Rev. Rul. 78-179

Advice has been requested whether, under the circumstances described below, a corporate partner in a partnership consisting of unrelated members may change its accounting period without the prior approval of the Commissioner.

The taxpayer, a domestic corporation, has consistently filed its Federal income tax returns on a calendar year basis. In addition, the taxpayer is a partner in a partnership that files its partnership return on a calendar year basis. The taxpayer's distributive share from such partnership forms a substantial portion of the taxpayer's income.

Pursuant to section 1.442-1(c) of the Income Tax Regulations, the taxpayer changed to a 52-53 week taxable year ending on the Saturday nearest December 31, beginning with the 52-53 week taxable year ended Saturday, December 28, 1974. The taxpayer had a substantial business purpose for the change.

Sections 1.442-1(b)(2)(ii) and 1.706-1(b)(2) of the regulations provide that a partner may change its taxable year only if it secures the prior approval of the Commissioner of Internal Revenue.

Section 1.442-1(b)(1) of the regulations provides that the change will generally be approved if the taxpayer establishes a substantial business purpose for making the change, and the taxpayer and the Commissioner agree to such terms and conditions as are necessary to prevent a substantial distortion of income, such as a deferral or shifting in the reporting of a substantial portion of income or deductions of a partner.

Section 1.442-1(c)(1) of the regulations provides that if all the conditions in section 1.442-1(c)(2) are met, a corporation may change its annual accounting period without the prior approval of the Commissioner.

Section 1.706-1(a) of the regulations provides, in part, that in computing taxable income, a partner is required to include the partner's distributive share of partnership items of income, gain, loss, deduction, and credit for any partnership year ending with or within the partner's taxable year.

Rev. Rul. 78-96, page 131, this Bulletin, concerns a small business corporation that filed its Federal income tax returns on a calendar year basis. The corporation was a member of various partnerships that also filed their Federal income tax returns on a calendar year basis. The taxpayer filed Form 1128, Application for Change in Accounting Period, to request a change to a 52-53 week taxable year ending on the Saturday nearest December 31, beginning with the 52-53 week taxable year ended Saturday, December 28, 1974.

Rev. Rul. 78-96 recognizes that the change to a 52-53 week taxable year would distort the taxpayer's income by permitting the deferral of the income from the partnerships whose 1974 calendar years would not end with or within the taxpayer's 1974 taxable year. But, because there was a substantial business purpose for the change, the Revenue Ruling concluded that the change would be approved if the taxpayer agreed to treat such 52-53 week taxable year as a calendar year for purposes of reporting its distributive shares of partnership income.

In the present situation, the taxpayer also demonstrated a substantial business purpose for the change in accounting period but had not requested prior approval from the Commissioner because the taxpayer, as a corporation, satisfied the conditions set forth in section 1.442-1(c) of the regulations. However, as a partner the taxpayer must request prior approval in order to change its accounting period. Sections 1.442-1(b)(2)(ii) and 1.706-1(b)(2) are intended to prevent abuse and tax avoidance through the manipulation of tax years by partners and partnerships. In order to give effect to their remedial purpose sections 1.442-1(b)(2)(ii) and 1.706-1(b)(2) must be applied to all partners regardless of the particular form of business enterprise the partner takes.

Accordingly, in the instant situation, because the taxpayer is a partner it must request prior approval from the Commissioner, under section 1.442-1(b)(2)(ii) of the regulations, before it changes its accounting period, and must agree to the conditions imposed by the Commissioner, including the treatment of its 52-53 week year as a calendar year for purposes of reporting its distributive share of partnership items. The taxpayer is required to request prior approval from the Commissioner even though the taxpayer would otherwise be entitled to change its accounting period without the prior approval pursuant to section 1.442-1(c).