PROCEDURES ARE EXPLAINED FOR TAXPAYERS TO CORRECT THE ADOPTION OF AN IMPROPER ACCOUNTING PERIOD

Rev. Proc. 85-15

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide procedures for taxpayers to follow in correcting the adoption of an improper annual accounting period.

SEC. 2. BACKGROUND

01 Section 441(a) of the Internal Revenue Code provides that taxable income shall be computed on the basis of the taxpayer's tax year.

02 Section 441(b) of the Code defines a tax year as the taxpayer's annual accounting period, if it is a calendar year or a fiscal year. Section 1.441-1(b)(3) of the Income Tax Regulations provides that a new taxpayer in its first return may adopt any tax year that meets the requirements of section 441 without obtaining prior approval from the Commissioner.

03 Section 441(c) of the Code defines an annual accounting period as the annual period on the basis of which the taxpayer regularly computes its income in keeping its books.

04 Section 441(d) of the Code provides that the term "calendar year" means a period of 12 months ending on December 31. Section 441(e) provides that the term "fiscal year" means a period of 12 months ending on the last day of any month other than December and also includes a 52-53 week tax year under section 441(f). Section 441(f)(1) provides that a 52-53 week tax year ends always on the same day of the week and ends always (A) on whatever date such same day of the week last occurs in a calendar month, or (B) on whatever date such same day of the week falls that is nearest to the last day of a calendar month.

05 Section 441(g) of the Code provides that the taxpayer's tax year shall be the calendar year if: (1) the taxpayer keeps no books; (2) the taxpayer does not have an annual accounting period; or (3) the taxpayer has an annual accounting period, but such period does not qualify as a fiscal year. Section 1.441-1(g) of the regulations provides that a taxpayer tax year is required to be the calendar year under section 441(g) (sic) may not adopt a fiscal year without obtaining prior approval from the Commissioner since such adoption is treated as a change of annual accounting period.

06 Section 442 of the Code provides that if a taxpayer changes its annual accounting period, the new accounting period shall become the taxpayer's tax year only if the change is approved by the Secretary. Section 442 and section 1.442-1(a)(2) of the regulations indicate that if a taxpayer to whom section 441(g) applies wishes to adopt a fiscal year, the taxpayer shall be treated as having changed its annual accounting period and such fiscal year can become the taxpayer's tax year only with the approval of the Commissioner.

07 Rev. Rul. 85-22, page 5, this Bulletin, concludes that a taxpayer who begins business operations on a date other than the first day of a calendar month and adopts an annual accounting period of exactly 12 months from the date business was begun as failed to establish an annual accounting period within the meaning of section 441 of the Code. The revenue ruling also provides that the taxpayer in the described situation is required under sections 441(a), 441(g) and 442 and the regulations thereunder either to: (1) file an amended return on a calendar year basis; or (2) if the taxpayer desires a tax year other than a calendar year, to request the approval of the Commissioner for such fiscal year.

SEC. 3. SCOPE

01 This revenue procedure applies only to taxpayers that (1) have adopted an improper annual accounting period within the meaning of section 441(g) of the Code, and (2) desire the calendar year as their tax year.

02 With respect to taxpayers that have adopted an improper annual accounting period and desire to adopt a tax year other than the calendar year, see section 1.442-1(b) of the regulations for the procedures to be followed in securing the prior approval of the Commissioner for a change in annual accounting period. With respect to corporations that have adopted an improper annual accounting period and desire a fiscal year, see also the automatic approval provisions of section 1.442-1(c) and the expeditious approval provisions of Rev. Proc. 84-34, 1984-1 C.B. 508.

SEC. 4. APPLICATION AND MANNER OF EFFECTING THE CORRECTION

01 A taxpayer that adopted an improper annual accounting period within the meaning of section 441(g) of the Code and does not desire a tax year other than the calendar year must complete and file a current Form 1128. Application for Change in Accounting Period. The Form 1128 must be attached to the amended federal income tax return that is filed on a calendar year basis and corrects the most recently filed federal income tax return that was filed on the basis of an improper annual accounting period. At the top of page 1 of the Form 1128 the taxpayer should type or print "FILED UNDER REV. PROC. 85-15."

02 For example, if a taxpayer began business on March 15 and adopted an annual accounting period ending on March 14 (a period of exactly 12 months), it has adopted an improper accounting period and should file an amended return for the period March 15, the day business began, through December 31, the last day of the calendar year. The income and deductions reported on the originally filed federal income tax return would be adjusted to reflect only that income and those deductions attributable to the period of March 15 through December 31. Subsequent federal income tax returns are to be filed on the calendar year basis.

03 The Form 1128 and the amended federal income tax return are to be filed with the Internal Revenue Service Center with which the taxpayer filed the original federal income tax return.

SEC. 5. EFFECTIVE DATE

This revenue procedure is limited in application to those federal income tax returns most recently filed on the basis of an improper annual accounting period.

SEC. 6. INQUIRIES

Inquiries in regard to this revenue procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention: CC:CC:1, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.