Rev. Proc. 74-33

Section 1. Purpose.

The purpose of this Revenue Procedure is to describe the procedures of the Internal Revenue Service in determining whether a "natural business year" exists for purposes of granting a request for change in accounting period.

Sec. 2. Background.

Section 1.442-1(b)(1) of the Income Tax Regulations, which sets forth the requirements for securing prior approval of the Commissioner of Internal Revenue for a change in accounting period, provides, in general, that a change of annual accounting period will be approved where the taxpayer establishes a substantial business purpose for making the change. Among the factors that are considered in determining whether a substantial business purpose has been established is the effect of the change on the taxpayer's annual cycle of business activity. In this connection, the requirement of a substantial business purpose may be satisfied if the desired taxable year coincides with the natural year of the business. See also, section 1.706-1(b)(4) of the regulations relating, in part, to changes in accounting period by partnerships.

Sec. 3. Determination of Natural Business Year.

Whether there is or is not a natural business year depends primarily on the type of business and the locality. Where a trade or business has a non-peak period and a peak period of business, the natural business year is generally deemed to end at, or soon after, the close of the peak period of business. A business whose income is steady from month to month, year around, would not have a natural business year as such.

Sec. 4. Procedure.

.01 In order to facilitate consideration of his application for change in accounting period, a taxpayer, whose business purpose for requesting a change in accounting period is to conform to his natural business year, should attach a statement to the Form 1128 (Application for Change in Accounting Period) setting forth gross receipts from sales or services and approximate monthly inventory costs (where applicable) for each month in the requested short period and for each month of the three immediately preceding taxable years.

.02 In the absence of substantial distortion of income, or other factors showing that the change is requested for purposes of tax advantage, the showing of a natural business year will ordinarily be accepted as a substantial business purpose for approval of a change in accounting period.

.03 However, except in unusual circumstances, no change of accounting period will be approved within 10 taxable years after a previous change in accounting period.

Sec. 5. Effect in Other Areas.

This Revenue Procedure is also applicable to the adoption of an accounting period by a newly formed partnership. See section 1.706-1(b)(4) of the regulations.