Rev. Rul. 85-83

1985-1 C.B. 291, 1985-25 I.R.B. 7.

SMALL BUSINESS CORPORATIONS; ADOPTION OF TAX YEAR

Published: June 24, 1985

Section 1378.-Taxable Year of § Corporation

  Small business corporations; adoption of tax year. Corporations electing § corporation status after October 19, 1982, and wishing to adopt a tax year ending other than on December 31, must comply with the terms and conditions set forth in Rev. Proc. 83-25. Rev. Rul.  66-68 obsoleted.

ISSUE AND FACTS

  The Internal Revenue Service has received inquiries as to the current applicability of Rev. Rul. 66-68, 1966-1 C.B. 197, in light of new section 1378 of the Internal Revenue Code, as enacted by the Subchapter § Revision Act of 1982, Pub. L. No. 97-354, 96 Stat. 1669, 1982-2 C.B. 702, as amended by the Technical Corrections Act of 1982, Pub. L. No. 97-448, 96 Stat. 2365, 1983-1 C.B. 451 (the Act).

  Rev. Rul. 66-68 provides that the statement on Form 2553, Election by a Small Business Corporation, that the taxpayer's first tax year was to end on January 31, 1966, did not constitute the adoption of a tax year ending on that date. Rev. Rul. 66-68 provides that the adoption of the taxpayer's first tax year was effected through the filing of a timely return for the period covered by such return; the taxpayer had filed a timely return for a tax year ending on September 30, 1965.

LAW AND ANALYSIS

  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 of the Code and the regulations thereunder without obtaining prior approval. The first tax year of a new taxpayer must be adopted on or before the time prescribed by law (not including extensions) for the filing of the return for such tax year.

  Prior to the enactment of section 1378 of the Code by the Act, a corporation electing subchapter § treatment was not subject to any special rules limiting the selection of a tax year end. Rev. Rul. 66-68 provides that the adoption of the taxpayer's first tax year was effected through the filing of a timely return for the period covered by such return.

  New section 1378(a) of the Code, enacted by the Act, provides that an election to be an § corporation cannot be perfected unless the tax year adopted is a 'permitted year.' Section 1378(b) defines permitted year as a calendar year or a fiscal year for which the corporation establishes a business purpose to the satisfaction of the Secretary.

  Temporary regulations under the Act were published in the Federal Register on January 26, 1983 (48 FR 3590). T.D. 7872, 1983-1 C.B. 193. The temporary regulations provide certain procedures for the adoption, retention, and change of accounting periods by corporations in existence and those not in existence on January 1, 1982, who make an election after October 19, 1982, to be an § corporation under the Act.

  Rev. Proc. 83-25, 1983-1 C.B. 689, provides a procedure whereby certain corporations, which make an election to be an § corporation under the Act, may obtain approval of an adoption of, a retention of, or a change to an annual accounting period other than a tax year ending on December 31.

  The taxpayer in Rev. Rul. 66-68 adopted a fiscal year ending on September 30 solely by filing a timely return for the period covered by the return. Taxpayers who timely file an election to be an § corporation after October 19, 1982 and who wish to adopt a tax year ending other than on December 31, must comply with all the terms and conditions set forth in Rev. Proc. 83- 25. Corporations not complying with or satisfying all the conditions of Rev. Proc. 83-25 will be deemed to have initiated an adoption that is not a 'permitted year' within the meaning of sections 1378(a) and (b) of the Code. See Section 6.02 of Rev. Proc. 83-25. Corporations described in section 6.02 of Rev. Proc. 83-25 will have their § corporation election rendered ineffective. See Section 6.03 of Rev. Proc. 83-25.

HOLDING

  Rev. Rul. 66-68 is obsolete with respect to corporations that are electing § corporation status after October 19, 1982, and wish to adopt a tax year ending other than on December 31. Such corporations must comply with all the terms and conditions set forth in Rev. Proc. 83-25.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 66-68 is obsoleted.