Rev. Proc. 72-51

Section 1. Purpose.

The purpose of this Revenue Procedure is to announce the procedures to be followed by the Internal Revenue Service in approving a request by a partnership desiring to change to, or adopt, a taxable year other than that of all its principal partners.

Sec. 2. Background.

.01 Section 1.706-1(b)(1)(ii) of the Income Tax Regulations provides that a newly formed partnership may adopt a taxable year which is the same as the taxable year of all its principal partners (or the same as the taxable year to which all of its principal partners are concurrently changing) without securing prior approval from the Commissioner of Internal Revenue, or it may adopt a calendar year without securing prior approval from the Commissioner if all its principal partners are not on the same taxable year. In any other case, a newly formed partnership must secure prior approval from the Commissioner for the adoption of a taxable year. In addition, section 1.706-1(b)(1)(iii) of the regulations provides that an existing partnership may not change its taxable year without securing prior approval from the Commissioner, unless all its principal partners have the same taxable year to which the partnership changes, or unless all its principal partners concurrently change to such taxable year. See also, section 1.442-1(b)(2) of the regulations.

Section 1.706-1(b)(4) of the regulations provides, in part, that where a partnership is required to secure prior approval from the Commissioner for a change in taxable year or for the adoption of a taxable year, the applicant must establish a business purpose to the satisfaction of the Commissioner. In determining whether a business purpose has been established, consideration is given to all the facts and circumstances, including the Federal income tax consequences resulting therefrom.

.02 In most cases in which a partnership changes to or adopts an accounting period different from that of its principal partners, there is a deferment of income with respect to the partners. Thus, situations of this type may give rise to distortions of year-to-year income. Nevertheless, as in other forms of business organization, it is desirable to provide as much flexibility in the selection of the proper taxable year as is practicable consistent with the applicable regulations. The procedures outlined in section 3 below are designed to facilitate certain adoptions and changes with respect to accounting periods under circumstances which minimize the distortion of income.

Sec. 3. Procedure.

.01 Consideration will be given to all the facts and circumstances, including the Federal income tax consequences, and to any distortion of income due to the deferment of income. However, in order to facilitate adoptions or changes, with a minimum of distortion, requests by partnerships to adopt or change an accounting period differing from that of its principal partners will generally be approved where the request for the adoption or change would result in a deferment of income to the partners of three months or less. Thus, for example, a calendar year partnership will generally be granted permission to change to or adopt a fiscal year ending September 30, even though the partners are on a calendar year.

.02 The Service will approve an adoption or change of an accounting period provided the partnership and the Commissioner agree to the terms under which the adoption or change will be affected.

.03 Generally, in effecting the adoption or change in accounting period in the example described in section 3.01 above, the excess of income over expenses of the partnership for the first three months immediately succeeding the short taxable year required to effect the adoption or change will be included in the taxable income of such short period. This excess of income over expenses shall be the adjustment required to effect the adoption or change in accounting period.

.04 One-tenth of the adjustment shall be deducted from partnership income for the short taxable year required to effect the adoption or change and one-tenth shall be deducted from partnership income in each of the nine succeeding taxable years.

.05 In those situations where the expenses of the three month period immediately following the short period required to effect the adoption or change in accounting period exceed the income for such short period, there will be no adjustment.

.06 In accordance with section 1.442-1(b)(1) of the regulations, a partnership desiring to adopt or change to an accounting period under this Revenue Procedure should file a timely application, Form 1128 (Application for change in accounting period) with the Commissioner of Internal Revenue, Attention: T:I:C:1:AM&P, Washington, D. C., 20224. Any inquiries in regard to this Revenue Procedure should be addressed to the same office.

Sec. 4. Effect in Other Areas.

This Revenue Procedure is applicable to a change in accounting period requested by an electing small business corporation as defined in section 1371(b) of the Internal Revenue Code of 1954 and the regulations thereunder. See section 1.442-1(c)(4) of the regulations.

¹ Also released as Technical Information Release 1207, dated October 19, 1972.