Rev. Rul. 83-95

1983-2 C.B. 76.

                       Internal Revenue Service
                                 Revenue Ruling

          ACCOUNTING PERIODS;  PARTNERSHIPS;  ADOPTION OF TAXABLE YEAR

                            Published: July 5, 1983

SECTION 442. - -CHANGE OF ANNUAL ACCOUNTING PERIOD, 26 CFR 1.442-1: Change of annual accounting period

(Also Section 706; 1.706-1.)

  Accounting periods;  partnerships;  adoption of taxable year.  A newly formed partnership may not adopt a calendar year taxable year without the consent of the Commissioner if the sole principal partner reports its income on a fiscal year basis.  The partnership may adopt the fiscal year of the principal partner.

ISSUE

  May a newly formed partnership adopt a calendar year without securing prior approval from the Commissioner of Internal Revenue if its principal partner has a fiscal year ending August 31?

FACTS

  PRS, a newly formed partnership, has 50 limited partners and a single principal partner, PR, who has a continuing 10 percent interest in the profits and capital of PRS, PR has a fiscal taxable year ending on August 31.  All of the other partners report their income on a calendar year basis.  PRS wants to adopt the calendar year.

LAW AND ANALYSIS.

  Section 706(b)(3) of the Internal Revenue Code provides that a principal partner is a partner having an interest of 5 percent or more in partnership profits or capital.

  Sections 1.442-1(b)(2)(i) and 1.706-1(b)(1)(ii) of the Income Tax Regulations contain the rules for the adoption of a taxable year for a newly formed partnership.  These regulations provide that a newly formed partnership may adopt a taxable year that is the same as the taxable year of all its principal partners (or is the same taxable year to which its principal partners who do not have such taxable year concurrently change) without securing prior approval from the Commissioner.  If all its principal partners are not on the same taxable year, a newly formed partnership may adopt a calendar year without securing prior approval from the Commissioner.  If a newly formed partnership wishes to adopt a taxable year that does not qualify under the preceding two sentences, the adoption of such year requires the prior approval of the Commissioner in accordance with section 706(b)(1) of the Code and section 1.706-1(b) of the regulations.

  Section 1.706-1(b)(4)(iii) of the regulations provides 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.

  Section 3.01 of Rev. Proc. 72-51, 1972-2 C.B. 832, provides that the adoption of an accounting period differing from that of its principal partners will generally be approved where the request for the adoption would result in a deferment of income to the partners of 3 months or less.

  A newly formed partnership that wishes to adopt a taxable year not the same as that of all of its principal partners, has several courses of action available:  (1) under Rev. Proc. 72-51 the partnership can adopt, with the approval of the Commissioner, a taxable year that does not result in a deferral of income to the partners of more than 3 months;  (2) the partnership can adopt any taxable year it selects, providing its principal partners concurrently change to the same taxable year;  (3) the partnership can adopt the calendar year, if all of its principal partners are not on the same taxable year;  and (4) the partnership can request the approval of the Commissioner to adopt any other taxable year.

  Since PRS has a principal partner that has a fiscal year taxable year ending August 31, PRS cannot rely upon Rev. Proc. 72-51 to adopt a calendar year because it would result in a deferral of income to PR of more than 3 months. In addition, PR, the only principal partner, did not apply concurrently to change its taxable year to a calendar year.  Further, there is only one principal partner and, thus, all the principal partners of PRS are on the same taxable year.  PRS must obtain the approval of the Commissioner to adopt the calendar year.

HOLDING

  A newly formed partnership may not adopt a calendar year without the prior approval of the Commissioner if its sole principal partner is on a fiscal year that ends on August 31.  The partnership may adopt the sole principal partner's fiscal year without prior approval of the Commissioner.

Rev. Rul. 83-95, 1983-2 C.B. 76.