Rev. Rul. 78-96

Advice has been requested concerning the proper tax year in which to account for the taxpayer-partner's distributive shares of income, gains, losses, deductions, and credits from partnerships having calendar years when the taxpayer changes from a calendar year to a 52-53 week taxable year, under the circumstances described below.

The taxpayer, an electing small business corporation, is a partner in various partnerships that file their partnership returns on a calendar year basis. The taxpayer's distributive shares from such partnerships form a substantial portion of the taxpayer's income. Prior to January 1, 1974, the taxpayer consistently filed its Federal income tax returns on a calendar year basis. Pursuant to section 1.442-1(b)(1) of the Income Tax Regulations, the taxpayer filed application on Form 1128 to 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. The application disclosed 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 1.706-1(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.

The change to a 52-53 week taxable year will result in the deferral of the reporting of all the taxpayer's distributive shares of partnership items because the partnerships' 1974 calendar years will not end with or within the taxpayer's 52-53 week taxable year ended December 28, 1974. Such deferral or shifting of a substantial portion of the income or deductions of the taxpayer-partner will substantially distort the taxpayer's income within the meaning of section 1.442-1(b)(1) of the regulations.

Accordingly, because the application of the taxpayer has shown a substantial business purpose for making the taxable year change, the change will be approved by the Commissioner provided the taxpayer agrees to the conditions imposed by the Commissioner, including the treatment of each of its 52-53 week years as a calendar year for purposes of reporting its distributive shares of partnership income, gains, losses, deductions, and credits. Thus, the taxpayer must report such distributive shares for the partnerships' 1974 calendar years on its Federal income tax return filed for the 52-53 week taxable year ended December 28, 1974.