Rev. Proc. 66-6

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to announce the procedure generally followed by the Internal Revenue Service in approving a request for change in annual accounting period for which a substantial business purpose exists, even though the short taxable year resulting from the change would have a net operating loss as defined in section 172 of the Internal Revenue Code of 1954.

SEC. 2. BACKGROUND.

Section 442 of the Code provides that if a taxpayer changes his annual accounting period, the new accounting period shall become the taxpayer's taxable year only if the change is approved by the Secretary or his delegate.

Section 1.442-1(a)(1) of the Income Tax Regulations provides that if a taxpayer wishes to change his annual accounting period, he must obtain prior approval from the Commissioner or the change must be authorized under the regulations.

Under the provisions of section 1.442-1(c) of the regulations corporations, other than electing small business corporations as defined in section 1371(b) of the Code, are permitted to change their accounting period without the prior approval of the Commissioner if certain conditions are met. One of these conditions is that the short period required to effect the change of annual accounting period is not a taxable year in which the corporation has a net operating loss as defined in section 172 of the Code.

Where individual taxpayers are concerned and where corporate taxpayers are unable to meet these conditions, prior approval of the Commissioner is required to effect a change of annual accounting period, and generally the change will be approved where the taxpayer establishes a substantial business purpose for making the change. In determining whether a substantial business purpose has been established, consideration will be given to all the facts and circumstances, including the tax consequences resulting from the change.

A change in accounting period may result in tax benefits not otherwise available to the taxpayer. This might happen, for example, in the case of a change in accounting period where the short taxable year includes a slack period of operations reflecting a loss which would produce a net operating loss carryback to a prior taxable year. Thus, if a taxpayer whose seasonal period of operations extends from May through October changes from a calendar year to a fiscal year ending April 30th, the short period ending April 30th would terminate just before the opening of the new season, and such short period would reflect expenses but little or no income. Because the income of the short period is distorted in relation to the annual income of the taxpayer, approval for the change will not be granted unless the distortion, if substantial, is eliminated by appropriate adjustments.

SEC. 3. PROCEDURE.

The Service will ordinarily approve a request for a change in accounting period under the following circumstances, provided that taxpayer otherwise qualifies for such change:

(i) The change results in a short period of nine months or longer and the net operating loss for the full 12-month period beginning with the first day of the short period equals or exceeds the net operating loss for the short period, or

(ii) The net operating loss for the short period cannot be carried back to prior taxable years, or

(iii) The net operating loss for the short period is not substantial in amount. For such purposes a net operating loss is considered not substantial if it does not exceed the greater of (1) $5,000 or (2) one percent of the taxpayer's average annual taxable income for the three years preceding the short period or $25,000, whichever is smaller.

In other cases involving a net operating loss in the short period the Commissioner may, under the authority of section 1.442-1(b)(1) of the regulations, approve a request for change in accounting period if the taxpayer agrees, in lieu of a net operating loss carryback, to deduct the amount of the net operating loss ratably over the 10-year period following the short period.