialed group that is not owned
by any other member of the affiliated
group is treated as the outstanding stock
of that corporation.
( 2 ) E x m p l e s . The provisions of this
paragraph (h) may be illustrated hy the
following examples:

Example I . The affiliated group AB,
consisting of corporarlou A and i l wholly
~
owned subsidiary 0 . liled a consolidated
Federal income tax reiwn for !he twable year
ending January 31. 2001, and AB is
attempting to dettrrmint whether it 1s affected
by h i s section far i l s :amble year beginning
February 1, 2001. During the teAting psriod
(i.e..the taxable year ending Ianuar? 31,
2D01). A did not perform personal ssrvicss.
Hon,ever. B's only activity was the
performance of personal services. On the last
day ofthe testing period, employees of A djd
not own any stock in A. However, some of
B ' s employees own stock in A. In the
aggregata, B's employees own 9 percenl n i
A's stock on the last day of the testing psrind.
Pursuant to paragraph (h)(l)of this secbon.
this section is effectively applied w s
consolidaisd basis to members o f an affiliated
group filing a consolidaicd Federal incums
tax return. B*causs h e o d y emplojroe
owners of Ab are the ernp~oyoesof B, and
because B's employws do not own more than
10 percent of AB o n the last day oiihe testing
period. AB is not a PSC: subject to the
(g) Employee-uwner define&{ 1)
provibions o f this sectica. Thus, AB is not
General rule. For purposes ot 1h1s
required to determine on a consolidated basis
section, a person is a n e m p I o y e ~ - o ~ - n ~whether,
r
during the tasting period, its
principal activity is the providing of personal
of a corporation for a testing period if(i) The person i s an employee of the
services, or the personal services arp
substantially performed by emplny~e-~wnere.
corporation on any day of i h e iestlng
Exumple 2. The facts are the same as in
period; a n d
Example I , except h a t on ihe lasl d ~ ni
y the
[ i i ) The person owns any outstanding
testing pmiod A owns only Hn percpn! of B.
stock nf tha corporatian on any day o f
The remaining 20 percent of B 1s ~ w n e dby
the testing period.
employees of B. The fair market value or A .
12) SpecioI ruIe Jor independent
contractors who are owners. Any person includmg its 80 perceni lnterest i n 8 , as of
the last day of the testhg period, is
who 1s an owner of the corporation
$l,OOO.DOO.In additmn, the fair market value
within the meaning of paragraph
of h a ZU percent interest in B owned by B'5
( g ) ( ~ ) ( ioif]this section and who
employees b $50,000 as of h e last day of the
performs p ~ ~ s o n services
al
for, or on
iestjng period. Pursuant to paragraphs
behalf of, the corporation i s treated as
[ c ) ( t J ( ~ \and
) (hj(1) of this section, AB must
an employee for purposes of this
determine whether the employee-owne~s
of
section, even if the ID^] form of that
A and 0 (i.e B's employees) own more than
10 percent o f the fair market value of A and
person's rslationshrp to t h corporation
~
B as of the last day of h a testing period.
i s such that the person w o ~ i l dhe
Because the $140,000 [($i,000,000 x ,091 t
considered an indspcnd ent contractor
$30,0001fair market value of the stock held
for other pur OSPF
by B's employsas i b greater than l o percent
h) ~ ~ e c i a f r u lfor
es n
nted groups
of the aggregate fair market r a l u r of A and
filing consolidated retu rns-(I] In
B as of the last day oftbe ie~lingperiod, or
general. For purposes of applying this
51 05.000 [$I ,000,000 + s5D.000 x .Ir)]. AB
section to the members of an a l i a t e d
may be subject t o his section if. on 3
group of ~orporationsfiling a
consolidated basis during the testinq period.
I-onsoltdated return for t b taxable
~
the principal aclivity of A S is the
yearperfurmsnce of personal servicri and the
[il The members of the alfiliated
person& servicas ere substantially performed
group are treated as a single corporation; by pmployes-owners.

.

Federal Register / Vol.
5 1.4414

67. No. 96 1 Friday,

May 17, 2002 1'Rules and Regdatj ons

35019

Notices, see 5 601.601 i d l ( 2 j uf this
chapter.
(4)Taxpayers to u,hom serfton 44
applies. If section 44 3 (g) and 1.441l(b)(f)(iv) apply to a taxpayer, the
adoption of a fiscal year is treated as a
change in the tapaver's annual
accounting period under section 432.
Therrfore, that fiscal year can hecome
the taxpayer's taxable year only with the
approval of the Commissioner. In
addition to any other terms and
conditions that may apply to such a
change, the taxpayer must establish and
malntain books that adequately and
clearly reflect income for the short
period involved in the change and for
the fiscal year proposed.
[ c ] Special rule for chotlge of annual
act0 unting period by subsidiaiy
corporatio&. A subsidiary corporation
that is required to change its annual
accounting period under 5 1.1502-76,
r~latingto thp taxabIe pear of members
of an affdiat~dgroup that file a
consolidated return, docs not nccd lo
obtain the approval of the
Commissioner or file an application on
Form 1328 with Tespecl to that change.
[d) Spec~alrule fear iretvly married
couples. ( I ) A newly married husband
or wife may obtan automatic apprcval
under this paragraph (dl to change his
or her annual accounting perigd in
order to use the annual a c c o u n t a
period of the other spouse SO that; joint
return may be filed for the first or
second taxable year of that spouse
ending after the date o f marriage. Such
automatic approval will be granted only
if the newly married husband or wife
adopting the annual accounting period
of the other spouse files a Federal
income tax return for the short period
required by that change on or before the
I 5th day of the 4th month following \he
close of the short period. See section
l o s s , os crcdit (including a general
monner for requesting approval. In
443
and the regulations thereunder. If
business
credit);
orthe
creatlon
ofa
order to secure the approval of the
the due date for any such short-period
short period in which t h e r ~IS a
Commissioner 1 o adnpt, change, or
return occurs before the date of
substantial amount of income to offset
retain an annual accou~ltinpperiod. a
marriage, the first taxable year of the
an expiring net operating loss, capital
taxpayer must f i l an
~ application,
other spouse ending aftor the date of
loss, or credit. See, for example, RPV.
generally on Form 1128, ".4ppllcation
marriage cannot be adopted under this
Proc. 2002-39, 2002-22 I.R.B.,
To Adopt, Change, 07 Retain a Tax
pnragrapb (d). The short-period return
procedures for obtaining the
Year," with the Cornm~ssiorr~r
within
must contain a statement at the top of
Commissioner's prior approval of an
such time and in siich manner as i s
adoption, change, or retention in annual page one of thp return that it is filed
provided in administrative procedures
under the authority of this paragraph
accounting period through application
published bv the Ccnnmissinnar.
(d). The nm-lymarried husballd or wife
( 2 ) General requirements fdr appmvol. to the national office; Rev. Proc. 2002need not file Form 1128 with respect to,
An adoption, change, 3 r retention in
3 7 , 2002-22 I.R.B., automatic approval
a change described in this paragraph (d).
a n n ~ l a accounting
l
period will be
procedures for certain corporations;
For a change of annual accounting
apprnved where the taxpayer establishes Rev. Proc. 2002-38, 2002-22 I R.B.,
pzr-iod by a husband or wife thal does
a business purpose for the requested
automatic approval procedures for
not qualify under this paragraph [d),see
annual accounting psriod and agrees to
partnerships, S corporations, elecljng S
paragraph (b] of this section.
the Commissioner's prescribed terns,
corporations, and PSCs; and Rev. Proc.
conditinns, and adjustments for
66-50. 1966-2 C.B. 1260.a~ltonl;itlc
[Z) The provisions of this paragraph
effecting the adoption, change, or
approval procedures for i n h v t d u a l s . Por (d) may be illustrated by the following
cxample:
retentian. In determining whether a
avajlabilitv of R P V ~ U I'rr~csdures
P
and
Effective date.
taxpayer has established a business
Sections 3.441-0 through 1.441-3 are purpose a n d which terms, conditions,
applicable for taxable years enLing on or and adjustments will be required,
consideration will be niven to all the
a f i e ~Mav 17,2002.
facts and circlunstancss relating to the
55 1.441-lT, 1.441-ZT, '1.441-3T and 1.441adoption, change, or retention,
4T pernoved]
including the tax cor~sequences
Par. 4 . S ~ c l i o n s1.441-IT, 1.441-2T,
therefrom. General]r.
. ,the
- 1.441-3T aqd 1.4414T are removed.
require&ent of a business purpDse w7ill
Par 5. Section 1.442-1 is revised to
be satisfied, and adjustmen~sto
read as folluws:
neutralize anv tax cons~auenceswill
not be required, if the requested annual
9 1.162-1 Change af annual accounting
accounting period coincides wlrh t h ~
period.
taxpayer's required taxable year ias
( a ) -4pprorcrl u,f the Commissioner. A
defined in 5 i.44i-l[b)12)),ownership
taxpayer that has adopted an annual
taxable
year, or natural business year. [n
accounting period [as defined in
the case of a partnership, S corporahon.
5 1.441-1(b)(3)) as its taxable year
electing S corporation, o r PSC, deferral
generally must continue to use that
annual accounting period in cumputing of income to partners, shareholders, or
employee-owners will not be treated as
its taxable income and for making its
d business purpose.
Federal income tax returns. If the
( 3 ) A dm inistrative procedures. The
taxpayer wants to change its annual
C~mmissionerwill prescribe
accounting period and use a new
taxable year, it must obtain the approval admin~strativeprocedures under which
a taxpayer may b e permitted to adopt,
of the Commissioner, unless i t is
otherwise authorized to change without change, or retain an annual accounting
the approval of the Commiss~onerunder period. These administrative procedures
will describe the business purpose
either the Internal Revenue Code (c.g ,
requir emsnts (including an ownership
section 444 and section 859) or the
taxable year and a natural business year)
~egulationstheceundet (e.g., p a w a p h
and the terms, conditions, and
(c) of this section). In add~tion,as
adlustments necessary to obtain
described in 5 1.44 1-1 (c) and {dl,a
approval Such terms, conditions, and
partnership. S corporation, electing S
adjustments may include adjustments
corporati3n. or personal senice
necessary lo neutralize the tax effects of
corporation (PSC] generally is required
a substantial distortion of income that
to secure the approval o f the
would othermss rasult born the
Commissioner t o adopt or retain an
annual accounting period other than its requested annual accouqting perind
including: a deferral of a substnntia1
required taxable year. The manner of
portion of the Taxpayer's income, or
obtaining approval from the
shifting of a substantial poTtinn of
Conmissinner t o adop, change, or
deductions, from one laxable year to
retain an annual accounting period is
another; a simllar deferral or shifting in
provided in paragraph (b) o f this
the case of any other person, such as a
section.However, special rules for
beneficiary in a n estate; tllc creabon o f
obtaining approval, may be provided in
a short panod In which there is a
other sections.
(b) Obtaining approval-[I 1 Time a n d substantial net operating loss, capital