TAXPAYERS WHO START ACCOUNTING PERIOD ON DAY OTHER THAN FIRST DAY OF MONTH AND ADOPT PERIOD OF 12 MONTHS FROM START OF BUSINESS DO NOT SATISFY SEC. 441

Rev. Rul. 85-22

The purpose of this revenue ruling is to restate and amplify the position in Rev. Rul. 54-273, 1954-2 C.B. 110, under current law.

ISSUE

Has a taxpayer who begins business operations on a date other than the first day of a calendar month and adopts an annual accounting period of exactly 12 months from the date business was begun satisfied the tax year requirements of section 441 of the Internal Revenue Code?

FACTS

The taxpayer began a business on March 15, 1982, and, for federal income tax purposes, adopted an annual accounting period of exactly 12 months ending on March 14. The taxpayer filed its federal income tax return for its first tax year based on a tax year ending March 14, 1983 with the Internal Revenue Service Center having jurisdiction over its return.

LAW AND ANALYSIS

Section 441(a) of the Code provides that taxable income shall be computed on the basis of the taxpayer's tax year.

Section 441(b) of the Code defines a tax year as the taxpayer's annual accounting period if it is a calendar year or a fiscal year.

Section 1.441-1(b)(3) of the Income Tax Regulations provides that a new taxpayer in its first return may adopt any tax year that meets the requirements of section 441 of the Code and section 1.441-1 without obtaining prior approval of the Commissioner.

Section 441(c) of the Code states that the term "annual accounting period" means the annual period on the basis of which the taxpayer regularly computes its income in keeping its books. Section 441(d) defines the term "calendar year" to mean a period of 12 months ending on December 31. Section 441(e) states that the term "fiscal year" means a period of 12 months ending on the last day of any month other than December, or, in the case of a taxpayer who has made an election provided by section 441(f), the term means the annual period (varying from 52 to 53 weeks) so elected.

Section 441(f)(1) of the Code provides that a taxpayer may elect to compute its taxable income on the basis of an annual period that varies from 52 to 53 weeks and ends always on the same of day of the week and ends always on whatever date such same day of the week last occurs in a calendar month, or on whatever date such same day of the week falls that is nearest to the last day of a calendar month.

Section 441(g) of the Code provides that the taxpayer's tax year shall be the calendar year if -- (1) the taxpayer keeps no books; (2) the taxpayer does not have an annual accounting period; or (3) the taxpayer has an annual accounting period, but such period does not qualify as a fiscal year.

Section 1.441-1(g) of the regulations provides that a taxpayer whose tax year is required to be the calendar year under section 441(g) of the Code may not adopt a fiscal year without obtaining prior approval from the Commissioner, since such adoption is treated as a change of annual accounting period.

Section 442 of the Code provides that if a taxpayer changes its annual accounting period, the new accounting period shall become the taxpayer's tax year only if the change is approved by the Secretary. Section 442 also provides that, if a taxpayer to whom section 441(g) applies adopts an annual accounting period (as defined in section 441(c)) other than the calendar year, the taxpayer shall be treated as having changed its annual accounting period.

Section 1.442-(b)(1) of the regulations provides that in order to secure prior approval of a change of a taxpayer's annual accounting period, the taxpayer must file an application on Form 1128 (Application for Change in Accounting Period) with the Commissioner of Internal Revenue, Washington, D.C., on or before the 15th day of the second calendar month following the close of the taxpayer's short tax year. Section 1.442(b)(1) also provides that approval will not be granted unless the taxpayer and the Commissioner agree to the terms, conditions and adjustments under which the change will be effected.

Rev. Rul. 54-273, 1954-2 C.B. 110, issued under the Internal Revenue Code of 1939, holds that a taxpayer who begins a business on a date other than the first day of a calendar month and adopts an accounting period of exactly 12 months beginning with such date and ending on a date other than the last day of a calendar month has failed to establish an annual accounting period within the meaning of section 41 of the 1939 Code (predecessor to section 441 of the 1954 Code). Since the taxpayer has failed to establish a fiscal year within the meaning of the law (section 41 of the 1939 Code), Rev. Rul. 54-273 concludes that the taxpayer filed a return on an incorrect basis.

A taxpayer has not adopted a proper tax year within the meaning of section 441 of the Code, if in its first return the taxpayer's annual accounting period ends exactly 12 months from the date the taxpayer's business began and this ending date is other than the last day of a month. This is so, as the taxpayer's tax year does not satisfy the definitional requirements of sections 441(d) and 441(e) regarding a calendar year and a fiscal year. The adoption of an accounting period ending exactly 12 months from the date business began does not satisfy the 52-53 week tax year requirements of section 441(f) because such tax year:

(1) does not end always on the same day of the week; and

(2) does not end always on whatever date this same day of the week (i) last occurs in a calendar month, or (ii) falls that is nearest to the last day of a calendar month.

Thus, the taxpayer in this situation is required under sections 441(g) and 442 of the Code and the regulations thereunder to either:

(1) file an amended federal income tax return on the basis of a calendar year; See Rev. Proc. 85-15 for procedures to be followed in effecting a calendar year selection; or

(2) request and secure the approval of the Commissioner for a change in annual accounting period, if the taxpayer desires to use a fiscal year; See, generally, section 1.442-1(b) of the regulations for the procedures to be followed in requesting a change in annual accounting period; See also, section 1.442-1(c) regarding the procedures and conditions for certain corporations to make a change in their annual accounting periods without the prior approval of the Commissioner, and Rev. Proc. 84-34, 1984-1 C.B. 508, for the procedures and conditions regarding expeditious approval of a change in annual accounting period by certain corporations.

HOLDING

A taxpayer who begins business operations on a date other than the first day of a calendar month and adopts an annual accounting period of exactly 12 months from the date business was begun has not satisfied the tax year requirements of section 441 of the Code. The taxpayer in this instance is required either to file an amended federal income tax return on the basis of a calendar year in accordance with the procedures set forth in Rev. Proc. 85-15, page 13, this Bulletin, or to secure the approval of the Commissioner under section 442 to change its annual accounting period, if the taxpayer desires to use a fiscal year.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 54-273 is superseded.