Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-30

1976-1 C.B. 112

Section 442
Section 991
Section 992
Section 993

IRS Headnote

Change of accounting period to preserve DISC status. Preservation of DISC status does not constitute a substantial business purpose for a change of annual accounting period within the meaning of section 1.442-1(b) of the regulations.

Full Text

Rev. Rul. 76-30

Advice has been requested whether, under the circumstances described below, a substantial business purpose has been shown for the granting of a change of annual accounting period under section 1.442-1(b) of the Income Tax Regulations.

X is a domestic corporation that has elected to be treated as a Domestic International Sales Corporation (DISC) under the provisions of section 992 of the Internal Revenue Code of 1954 and the regulations thereunder. X is engaged in the sale of export property within the meaning of section 993(c) of the Code. X's annual accounting period is a fiscal year ending April 30. For its taxable years ended April 30, 1973, and 1974, X qualified as a DISC.

On March 5, 1975, X sold a patent on one of the products it owned to an unrelated third party. The gross receipts from the sale of the patent will not be "qualified export receipts" within the meaning of section 993(a)(1) of the Code. Because of the dollar amount of this sale, X would not satisfy the "95 percent gross receipts" test of section 992(a)(1)(A) for its taxable year ended April 30, 1975. Therefore, X would not qualify as a DISC for its taxable year ended April 30, 1975.

X timely requested approval, under section 1.442-1(b) of the regulations, from the Commissioner of Internal Revenue to change its accounting period from its present fiscal year ended April 30 to a fiscal year ending on the last day of February, effective February 28, 1975. The sole purpose of X's request was to avoid the inclusion in its income of the gross receipts from the sale of the patent to Y that would not be "qualified export receipts" within the meaning of section 993(a)(1) of the Code. The effect of such a proposed change in accounting period from April 30 to February 28, 1975, would be to preserve X's status as a DISC for a short period running from May 1, 1974, to February 28, 1975.

Section 1.991-1(b) of the regulations provides, in part, that changes in the annual accounting period of a DISC are subject to the requirements of section 442 and the regulations thereunder.

Section 1.442-1(b) of the regulations provides, in part, that a change of annual accounting period will be approved where the taxpayer establishes a substantial business purpose for making the change. In determining whether a taxpayer has established a substantial business purpose for making the change, consideration will be given to all the facts and circumstances relating to the change, including the tax consequences resulting therefrom.

Therefore, in requesting a change in annual accounting period, a DISC must establish a substantial business purpose for making the change. In the instant case, X's sole purpose for requesting a change in its annual accounting period is to maintain its DISC status for sales made prior to March 1, 1975.

Accordingly, X has not shown a substantial business purpose for seeking a change in its annual accounting period under section 1.442-1(b) of the regulations. Further, approval will not be given to a request for a change in accounting period where the sole purpose of the change is to maintain a preferential status under the Internal Revenue Code.