Internal Revenue Bulletin 2002-22 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT
Announcement 2002–53, page 1063.
Annual accounting periods; approval.This announcement
discusses some of the more significant issues raised in con-
nection with finalizing Notice 2001–34, 2001–23 I.R.B. 1302,
and Notice 2001–35, 2001–23 I.R.B. 1314, which proposed
procedures for obtaining the Commissioner’s approval to
adopt, change, or retain an annual accounting period under
sections 441 and 442 of the Code.
INCOME TAX
Rev. Rul. 2002–31, page 1023.
Contingent convertible debt instruments. This ruling pro-
vides guidance on the tax treatment of a debt instrument that
is convertible into stock of the issuer and that also provides for
one or more cash contingent payments.
T.D. 8993, page 1026.
Final regulations under section 1275 of the Code provide guid-
ance on the treatment of annuity contracts issued by an insur-
ance company subject to tax under subchapter L.
REG–154920–01, page 1060.
Proposed regulations under section 954 of the Code provide
that gain or loss arising from certain commodities hedging
transactions and currency gain or loss arising from certain
interest-bearing liabilities do not constitute (or are not netted
against) foreign personal holding company income.
EXEMPT ORGANIZATIONS
Announcement 2002–51, page 1063.
Crisis at Home Intervention Center, of San Bruno, CA, no longer
qualifies as an organization to which contributions are deduct-
ible under section 170 of the Code.
ADMINISTRATIVE
Notice 2002–36, page 1029.
Contingent convertible debt instruments. This notice
requests comments and suggestions for change in the relative
tax treatment of straight convertible debt instruments and con-
tingent convertible debt instruments. Rev. Rul. 2002–31 sets
forth the tax treatment of contingent convertible debt instru-
ments under current law.
Rev. Proc. 2002–37, page 1030.
Changes in accounting periods; automatic approval for
corporations. Procedures are provided by which certain cor-
porations may obtain automatic approval of the Commissioner
to change their annual accounting period under section 442 of
the Code. Rev. Proc. 2000–11 modified, amplified, and super-
seded.
Rev. Proc. 2002–38, page 1037.
Changes in accounting periods; automatic approval for
flowthrough entities. Procedures are provided by which part-
nerships, S corporations, electing S corporations, and per-
sonal service corporations may obtain automatic approval of
the Commissioner to adopt, change, or retain an annual
accounting period under sections 441 and 442 of the Code.
Rev. Proc. 87–32 clarified, modified, amplified, and super-
seded.
(Continued on the next page)
Finding Lists begin on page ii.
Index for January through May begins on page vi.
Bulletin No. 2002–22
June 3, 2002

Rev. Proc. 2002–39, page 1046.
Annual accounting periods; prior approval. Procedures
are provided under sections 441 and 442 of the Code to estab-
lish a business purpose and request the prior approval of the
Commissioner to adopt, change, or retain an annual account-
ing period. Rev. Procs. 85–16 and 74–33 superseded.
June 3, 20022002–22 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 163(l).—Disallow-
ance of Deduction on Certain
Debt Instruments of
Corporations
The revenue ruling provides guidance on the tax
treatment of a debt instrument that is convertible
into stock of the issuer and that also provides for
one or more contingent cash payments. See Rev.
Rul. 2002–31, on this page.
Section 249.—Limitation on
Deduction of Bond Premium
on Repurchase
26 CFR 1.249–1: Limitation on deduction of bond
premium on repurchase.
The revenue ruling provides guidance on the tax
treatment of a debt instrument that is convertible
into stock of the issuer and that also provides for
one or more contingent cash payments. See Rev.
Rul. 2002–31, on this page.
Section 441.—Period for
Computation of Taxable
Income
26 CFR 1.441–1: Period for computation of taxable
income.
What procedures apply for corporations to
obtain the automatic approval of the Commissioner
to change their annual accounting period? See Rev.
Proc. 2002–37, page 1030.
What procedures apply for partnerships, S cor-
porations, electing S corporations, and personal ser-
vice corporations to obtain the automatic approval
of the Commissioner to adopt, change, or retain an
annual accounting period? See Rev. Proc. 2002–38,
page 1037.
What procedures apply for taxpayers to obtain
the prior approval of the Commissioner to adopt,
change, or retain an annual accounting period? See
Rev. Proc. 2002–39, page 1046.
What significant issues were raised in connec-
tion with finalizing Notice 2001–34 and Notice
2001–35, which provided procedures for taxpayers
to obtain the approval of the Commissioner to
adopt, change, or retain an annual accounting
period? See Announcement 2002–53, page 1063.
Section 442.—Change of
Annual Accounting Period
26 CFR 1.442–1: Change of annual accounting
period.
What procedures apply for corporations to
obtain the automatic approval of the Commissioner
to change their annual accounting period? See Rev.
Proc. 2002–37, page 1030.
What procedures apply for partnerships, S cor-
porations, electing S corporations, and personal ser-
vice corporations to obtain the automatic approval
of the Commissioner to adopt, change, or retain an
annual accounting period? See Rev. Proc. 2002–38,
page 1037.
What procedures apply for taxpayers to obtain
the prior approval of the Commissioner to adopt,
change, or retain an annual accounting period? See
Rev. Proc. 2002–39, page 1046.
What significant issues were raised in connec-
tion with finalizing Notice 2001–34 and Notice
2001–35, which provided procedures for taxpayers
to obtain the approval of the Commissioner to
adopt, change, or retain an annual accounting
period? See Announcement 2002–53, page 1063.
Section 444.—Election of
Taxable Year Other Than
Required Taxable Year
What procedures apply for partnerships, S cor-
porations, electing S corporations, and personal ser-
vice corporations to obtain the automatic approval
of the Commissioner to adopt, change, or retain an
annual accounting period? See Rev. Proc. 2002–38,
page 1037.
What procedures apply for taxpayers to obtain
the prior approval of the Commissioner to adopt,
change, or retain an annual accounting period? See
Rev. Proc. 2002–39, page 1046.
Section 706.—Taxable Years
of Partner and Partnership
26 CFR 1.706–1: Taxable years of partner and part-
nership.
What procedures apply for partnerships, S cor-
porations, electing S corporations, and personal ser-
vice corporations to obtain the automatic approval
of the Commissioner to adopt, change, or retain an
annual accounting period? See Rev. Proc. 2002–38,
page 1037.
What procedures apply for taxpayers to obtain
the prior approval of the Commissioner to adopt,
change, or retain an annual accounting period? See
Rev. Proc. 2002–39, page 1046.
What procedures apply for corporations to
obtain the automatic approval of the Commissioner
to change their annual accounting period? See Rev.
Proc. 2002–37, page 1030.
Section 898.—Taxable Year of
Certain Foreign Corporations
What procedures apply for corporations to
obtain the automatic approval of the Commissioner
to change their annual accounting period? See Rev.
Proc. 2002–37, page 1030.
Section 1275.—Other
Definitions and Special Rules
26 CFR 1.1275–4: Contingent payment debt instru-
ments.
(Also §§ 163, 249; 1.249–1.)
Contingent convertible debt instru-
ments. This ruling provides guidance on
the tax treatment of a debt instrument that
is convertible into stock of the issuer and
that also provides for one or more cash
contingent payments.
Rev. Rul. 2002–31
ISSUES
Does the noncontingent bond method
described in § 1.1275–4(b) of the Income
Tax Regulations apply to a debt instru-
ment that is convertible into stock of the
issuer and that also provides for one or
more contingent cash payments? If so,
2002–22 I.R.B.1023June 3, 2002

how is the comparable yield determined,
and does either§163(l)or§249 of the
Internal Revenue Code affect the issuer’s
ability to deduct the interest that accrues
on the instrument under the noncontin-
gent bond method?
FACTS
On January 1, 2002, CorporationX
issues for $625xa 20-year debt instru-
ment with a stated principal amount of
$1,000x. Except for the contingent inter-
est payments described below, the debt
instrument does not provide for any stated
interest. The debt instrument is convert-
ible at any time into a number of shares
of CorporationXcommon stock having a
value, on the date of issue of the debt
instrument, that is significantly less than
$625x. The debt instrument is part of an
issue that is not marketed or sold in sub-
stantial part to persons for whom the
inclusion of interest from the instruments
in the issue is not expected to have a sub-
stantial effect on their U.S. tax liability.
The debt instrument provides that,
beginning after January 1, 2005, interest
(“contingent interest”) is payable for any
six-month period ending on June 30 or
December 31 if the average market price
of the instrument for a measurement
period before the applicable six-month
period is greater than 120 percent of the
instrument’s accreted value. Under the
terms of the debt instrument, accreted
value is defined as the issue price of the
instrument plus the economic accrual to
any date of determination of a portion of
the difference between the issue price and
the stated principal amount at maturity.
The amount of contingent interest that is
payable is equal to the greater of (1) the
regular cash dividend per share of Corpo-
rationXcommon stock for the six-month
period multiplied by the number of shares
into which the debt instrument may be
converted, or (2)ypercent of the average
market price of the debt instrument for
the measurement period. The contingent
interest is neither a remote nor an inci-
dental contingency within the meaning of
§1.1275–2(h).
On or after January 1, 2005, Corpora-
tionXhas the option to redeem the debt
instrument for cash in an amount equal to
the instrument’s accreted value as of the
date the instrument is redeemed. In addi-
tion, the holder of the debt instrument has
the option to put the debt instrument to
CorporationXon January 1, 2005, or
January 1, 2012, for an amount equal to
the instrument’s accreted value as of each
such date. If the holder exercises this
option, CorporationXcan satisfy its obli-
gation with cash, shares of CorporationX
common stock, or a combination of cash
and shares of CorporationXcommon
stock, in each case having a total value
equal to the instrument’s accreted value.
Taking into account both the likelihood of
conversion of the debt instrument and the
likelihood that the instrument will be put
by the holder, it is not substantially cer-
tain that a substantial amount of the prin-
cipal or interest on the debt instrument
will be required to be paid in stock or will
be payable in stock at the option of the
issuer.
CorporationXtakes the position that
the noncontingent bond method applies to
the debt instrument and that the compa-
rable yield for the instrument is 7 percent,
compounded semiannually. (To determine
the comparable yield under§1.1275–
4(b), CorporationXused the yield at
which it would issue a comparable fixed-
rate, nonconvertible debt instrument.) In
preparing the projected payment schedule
required by the noncontingent bond
method, CorporationXprojects payments
of contingent interest and a payment at
maturity (based on a projected exercise of
the conversion privilege) in an amount
sufficient to cause the yield on the debt
instrument to equal 7 percent, com-
pounded semiannually. When the debt
instrument was issued, the long-term
applicable Federal rate (AFR) was 5.39
percent, compounded semiannually.
LAW AND ANALYSIS
Section 1.1275–4 provides rules for
the treatment of contingent payment debt
instruments. In general, if a contingent
payment debt instrument is issued for
cash or publicly traded property, the non-
contingent bond method applies to the
instrument.See§1.1275–4(b). Under the
noncontingent bond method, interest
accrues on the debt instrument as if it
were a fixed-payment debt instrument.
This fixed-payment debt instrument is
constructed by using the instrument’s
comparable yield and a projected pay-
ment schedule.
In general, under§1.1275–4(b)(4)(i),
the comparable yield for a contingent
payment debt instrument is the yield at
which the issuer would issue a fixed rate
debt instrument with terms and conditions
similar to those of the contingent payment
debt instrument. Relevant terms and con-
ditions include the level of subordination,
term, timing of payments, and general
market conditions. In determining the
comparable yield, no adjustments are
made for the riskiness of the contingen-
cies or the liquidity of the debt instru-
ment. In all cases, the yield must be a
reasonable yield for the issuer and may
not be less than the AFR. In certain situ-
ations, the comparable yield is presumed
to be the AFR.See§1.1275–4(b)(4)
(i)(B).
The projected payment schedule for a
debt instrument includes each noncontin-
gent payment and a projected amount for
each contingent payment.See§1.1275–
4(b)(4)(ii). In general, if a contingent pay-
ment is based on market information, the
amount of the projected payment is the
forward price of the contingent payment.
If a contingent payment is not based on
market information, the amount of the
projected payment is the expected value
of the contingent payment as of the issue
date. If the projected payment schedule
and the instrument’s issue price do not
produce the comparable yield, then the
schedule must be adjusted to produce the
comparable yield. In most cases, the issu-
er’s determination of the projected pay-
ment schedule will be respected unless it
was set with a principal purpose to over-
state, understate, accelerate, or defer
interest accruals on the debt instrument.
See§1.1275–4(b)(4)(v).
If the actual amount of a contingent
payment is different from the projected
payment, then the difference is taken into
account as either a positive or negative
adjustment. A positive adjustment results
when the actual amount is greater than
the projected amount. In general, a net
positive adjustment is treated as interest
and is includible in income by the holder
and deductible by the issuer in the taxable
year in which the adjustment occurs. A
negative adjustment results when the
actual amount is less than the projected
amount. In general, a net negative adjust-
ment (1) reduces interest accruals on the
debt instrument for the taxable year, (2)
June 3, 200210242002–22 I.R.B.

to the extent of any excess, is treated as
an ordinary loss by a holder and ordinary
income by the issuer, but only to the
extent of prior accruals on the debt instru-
ment by the holder or issuer, and (3) to
the extent of any further excess, is a car-
ryforward to the next taxable year.See
§1.1275–4(b)(6) for the specific rules
that apply to negative and positive adjust-
ments.
Except as provided in§1.1275–4(a)
(2),§1.1275–4 applies to any debt instru-
ment that provides for one or more con-
tingent payments. A payment is not a con-
tingent payment merely because of a
contingency that, as of the issue date, is
either remote or incidental.See§1.1275–
2(h) for rules relating to remote and inci-
dental contingencies.
In addition, a debt instrument does not
provide for contingent payments merely
because it provides for an option to con-
vert the instrument into the stock of the
issuer, into the stock or debt of a related
party, or into cash or other property in an
amount equal to the approximate value of
such stock or debt. Section 1.1275–
4(a)(4). However, this exception does not
apply when the debt instrument provides
for contingent payments other than the
conversion feature and those contingent
payments are neither remote nor inciden-
tal.
Although the debt instrument issued
by CorporationXprovides for an option
described in§1.1275–4(a)(4), the debt
instrument also provides for one or more
contingent payments (the contingent
interest) that are neither remote nor inci-
dental. As a result, the debt instrument is
a contingent payment debt instrument
subject to the noncontingent bond method
described in§1.1275–4(b). Although a
conversion feature alone does not cause a
convertible debt instrument to be subject
to the noncontingent bond method, the
possibility of a conversion is nevertheless
a contingency. Therefore, the comparable
yield for a convertible debt instrument
subject to the noncontingent bond method
is determined under§1.1275–4(b) by ref-
erence to comparable fixed-rate noncon-
vertible debt instruments. Moreover, the
projected payment schedule is determined
by treating the stock received upon a con-
version of the debt instrument as a contin-
gent payment.
Under§1.163–7, the amount of inter-
est that is deductible each year on a con-
tingent payment debt instrument is deter-
mined under§1.1275–4. Therefore, for
purposes of§163(a), CorporationXcom-
putes its interest deductions for each year
the debt instrument is outstanding based
on the comparable yield of 7 percent,
compounded semiannually. Based on the
facts set forth above, the original issue
discount anti-abuse rule in§1.1275–2(g)
does not apply because the result reached
is not unreasonable in light of the pur-
poses of§163(e),§§1271 through 1275,
or any related section of the Code. The
anti-abuse rule, therefore, does not affect
CorporationX’s ability to compute its
interest deductions based on the compa-
rable yield of 7 percent, compounded
semiannually.
Certain provisions of the Internal Rev-
enue Code, such as§163(l) and§249,
may affect an issuer’s ability to deduct
the interest computed under the noncon-
tingent bond method.
Section 163(l), which was added to the
Internal Revenue Code by the Taxpayer
Relief Act of 1997,§1005, 1997–4 (Vol.
1) C.B. 125, provides that no deduction is
allowed for any interest paid or accrued
on a disqualified debt instrument, which
is any indebtedness of a corporation that
is payable in equity of the issuer or a
related party. Under§163(l), indebted-
ness is payable in equity only if (A) a
substantial amount of the principal or
interest is required to be paid or con-
verted, or at the option of the issuer or a
related party is payable in, or convertible
into, such equity, (B) a substantial amount
of the principal or interest is required to
be determined, or at the option of the
issuer or a related party is determined, by
reference to the value of such equity, or
(C) the indebtedness is part of an arrange-
ment that is reasonably expected to result
in a transaction described in either (A) or
(B) above. Principal or interest is required
to be so paid, converted, or determined if
it may be required at the option of the
holder or a related party and there is a
substantial certainty the option will be
exercised.
The conference report on the 1997 leg-
islation indicates that an instrument is
treated as payable in stock if it is part of
an arrangement designed to result in pay-
ment with or by reference to such stock,
including certain issuances of a forward
contract in connection with the issuance
of debt, nonrecourse debt that is secured
principally by such stock, or certain debt
instruments that are convertible at the
holder’s option when it is substantially
certain that the right will be exercised.
The conference report further states that it
is not expected that§163(l) will affect
debt with a conversion feature if the con-
version price is significantly higher than
the market price of the stock on the issue
date of the debt.SeeH.R. Conf. Rep. No.
220, 105th Cong., 1st Sess. 523–24
(1997), 1997–4 (Vol. 2) C.B. 1993–94.
Under the terms of the debt instrument
issued by CorporationX, none of the
instrument’s principal or interest is
required to be determined by reference to
the value of CorporationX’s stock.
Although the value of CorporationX’s
stock is used in constructing the debt
instrument’s projected payment schedule,
this projected payment is not determina-
tive in applying§163(l) to the instru-
ment. Under the noncontingent bond
method, the projected payment schedule
is a mechanism for comparing actual pay-
ments to projected payments and then
applying the rules for negative and posi-
tive adjustments.
The debt instrument will be paid in
stock on conversion and may be paid in
stock, at the option of CorporationX,if
the holder exercises its put option. Never-
theless, it is not substantially certain that
a substantial amount of the principal or
interest on the debt instrument will be
required to be paid in stock or will be
payable in stock at the option of Corpora-
tionX. Therefore, the debt instrument is
not a disqualified debt instrument under
§163(l), and§163(l) does not bar Corpo-
rationX’s accrual of interest deductions
based on the comparable yield of 7 per-
cent, compounded semiannually.
Section 249 provides that no deduction
is allowed to the issuing corporation for
any premium paid or incurred upon the
repurchase of a bond, debenture, note or
certificate or other evidence of indebted-
ness that is convertible into the stock of
the issuing corporation, or a corporation
in control of, or controlled by, the issuing
corporation, to the extent the repurchase
price exceeds an amount equal to the
adjusted issue price plus a normal call
premium on bonds or other evidences of
2002–22 I.R.B.1025June 3, 2002

indebtedness that are not convertible.
However,§249 does not apply to the
extent the corporation can demonstrate to
the satisfaction of the Secretary that such
excess is attributable to the cost of bor-
rowing and is not attributable to the con-
version feature.See§1.249–1. For pur-
poses of§249, a conversion is a
repurchase.See Clark Equipment Com-
pany v. United States, 912 F.2d 113 (6th
Cir. 1990).See also§§1.61–12(c)(2) and
1.163–7(c).
Section 249 was added to the Internal
Revenue Code in 1969 because, in the
case of a premium paid upon a corpora-
tion’s repurchase of its convertible
indebtedness, Congress believed that the
amount of the premium in excess of the
cost of borrowing is not analogous to an
interest expense or deductible business
expense. Instead, the amount is paid in a
capital transaction analogous to a corpo-
ration’s repurchase of its common stock
and, therefore, is not deductible. H.R.
Rep. No. 413 (Part 1), 91st Cong., 1st
Sess. 1, 110 (1969), 1969–3 C.B. 200,
269; S. Rep. No. 552, 91st Cong., 1st
Sess. 1, 149 (1969), 1969–3 C.B. 423,
518.
Section 249 applies only to a premium
paid to repurchase a convertible debt
instrument. Therefore,§249 does not
affect CorporationX’s ability to deduct
accruals of interest based on the compa-
rable yield. However,§249 applies to a
conversion of the debt instrument into
stock having a value in excess of the debt
instrument’s adjusted issue price.See
Clark Equipment; National Can Corp. v.
United States, 687 F.2d 1107 (7th Cir.
1982); and§1.249–1. Therefore, this
excess is not deductible by Corporation
X, except to the extent the excess does not
exceed a normal call premium under
§1.249–1(d) or CorporationXcan dem-
onstrate that the excess is attributable to
the cost of borrowing and not to the con-
version feature.
HOLDINGS
The noncontingent bond method
described in§1.1275–4(b) applies to the
convertible debt instrument issued by
CorporationX. The yield at which Corpo-
rationXwould issue a comparable fixed
rate nonconvertible debt instrument is
used to determine the instrument’s com-
parable yield and, therefore, the accruals
of interest on the instrument. In addition,
the debt instrument is not a disqualified
debt instrument under§163(l). Moreover,
§249 does not affect CorporationX’s
ability to deduct periodic interest accruals
on the debt instrument. However, if the
debt instrument is converted into Corpo-
rationXstock having a value in excess of
the debt instrument’s adjusted issue price,
CorporationXmay not be able to deduct
this excess under§249.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are William E. Blanchard and Dale
S. Collinson of the Office of Associate
Chief Counsel (Financial Institutions and
Products). For further information regard-
ing this revenue ruling, contact Mr. Blan-
chard at (202) 622–3950 and Mr. Collin-
son at (202) 622–3900 (not toll-free
calls).
26 CFR 1.1275–1: Definitions.
T.D. 8993
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Debt Instruments With
Original Issue Discount;
Annuity Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the federal
income tax treatment of annuity contracts
issued by certain insurance companies.
The regulations provide guidance on
whether certain annuity contracts are
excluded from the definition of a debt
instrument under the original issue dis-
count provisions of the Internal Revenue
Code.
DATES:Effective Date: These regula-
tions are effective June 6, 2002.
Applicability Dates: For dates of appli-
cability, see§1.1275–1(k)(3).
FOR FURTHER INFORMATION
CONTACT: Patrick E. White, (202)
622–3920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Sections 163(e) and 1271 through
1275 of the Internal Revenue Code
(Code) provide rules for the treatment of
debt instruments with original issue dis-
count (OID). Section 1275(a)(1)(A)
defines the termdebt instrumentto
include a bond, debenture, note, or certifi-
cate or other evidence of indebtedness.
Sections 1275(a)(1)(B)(i) and (ii), how-
ever, exclude certain annuity contracts
from the definition of a debt instrument.
This document contains rules concerning
the exception for annuities described in
section 1275(a)(1)(B)(ii). A notice of pro-
posed rulemaking (REG–125237–00,
2001–12 I.R.B. 919) was published in the
Federal Register(66 FR 2852) on Janu-
ary 12, 2001. One individual commented
anonymously on the proposed regula-
tions. The individual primarily expressed
concern that the proposed guidance
should not limit the investment options of
U.S. investors. No public hearing was
requested or held. The proposed regula-
tions are adopted as proposed.
Explanation of Provisions
In general, the OID provisions apply
to issuers and holders of debt instruments.
The term debt instrument generally
means any instrument or contractual
arrangement that constitutes indebtedness
under general principles of income tax
law. See section 1275(a)(1)(A) and§1.
1275–1(d) of the Income Tax Regula-
tions.
If a contract is a debt instrument with
OID, section 1272 generally requires the
holder of the contract to include OID in
income currently on a constant yield
basis, regardless of the holder’s overall
method of accounting. By contrast, the
holder of an annuity contract to which
section 72 applies generally is allowed to
June 3, 200210262002–22 I.R.B.

defer recognizing economically earned
income until distributions are made on the
contract.
Section 1275(a)(1)(B) excepts two
types of annuity contracts from the defi-
nition of a debt instrument. First, section
1275(a)(1)(B)(i) excepts an annuity con-
tract to which section 72 applies if the
contract“depends (in whole or in sub-
stantial part) on the life expectancy of 1
or more individuals.”Second, section
1275(a)(1)(B)(ii) excepts an annuity con-
tract to which section 72 applies under
certain circumstances if the contract“is
issued by an insurance company subject
to tax under subchapter L (or by an entity
described in section 501(c) and exempt
from tax under section 501(a) which
would be subject to tax under subchapter
L were it not so exempt)....”
The regulations provide that an annu-
ity contract issued by a foreign insurance
company is treated under section
1275(a)(1)(B)(ii) as issued by an insur-
ance company subject to tax under sub-
chapter L if the insurance company is
subject to tax under subchapter L with
respect to income earned on the annuity
contract. The IRS and Treasury conclude
that this is the most appropriate applica-
tion of the language of section
1275(a)(1)(B)(ii) and is consistent with
the use of that phrase elsewhere in the
Code and regulations. See,e.g., sections
953(e)(3)(C) and 1297(b)(2)(B);§1.848–
2(h).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking pre-
ceding these regulations was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Patrick E. White, Office of the
Associate Chief Counsel (Financial Insti-
tutions & Products). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.1271–0 is amended
by adding entries for paragraphs (k)
through (k)(3) to§1.1275–1 to read as
follows:
§1.1271–0 Original issue discount; effec-
tive dates; table of contents.
*****
§1.1275–1 Definitions.
*****
(k)Exceptionundersection
1275(a)(1)(B)(ii) for annuities issued by
an insurance company subject to tax
under subchapter L of the Internal Rev-
enue Code.
(1) Rule.
(2) Examples.
(3) Effective date.
*****
Par. 3. Section 1.1275–1 is amended
by adding paragraph (k) to read as fol-
lows:
§1.1275–1 Definitions.
*****
(k)Exceptionundersection
1275(a)(1)(B)(ii) for annuities issued by
an insurance company subject to tax
under subchapter L of the Internal Rev-
enue Code—(1)Rule. For purposes of
section 1275(a)(1)(B)(ii), an annuity con-
tract issued by a foreign insurance com-
pany is considered as issued by an insur-
ance company subject to tax under
subchapter L if the insurance company is
subject to tax under subchapter L with
respect to income earned on the annuity
contract.
(2)Examples. The following examples
illustrate the rule of paragraph (k)(1) of
this section. Each example assumes that
the annuity contract is a contract to which
section 72 applies and was issued in a
transaction where there is no consider-
ation other than cash or another qualify-
ing annuity contract, pursuant to the exer-
cise of an election under an insurance
contract by a beneficiary thereof on the
death of the insured party, or in a transac-
tion involving a qualified pension or
employee benefit plan. The examples are
as follows:
Example 1. Company X is an insurance com-
pany that is organized, licensed and doing business
in Country Y. Company X does not have a U.S.
trade or business and is not, under section 842, sub-
ject to U.S. income tax under subchapter L with
respect to income earned on annuity contracts. A, a
U.S. taxpayer, purchases an annuity contract from
Company X in Country Y. The annuity contract is
not excepted from the definition of a debt instru-
ment by section 1275(a)(1)(B)(ii).
Example 2. The facts are the same as inExample
1, except that Company X has a U.S. trade or busi-
ness. A purchased the annuity from Company X’s
U.S. trade or business. Under section 842(a), Com-
pany X is subject to tax under subchapter L with
respect to income earned on the annuity contract.
Under these facts, the annuity contract is excepted
from the definition of a debt instrument by section
1275(a)(1)(B)(ii).
Example 3. The facts are the same as inExample
2, except that there is a tax treaty between Country
Y and the United States. Company X is a resident of
Country Y for purposes of the U.S.-Country Y tax
treaty. Company X’s activities in the U.S. do not
constitute a permanent establishment under the
U.S.-Country Y tax treaty. Because Company X
does not have a U.S. permanent establishment,
Company X is not subject to tax under subchapter L
with respect to income earned on the annuity con-
tract. Thus, the annuity contract is not excepted
from the definition of a debt instrument by section
1275(a)(1)(B)(ii).
Example 4. The facts are the same as inExample
1, except that Company X is a foreign insurance
corporation controlled by a U.S. shareholder. Com-
pany X does not make an election under section
953(d) to be treated as a domestic corporation. The
controlling U.S. shareholder is required under sec-
tions 953 and 954 to include income earned on the
annuity contract in its taxable income under subpart
F. However, Company X is not subject to tax under
subchapter L with respect to income earned on the
annuity contract. Thus, the annuity contract is not
excepted from the definition of a debt instrument by
section 1275(a)(1)(B)(ii).
Example 5. The facts are the same as inExample
4, except that Company X properly elects under sec-
tion 953(d) to be treated as a domestic corporation.
By reason of its election, Company X is subject to
tax under subchapter L with respect to income
2002–22 I.R.B.1027June 3, 2002

earned on the annuity contract. Thus, the annuity
contract is excepted from the definition of a debt
instrument by section 1275(a)(1)(B)(ii).
(3)Effective date. This paragraph (k)
is applicable for interest accruals on or
after June 6, 2002. This paragraph (k)
does not apply to an annuity contract that
was purchased before January 12, 2001.
For purposes of this paragraph (k), if any
additional investment in a contract pur-
chased before January 12, 2001, is made
on or after January 12, 2001, and the
additional investment is not required to be
made under a binding written contractual
obligation that was entered into before
that date, then the additional investment
is treated as the purchase of a contract
after January 12, 2001.
David A. Mader,
Acting Deputy Commissioner of
Internal Revenue.
Approved April 26, 2002.
Pamela F. Olson,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on May
6, 2002, 8:45 a.m., and published in the issue of the
Federal Register for May 7, 2002, 67 F.R. 30547)
Section 1378.—Taxable Year
of S Corporation
26 CFR 1.1378–1: Taxable year of S corporation.
What procedures apply for partnerships, S cor-
porations, electing S corporations, and personal ser-
vice corporations to obtain the automatic approval
of the Commissioner to adopt, change, or retain an
annual accounting period? See Rev. Proc. 2002–38,
page 1037.
What procedures apply for taxpayers to obtain
the prior approval of the Commissioner to adopt,
change, or retain an annual accounting period? See
Rev. Proc. 2002–39, page 1046.
Section 1502.—Regulations
26 CFR 1.1502–76: Taxable year of members of
group.
What procedures apply for corporations to
obtain the automatic approval of the Commissioner
to change their annual accounting period? See Rev.
Proc. 2002–37, page 1030.
What procedures apply for taxpayers to obtain
the prior approval of the Commissioner to adopt,
change, or retain an annual accounting period? See
Rev. Proc. 2002–39, page 1046.
June 3, 200210282002–22 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Contingent Convertible Debt
Instruments—Request for
Comments
Notice 2002–36
Rev. Rul. 2002–31, 2002–22 I.R.B.,
dated June 3, 2002, provides guidance on
the tax treatment of a debt instrument that
is convertible into stock of the issuer and
that also provides for one or more contin-
gent cash payments (contingent convert-
ible debt instruments). The revenue ruling
holds that, in the described circum-
stances, the noncontingent bond method
described in§1.1275–4(b) of the Income
Tax Regulations applies to these debt
instruments. In addition, the revenue rul-
ing addresses how an issuer determines
the comparable yield used to determine
the interest accruals, the effect of§163(l)
of the Internal Revenue Code on the
accruals, and the consequences of a con-
version of the instrument, including the
application of§249. See Rev. Rul.
2002–31 for a discussion of these issues.
The Internal Revenue Service and the
Treasury Department are aware that the
contingent convertible debt instruments
described in the revenue ruling have been
the subject of considerable comment
within the tax bar and the media regard-
ing whether the applicable tax rules are
those generally governing contingent debt
instruments or those generally governing
convertible debt instruments. Existing
regulations dealing with contingent debt
instruments establish a general rule that
issuers of such instruments are required to
accrue interest expense (and holders are
required to accrue interest income) as if
the debt instruments bore a yield equal to
the rate at which an issuer would issue a
comparable debt instrument. However,
certain convertible debt instruments are
generally excluded from the application
of the noncontingent bond method.
Specifically,§1.1275–4(a)(4) provides
that a debt instrument does not provide
for contingent payments merely because
it provides for an option to convert the
instrument into the stock of the issuer,
into the stock or debt of a related party, or
into cash or other property in an amount
equal to the approximate value of such
stock or debt. Because of this exclusion
from the noncontingent bond method for
straight convertible debt (that is, debt
with no contingencies other than the con-
version privilege described in§1.1275–
4(a)(4)), issuers and holders of such
instruments accrue interest expense and
income at a yield that assumes the instru-
ment will not be converted (the noncon-
version yield). That yield generally is
considerably less than the yield for a
comparable nonconvertible debt instru-
ment. By contrast, if a convertible debt
instrument providing for the possible pay-
ment of additional interest upon the
occurrence of particular contingencies is
eligible for the application of the noncon-
tingent bond method, relatively insignifi-
cant changes in the investment economics
of a convertible debt instrument can
effect a dramatic change in the amount of
interest accruals.
Some commentators have argued that
the general approach of the noncontingent
bond method, which requires issuers and
holders of contingent debt instruments to
accrue interest income and expense based
on the yield of comparable debt instru-
ments, is economically sound. They argue
that the exclusion of straight convertible
debt from this general approach simply
reflects the historical treatment of con-
vertible debt instruments but is otherwise
inconsistent with the economic rationale
for the general rule. Accordingly, these
commentators argue for limited applica-
tion of the exclusion for straight convert-
ible debt and assert that sound policy sup-
ports the application of the comparable
yield methodology to contingent convert-
ible debt instruments.
Other commentators support the exclu-
sion for straight convertible debt (or have
assumed its continued existence) and
have questioned whether contingent con-
vertible debt instruments should be sub-
ject to the comparable yield methodology,
particularly if the result is to permit an
issuer to deduct interest accruals based on
the yield of comparable nonconvertible
debt instruments. These commentators
have suggested that the discontinuity
between the treatment of straight convert-
ible debt and the treatment of contingent
convertible debt instruments could be
eliminated, or substantially ameliorated,
by requiring use of the nonconversion
yield on a straight convertible debt instru-
ment as the comparable yield for accruals
on contingent convertible debt instru-
ments under the noncontingent bond
method.
Several commentators have focused
attention on the rule that only remote and
incidental contingencies are disregarded
in determining whether a debt instrument
is a contingent debt instrument. See§§1.
1275–4(a)(5) and 1.1275–2(h). To the
extent that§1.1275–4 takes into account
contingent payments that are relatively
unlikely to occur (but not so unlikely as
to be remote) and relatively insignificant
in amount (but not so insignificant as to
be incidental), the narrow scope of the
exception tends to make largely elective
the exclusion of straight convertible debt
from the noncontingent bond method.
That is, through changes in the terms of
debt instruments that result in relatively
small economic differences, issuers can
trigger the application of the comparable
yield methodology. Critics of this result
have suggested an expansion of the uni-
verse of contingent payments that are dis-
regarded in determining whether debt is
contingent debt.
As a policy matter, the Service and the
Treasury are concerned whenever signifi-
cantly different tax results obtain for eco-
nomically similar financial instruments,
such as (1) straight convertible debt and
(2) convertible debt that provides for con-
tingent payments that, while not remote
or incidental, are relatively insignificant
in amount or in likelihood of occurrence.
Such inconsistencies create market ineffi-
ciencies and increased transactional
expense.
Disparate tax treatment for economi-
cally similar financial instruments exists
in other instances, however, and the
means for achieving equivalent tax treat-
ment may not be clear or acceptable.
With respect to contingent convertible
debt instruments, for example, differing
considerations support competing
answers to the question of whether the
comparable yield used for interest accru-
als should be based on a comparable non-
convertible debt instrument or a compa-
rable convertible debt instrument.
2002–22 I.R.B.1029June 3, 2002

Referring to nonconvertible debt instru-
ments to ascertain the comparable yield is
more consistent with the economic ratio-
nale underlying the comparable yield
methodology, although using the noncon-
version yield of convertible debt instru-
ments would minimize the cliff effect and
discontinuity in tax treatment that result
when a contingent convertible debt
instrument ceases to be eligible for the
exclusion and becomes subject to the
comparable yield methodology.
Similarly, changing the rule disregard-
ing remote and incidental contingencies,
which applies to nonconvertible debt
instruments as well as convertible debt
instruments, could have broader effects
than simply reducing the cliff effect of
adding contingent interest to a convertible
debt instrument. The rule generally sim-
plifies administration by avoiding the
necessity of applying the comparable
yield methodology (and the associated
requirements for payment projections and
adjustments for differences between pro-
jected payments and actual payments) to
instruments having contingent payments
that are insignificant in amount or
unlikely to occur. Any expansion of the
rule could cause the universe of instru-
ments to which the comparable yield
methodology is inapplicable to include
cases in which the possibility of contin-
gent payments has a significant depress-
ing effect on the noncontingent yield on
the instrument. The result would be the
accrual of income and deduction in
amounts less than the true economic yield
on the instrument.
***
The Service and the Treasury are con-
cerned whenever issuers and their counsel
are uncertain about the tax consequences
of new financial instruments that are
widely used and broadly traded in the
capital markets. The capital markets oper-
ate most efficiently when the tax treat-
ment of various financial instruments is
clear. To resolve the existing controversy
and to eliminate confusion in the market-
place, Rev. Rul. 2002–31 sets forth the
position of the Service and the Treasury
regarding the tax treatment of contingent
convertible debt instruments under cur-
rent law and regulations. This notice
invites comments and suggestions for
changes in the relative tax treatment of
straight convertible debt instruments and
contingent convertible debt instruments to
eliminate or reduce the disparity in treat-
ment of these instruments.
The Service and the Treasury invite
comments and suggestions for the use of
existing regulatory authority (including
regulatory authority under§1275(d)), as
well as other administrative measures, to
modify the rules governing the tax treat-
ment of straight convertible debt instru-
ments and contingent convertible debt
instruments. Specifically, comments and
suggestions are invited on whether the
exclusion from the noncontingent bond
method for straight convertible debt
instruments should be eliminated,
expanded, or modified; whether the rules
for determining a comparable yield for
purposes of applying the noncontingent
bond method to a contingent convertible
debt instrument should be revised to
require comparison with a straight con-
vertible debt instrument; and whether the
rule that remote and incidental contingen-
cies are disregarded in determining
whether a debt instrument is a contingent
debt instrument should be modified.
As part of the discussion of the tax
treatment of contingent convertible debt
instruments, some commentators also
have raised issues regarding whether it is
appropriate as a matter of public policy to
allow issuers deductions for interest
accruals on convertible debt instruments
to the extent that payment of the accrued
interest can ultimately be effected only by
the issuance of the issuer’s stock. Sec-
tions 163(l) and 249 contain restrictions
on the deductibility of amounts based on
the value of an issuer’s stock, but those
restrictions have limited scope. See the
discussion of§§163(l) and 249 in Rev.
Rul. 2002–31. Persons responding to this
request for comments may want to
include a discussion of how the policies
underlying§§163(l) and 249 relate to
suggestions they may make for changes
in regulations or other administrative
measures.
The Service and the Treasury note that
in Notice 2000–29, 2000–1 C.B. 1241,
they had previously requested comments
on certain federal tax consequences of
options to acquire partnership interests
and partnership debt instruments convert-
ible into partnership interests. Persons
responding to this invitation for com-
ments and suggestions may want to
include a discussion of whether a sug-
gested treatment of convertible debt
instruments issued by corporations also
should apply to similar instruments issued
by partnerships.
Please submit all comments by August
30, 2002. Written comments should be
sent to:
Internal Revenue Service
Attn: CC:ITA:RU (Notice 2002–36)
Room 5226
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand delivered between the hours of 8
a.m. and 5 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:ITA:RU (Notice 2002–36)
1111Constitution Avenue, N.W.
Washington, D.C. 20224
Alternatively, comments may be sub-
mitted electronically via e-mail to the fol-
lowingaddress:Notice.Comments@
irscounsel.treas.gov. Please include
“Notice 2002–36”in the subject line. All
comments will be available for public
inspection and copying in their entirety.
The principal authors of this notice are
Dale S. Collinson and William E. Blan-
chard of the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts). For further information regarding
this notice, contact Mr. Collinson at (202)
622–3900 and Mr. Blanchard at (202)
622–3950 (not toll-free calls).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I,§§442, 706, 898, 1502; 1.442–1,
1.706–1, 1.1502–76.)
Rev. Proc. 2002–37
CONTENTS
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
.01Taxable Year Defined
(1)In general
(2)Annual accounting period
(3)Required taxable year
June 3, 200210302002–22 I.R.B.

.02Change in Taxable Year
(1)In general
(2)Annualization of short period
return
(3)No retroactive change in annual
accounting period
.03Approval of a Change
SECTION 3. SIGNIFICANT CHANGES
SECTION 4. SCOPE
.01Applicability
(1)In general
(2)Certain52–53–weektaxable
years
(3)Natural business year
(4)Section 898 election
.02Inapplicability
(1)Prior change
(2)Interest in a pass-through entity
(3)Shareholder of certain FSCs or
IC-DISCs
(4)FSC or an IC-DISC
(5)S corporation
(6)Electing S corporation
(7)PSC
(8)CFC or FPHC
(9)Tax-exempt organization
(10)Possessions corporation
(11)Cooperative association
(12)Corporation with a required
taxable year
.03Nonautomatic Changes
.04Examples
SECTION 5. DEFINITIONS
.01Corporation
.02Pass-through Entity
.03Required Taxable Year
.04Permitted Taxable Year
.05Ownership Taxable Year
.06Natural Business Year
(1)Prior three years gross receipts
(2)Natural business year
(3)Special rules
.07First Effective Year
.08Short Period
SECTION 6. TERMS AND CONDI-
TIONS OF CHANGE
.01In General
.02Short Period Tax Return
.03Subsequent Year Tax Returns
.04Record Keeping/Book Conformity
.05Changes in Natural Business Year
.06Changes in Ownership Taxable
Year
.0752–53–week Taxable Years
.08Creation of Net Operating Loss or
Capital Loss
.09Creation of General Business
Credits
.10Concurrent Change for Related
Entities
SECTION 7. GENERAL APPLICATION
PROCEDURES
.01Approval
.02Filing Requirements
(1)Where to file
(2)When to file
(3)Label
(4)Signature requirements
(5)No user fee
(6)Additional information
(7)Consolidated application
SECTION 8. REVIEW OF APPLICA-
TION
.01Service Center Review
.02Review of Director
SECTION 9. EFFECTIVE DATE AND
TRANSITION RULE
.01Effective Date
.02Transition Rule
SECTION 10. EFFECT ON OTHER
DOCUMENTS
SECTION 11. PAPERWORK REDUC-
TION ACT
DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure provides the
exclusive procedures for certain corpora-
tions to obtain automatic approval to
change their annual accounting period
under§442 of the Internal Revenue Code
and§1.442–1(b) of the Income Tax
Regulations. This revenue procedure
modifies, amplifies, and supersedes Rev.
Proc. 2000–11, 2000–3 C.B. 309. A cor-
poration complying with all the appli-
cable provisions of this revenue proce-
dure will be deemed to have established a
business purpose and obtained the
approval of the Commissioner of the
Internal Revenue Service to change its
annual accounting period under§442 and
the regulations thereunder.
SECTION 2. BACKGROUND
.01Taxable Year Defined.
(1)In general. Section 441(b) and
§1.441–1(b)(1) provide that the term
“taxable year”generally means the tax-
payer’s annual accounting period, if it is
a calendar or fiscal year, or, if applicable,
the taxpayer’s required taxable year.
(2)Annual accounting period. Sec-
tion 441(c) and§1.441–1(b)(3) provide
that the term“annual accounting period”
means the annual period (calendar year or
fiscal year) on the basis of which the tax-
payer regularly computes its income in
keeping its books.
(3)Required taxable year. Section
1.441–1(b)(2) provides that certain tax-
payers must use the particular taxable
year that is required under the Code and
the regulations thereunder. See§1.441–
1(b)(2) for examples of taxpayers, includ-
ing certain corporations, with required
taxable years.
.02Change in Taxable Year.
(1) In general. Section 1.442–
1(a)(1) generally provides that a taxpayer
that wants to change its annual account-
ing period and use a new taxable year
must obtain the approval of the Commis-
sioner.
(2)Annualization of short period
return. Section 443(b) and§1.443–
1(b)(1)(i) generally provide that if a
return is made for a short period resulting
from a change of an annual accounting
period, the taxable income for the short
period must be placed on an annual basis
by multiplying the income by 12 and
dividing the result by the number of
months in the short period. Unless
§443(b)(2) and§1.443–1(b)(2) apply,
the tax for the short period generally is
the same part of the tax computed on an
annual basis as the number of months in
the short period is of 12 months. But see,
for example,§§1.852–3(e), 1.857–
2(a)(4), and 1.1502–76 for exceptions to
this general rule for a regulated invest-
ment company (RIC), a real estate invest-
ment trust (REIT), and a subsidiary cor-
poration ceasing to be a member of a
consolidated group, respectively.
(3)No retroactive change in annual
accounting period. Unless specifically
authorized by the Commissioner, a tax-
payer may not request, or otherwise
make, a retroactive change in annual
accounting period, regardless of whether
the change is to a required taxable year.
.03Approval of a Change. Section
1.442–1(b) provides, in part, that in order
to secure the approval of the Commis-
sioner to change an annual accounting
2002–22 I.R.B.1031June 3, 2002

period, a taxpayer must file an applica-
tion, generally on Form 1128,Application
to Adopt, Change, or Retain a Tax Year,
with the Commissioner within such time
and in such manner as is provided in
administrative procedures published by
the Commissioner. In general, a change in
annual accounting period will be
approved where the taxpayer establishes a
business purpose for the requested annual
accounting period and agrees to the Com-
missioner’s prescribed terms, conditions,
and adjustments for effecting the change.
SECTION 3. SIGNIFICANT CHANGES
Significant changes to Rev. Proc.
2000–11 made by this revenue procedure
include:
.01 Section 4.01(1) of this revenue
procedure provides that this revenue pro-
cedure is the exclusive procedure for cor-
porations within its scope to change their
annual accounting period;
.02 Section 4.01(2) of this revenue
procedure waives only certain scope
restrictions for changes to (or from) a
52–53-week taxable year that references
the same calendar month;
.03 Section 4.01(3) of this revenue
procedure provides that a corporation that
wants to change to or retain a natural
business year that satisfies the 25-percent
gross receipts test described in section
5.05 of this revenue procedure, or to a
52–53-week taxable year ending with ref-
erence to such taxable year, may do so
under this revenue procedure notwith-
standing certain of the limitations
imposed under section 4.02;
.04 Section 4.02(1) of this revenue
procedure reduces the period of time
required between a prior accounting
period change and a change effected
under this revenue procedure from 6 cal-
endar years to 48 months;
.05 Section 4.02(1) of this revenue
procedure also adds to the list of account-
ing period changes that will not be con-
sidered prior changes for purposes of the
48-month rule: (a) a change to comply
with§1.1502–75, (b) any prior change
made by a corporation whose majority
shareholder has changed its taxable year
within the last 12 months if the corpora-
tion wants to change to that shareholder’s
taxable year in order to file consolidated
financial statements, and (c) a change to a
required taxable year or an ownership
taxable year;
.06 Section 4.02(2) of this revenue
procedure adds to the list of corporations
with certain pass-through interests that
are ineligible to use this revenue proce-
dure certain shareholders of a closely-
held REIT;
.07 Section 4.02(2) of this revenue
procedure also incorporates into this list
of potentially prohibited pass-through
interests an interest in a controlled foreign
corporation (CFC), foreign personal hold-
ing company (FPHC), or passive foreign
investment company (PFIC) and, as a
result, allows an exception forde minimis
interests in these entities;
.08 Section 4.02(2)(b) of this revenue
procedure provides that, in certain cases
in which a partnership is owned
50-percent by each of two partners, the
corporate partner’s interest in the partner-
ship will be disregarded;
.09 Section 4.02(8) of this revenue
procedure provides an exception to the
scope restrictions for a CFC or FPHC that
wants to change to its required taxable
year;
.10 Section 4.02(12) of this revenue
procedure adds to the list of corporations
ineligible to use this revenue procedure a
corporation not otherwise described in
this revenue procedure that has a required
taxable year, unless that corporation is
changing to its required taxable year;
.11 Section 6.04 of this revenue proce-
dure now provides certain exceptions to
the record keeping/book conformity rule;
and
.12 Section 6.08 of this revenue proce-
dure adds a term and condition to prevent
the carryback of capital losses generated
in the short period.
SECTION 4. SCOPE
.01Applicability. (1)In general.
Except as provided in section 4.02, this
revenue procedure, which is the exclusive
procedure for corporations within its
scope, applies to a corporation requesting
automatic approval to change its annual
accounting period.
(2)Certain 52–53-week taxable
years. This revenue procedure applies to
a corporation (including a member of a
consolidated group) that wants to change
to (or from) a 52–53-week taxable year,
subject to the provisions of section 4.02
of this revenue procedure. However, not-
withstanding sections 4.02(1), (2), (3),
(6), (8), and (11) of this revenue proce-
dure, this revenue procedure applies to a
corporation (including a member of a
consolidated group) that wants to change
from a 52–53-week taxable year that ref-
erences a particular month to a non–52–
53-week taxable year that ends on the last
day of that month, and vice versa.
(3)Natural business year. Notwith-
standing sections 4.02(2) and (3) of this
revenue procedure, this revenue proce-
dure applies to a corporation that wants to
change to a natural business year that sat-
isfies the 25-percent gross receipts test
described in section 5.
(4)Section 898 election. Notwith-
standing section 4.02 of this revenue pro-
cedure, this revenue procedure applies to
a CFC (as defined in§957) that wants to
revoke its one-month deferral election
under§898(c)(1)(B) and change its tax-
able year to the majority U.S. shareholder
year (as defined in§898(c)(1)(C)).
.02Inapplicability. This revenue pro-
cedure does not apply to the following
corporations:
(1)Prior change. A corporation that
has changed its annual accounting period
at any time within the most recent
48–month period ending with the last
month of the requested taxable year. For
this purpose, the following changes will
not be considered a change in annual
accounting period:
(a) a prior change in accounting
period by a corporation in order to com-
ply with the common taxable year
requirement of either§1.1502–
75(d)(3)(v) or 1.1502–76(a)(1). See§1.
442–1(d);
(b) a prior change in accounting
period by a corporation either acquired
within the last 12 months, or whose
majority shareholder changed its taxable
year within the last 12 months, if that cor-
poration currently wants to change to the
taxable year of its majority shareholder
with which it does not file consolidated
tax returns in order to file consolidated
financial statements. For purposes of this
section 4.02(1)(b),“majority shareholder”
means ownership that satisfies the test of
§1504(a)(2), substituting“more than 50
percent”for“at least 80 percent;”
June 3, 200210322002–22 I.R.B.

(c) a prior change from a 52–53-
week taxable year that references a par-
ticular month to a non–52–53-week tax-
able year that ends on the last day of that
month, and vice versa; or
(d) a prior change in accounting
period to a required taxable year or an
ownership taxable year.
(2)Interest in a pass-through entity.
A corporation that has an interest in a
pass-through entity as of the end of the
short period. However, an interest in a
pass-through entity will be disregarded
for this purpose if any of the following
conditions are met:
(a) the pass-through entity would
be required under the Code or regulations
to change its taxable year to the new tax-
able year of the corporation (or, if appli-
cable in the case of a CFC or FPHC, to a
taxable year that begins one month-earlier
than the new taxable year of the corpora-
tion). See section 6.10 of this revenue
procedure for a special term and condi-
tion related to this exception;
(b) the pass-through entity is a
partnership that is owned 50-percent by
each of two partners and the corporation
and the partnership both want to change
to the taxable year of the other 50-percent
partner. See section 6.10 of this revenue
procedure for a special term and condi-
tion related to this exception;
(c) the new taxable year of the
corporation would result in no change in
or less deferral (as described in§1.706–
1(b)(3)) from the pass-through entity than
the present taxable year of the corpora-
tion. If the pass-through entity is a part-
nership, CFC, or FPHC, the corporation
should compare the existing deferral
period (between the pass-through entity’s
and the corporation’s current taxable
years) with the new deferral period
(between the new required taxable year of
the pass-through entity and the corpora-
tion’s new taxable year). See section 4.04
of this revenue procedure for an example
of this rule; or
(d) for pass-through entities not
qualifying for the exceptions in either
section 4.02(2)(a) or (b) of this revenue
procedure, the pass-through entity in
which the corporation has an interest has
been in existence for at least 3 taxable
years and the interest isde minimis. For
this purpose, an interest in a pass-through
entity isde minimisonly if:
(i) for each of the prior 3 tax-
able years of the corporation, the amount
of income (including ordinary income or
loss, capital gains or losses, rents, royal-
ties, interest, dividends and deduction
equivalents of credits) from such pass-
through entity is less than or equal to (A)
5 percent of the corporation’s gross
receipts (or, in the case of a member of a
consolidated group, the consolidated
group’s gross receipts) for those taxable
years, and (B) $500,000; and
(ii) the amount of income from
all such pass-through entities in the
aggregate is less than or equal to the
amounts described in (A) and (B) above.
See section 4.04 of this revenue proce-
dure for an example of this rule;
(3)Shareholder of certain FSCs or
IC-DISCs. A corporation that is a share-
holder of a foreign sales corporation
(FSC) or interest charge domestic interna-
tional sales corporation (IC-DISC), as of
the end of the short period. However, an
interest in a FSC or IC-DISC is disre-
garded if either of the following condi-
tions is met:
(a) the FSC or IC-DISC in which
the corporation is the principal share-
holder (i.e., the shareholder with the high-
est percentage of voting power as defined
in§441(h)) would be required to change
its taxable year pursuant to§§1.921–
1T(b)(4) and (b)(6) to the new taxable
year of the corporation. See section 6.10
of this revenue procedure for a special
term and condition related to this excep-
tion; or
(b) the new taxable year of the
corporation would result in no change in
or less deferral of income (as determined
under the principles of§1.706–1(a)(3))
from the FSC or IC-DISC than the
present taxable year of the corporation;
(4)FSC or an IC-DISC. A corpo-
ration that is a FSC or an IC-DISC. See
§1.921–1T(b)(4) for rules regarding
automatic changes of the annual account-
ing period of a FSC or IC-DISC to the
taxable year of its principal shareholder;
(5)S corporation. A corporation
that is an S corporation (as defined in
§1361). See Rev. Proc. 2002–38,
2002–22 I.R.B. 1037, for procedures to
follow for certain automatic changes in
the annual accounting period of an S cor-
poration;
(6)Electing S corporation. A corpo-
ration that attempts to make an S corpo-
ration election for the taxable year imme-
diately following the short period, unless
the change is to a permitted taxable year;
(7)PSC. A corporation that is a per-
sonal service corporation (PSC) (as
defined in§441(i)). See Rev. Proc.
2002–38 for procedures to follow for cer-
tain automatic changes in the annual
accounting period of a PSC;
(8)CFC or FPHC. A corporation
that is a CFC (as defined in§957),
including a CFC that is also a PFIC (as
defined in§1297(a)), or a FPHC (as
defined in§552), unless the CFC or
FPHC either does not have a required tax-
able year under final regulations under
§898, or is changing to its required tax-
able year or to a 52–53-week taxable year
that references its required taxable year;
(9)Tax-exempt organization. A cor-
poration that is a tax-exempt organiza-
tion, other than an organization exempt
from federal income tax under§§521,
526, 527, or 528. See Rev. Proc. 85–58,
1985–2 C.B. 740, for procedures to fol-
low in changing an annual accounting
period of a tax-exempt organization that
is not within the scope of this revenue
procedure;
(10)Possessions corporation.A
corporation that has in effect an election
under§936;
(11)Cooperative association.A
corporation that is a cooperative associa-
tion (within the meaning of§1381(a))
with a loss in the short period required to
effect the change of annual accounting
period, unless the patrons of the coopera-
tive association are substantially the same
in the year before the change of annual
accounting period, in the short period
required to effect the change, and in the
year following the change. For purposes
of this subsection,“substantially the
same”means that ownership of more than
90 percent of the cooperative associa-
tion’s stock is owned by the same mem-
bers; or
(12)Corporation with a required
taxable year. A corporation that is not
described in sections 4.02(1) through (11)
of this revenue procedure that has a
required taxable year (e.g., a REIT, or a
qualified settlement fund or designated
settlement fund as defined in§1.468B),
2002–22 I.R.B.1033June 3, 2002

unless the corporation is changing to its
required taxable year.
.03Nonautomatic Changes. Corpora-
tions that are unable to obtain automatic
approval for a change in accounting
period under this revenue procedure, the
applicable regulations, or any other rev-
enue procedure must secure prior
approval from the Commissioner for a
change in an accounting period pursuant
to§442 and the regulations thereunder.
SeeRev. Proc. 2002–39, 2002–22 I.R.B.
1046.
.04Examples.
(1) Example 1. (i) Corporations V, W, X, Y,
and Z hold equal 20 percent interests in the capital
and profits of partnership ABC. V and W are calen-
dar year taxpayers. X and Y have taxable years end-
ing June 30, and Z has a taxable year ending Sep-
tember 30. ABC does not have a business purpose
for a particular taxable year, and thus, pursuant to
§1.706–1, ABC is required to use a taxable year
ending June 30 because that taxable year results in
the least aggregate deferral of income to its partners.
Z currently has a 3-month deferral period (the num-
ber of months from the end of ABC’s taxable year
to the end of Z’s taxable year). Z wants to change
its taxable year to a calendar year.
(ii) If Z changes its taxable year to a cal-
endar year, ABC would be required to change its
taxable year under§706 to its majority interest tax-
able year, which is the calendar year. As a result of
Z’s new taxable year and ABC’s new taxable year,
Z’s deferral period would be eliminated. Because
Z’s new taxable year would reduce Z’s deferral, Z
may disregard its interest in ABC under section
4.02(2)(c) of this revenue procedure.
(2)Example 2. (i) Corporation X, a calendar
year taxpayer, wants to change its taxable year to a
year ending June 30. X has interests in five partner-
ships, ABC, DEF, GHI, JKL, and MNO. All of the
partnerships have been in existence for over three
taxable years. X’s interests in each of ABC and DEF
is greater than 50 percent. X’s interest in GHI, JKL,
and MNO is 15 percent, 10 percent, and 5 percent,
respectively. GHI uses the majority interest taxable
year ending May 31 and JKL and MNO each use
their respective majority interest taxable year ending
December 31. X’s distributive share of income/
(loss) from JKL for the prior three taxable years is
$300,000, $(100,000), and $200,000, respectively,
and from MNO is $300,000, $200,000, and
$100,000, respectively. X’s gross receipts for each
of those same taxable years was $15,000,000.
(ii) X’s interests in its pass-through entities
will be disregarded only if each pass-through entity
satisfies one of the exceptions enumerated under
section 4.02(2) of this revenue procedure. In the
instant case, X’s interests in ABC and DEF each
meet the exception in section 4.02(2)(a) because X
is the majority interest partner in each partnership.
X’s interest in GHI meets the exception in section
4.02(2)(c) because X’s new taxable year would
result in less deferral than its old taxable year (the
deferral between May 31 and June 30 of 1 month as
compared to the deferral between May 31 and
December 31 of 7 months). Because X is not the
majority interest partner in JKL and MNO and
because its new taxable year would not result in less
deferral from these partnerships, X’s interests in
JKL and MNO may be disregarded only if they sat-
isfy thede minimisexception in section 4.02(2)(d).
Although the income from JKL and MNO for each
of the prior three taxable years is less than 5 percent
of X’s gross receipts and $500,000, the income for
year 1 from JKL and MNO, in the aggregate
($300,000 and $300,000), exceeds the $500,000
amount specified in section 4.02(2)(d)(ii). Conse-
quently, JKL and MNO fail to satisfy thede minimis
exception in section 4.02(2)(d). Because X’s inter-
ests in all of its pass-through entities will not be
disregarded, X is not within the scope of this rev-
enue procedure.
SECTION 5. DEFINITIONS
The following definitions apply solely
for the purpose of this revenue procedure:
.01Corporation. The term“corpora-
tion”includes associations, joint-stock
companies, and insurance companies, as
provided in§7701(a)(3), and includes
each member of a consolidated group.
However, the common parent of a con-
solidated group may change the group’s
annual accounting period under this rev-
enue procedure if every member of the
consolidated group meets all the require-
ments and complies with all the condi-
tions of this revenue procedure.
.02Pass-through Entity. The term
“pass-through entity”means a partner-
ship; a trust; an estate; a common trust
fund (as defined in§584); a CFC (as
defined in§957), but only to the extent
the corporation is a U.S. shareholder (as
defined in§951(b)); an FPHC (as
defined in§552), but only to the extent
the corporation is a U.S. shareholder (as
defined in§551(a)); a PFIC, but only if
the corporation has elected to treat such
PFIC as a qualified electing fund (as
defined in§1295); and a closely-held
REIT (as defined in§6655(e)(5)(B)), but
only to the extent the corporation is
described in§6655(e)(5)(A).
.03Required Taxable Year. The
required taxable year is the particular tax-
able year that certain taxpayers are
required to use under the Code and the
regulations thereunder. See§1.441–
1(b)(2) for examples of taxpayers, includ-
ing certain corporations, with required
taxable years.
.04Permitted Taxable Year.A“per-
mitted taxable year”of an electing S cor-
poration is the required taxable year; a
taxable year elected under§444; a natu-
ral business year that satisfies the
25-percent gross receipts test described in
section 5.06 of this revenue procedure;
the ownership taxable year; or a 52–53-
week taxable year that references the
required taxable year, taxable year elected
under§444, natural business year, or
ownership taxable year.
.05Ownership Taxable Year.An
“ownership taxable year”of an electing S
corporation is the taxable year (if any)
that, as of the first day of the first effec-
tive year, constitutes the taxable year of
one or more shareholders (including any
shareholder that concurrently changes to
such taxable year) holding more than
50-percent of the corporation’s issued and
outstanding shares of stock. For this pur-
pose,underprinciplessimilarto
§1.706–3T for determining the taxable
year of a partnership, a shareholder that is
tax-exempt under§501(a) is disregarded
if such shareholder is not subject to tax
on any income attributable to the electing
S corporation. Tax-exempt shareholders
are not disregarded, however, if the elect-
ing S corporation is wholly-owned by
such tax-exempt entities. A shareholder in
an electing S corporation that wants to
concurrently change its taxable year must
follow the instructions generally appli-
cable to taxpayers changing their taxable
years contained in§1.442–1(b), Rev.
Proc. 2002–39, or any other applicable
administrative procedure published by the
Commissioner.
.06Natural Business Year. A corpora-
tion establishes a“natural business year”
under this revenue procedure by satisfy-
ing the following“25-percent gross
receipts test:”
(1)Prior three years gross receipts.
(a) Gross receipts from sales and
services for the most recent 12-month
period that ends with the last month of
June 3, 200210342002–22 I.R.B.

the requested annual accounting period
are totaled and then divided into the
amount of gross receipts from sales and
services for the last 2 months of this
12-month period.
(b) The same computation as in
(1)(a) above is made for the two preced-
ing 12-month periods ending with the last
month of the requested annual accounting
period.
(2)Natural business year.
(a) Except as provided in (b)
below, if each of the three results
described in (1) equals or exceeds 25 per-
cent, then the requested annual account-
ing period is deemed to be the taxpayer’s
natural business year.
(b) The taxpayer must determine
whether any annual accounting period
other than the requested annual account-
ing period also meets the 25-percent gross
receipts test described in (2)(a). If one or
more other annual accounting periods
produce higher averages of the three per-
centages (rounded to 1/100 of a percent)
described in (1) than the requested annual
accounting period, then the requested
annual accounting period will not qualify
as the taxpayer’s natural business year.
(3)Special rules. (a) To apply the
25-percent gross receipts test for any par-
ticular year, the taxpayer must compute
its gross receipts under the method of
accounting used to prepare its federal
income tax returns for such taxable year.
(b) Regardless of the taxpayer’s
method of accounting, the taxpayer’s
share of income from a pass-through
entity generally must be reported as gross
receipts in the month that the pass-
through entity’s taxable year ends.
(c) If a taxpayer has a predecessor
organization and is continuing the same
business as its predecessor, the taxpayer
must use the gross receipts of its prede-
cessor for purposes of computing the
25-percent gross receipts test.
(d) If the taxpayer (including any
predecessor organization) does not have a
47-month period of gross receipts (36-
month period for requested taxable year
plus additional 11-month period for com-
paring requested taxable year with other
potential taxable years), then it cannot
establish a natural business year under
this revenue procedure.
(e) If the requested taxable year is
a52–53-week taxable year, the calendar
month ending nearest to the last day of
the 52–53-week taxable year is treated as
the last month of the requested taxable
year for purposes of computing the
25-percent gross receipts test.
.07First Effective Year. The first
effective year is the first taxable year for
which a change in annual accounting
period is effective,e.g., the short period
required to effect the change. Thus, in the
case of a change, the first effective year is
the short period required to effect the
change. The first effective year is also the
first taxable year for complying with all
the terms and conditions set forth in this
revenue procedure necessary to effect the
change in annual accounting period.
.08Short Period. A corporation’s short
period is the period beginning with the
day following the close of the old taxable
year and ending with the day preceding
the first day of the new taxable year.
SECTION 6. TERMS AND
CONDITIONS OF CHANGE
.01In General. A change in annual
accounting period filed under this rev-
enue procedure must be made pursuant to
the terms and conditions provided in this
revenue procedure.
.02Short Period Tax Return. The cor-
poration must file a federal income tax
return for the short period required to
effect a change in annual accounting
period by the due date of that return,
including extensions pursuant to§1.443–
1(a). The corporation’s taxable income
for the short period must be annualized
and the tax must be computed in accor-
dance with the provisions of§443(b) and
§1.443–1(b). However, for changes to (or
from) a 52–53-week taxable year refer-
encing the same month as the current (or
requested) taxable year, see special rules
in§1.441–2.
.03Subsequent Year Tax Returns.
Returns for subsequent taxable years gen-
erally must be made on the basis of a full
12 months (or on a 52–53-week basis)
ending on the last day of the requested
taxable year, unless the corporation
secures the approval of the Commissioner
to change that taxable year.
.04Record Keeping/Book Conformity.
The books of the corporation must be
closed as of the last day of the first effec-
tive year. Thereafter, the corporation must
compute its income and keep its books
and records (including financial state-
ments and reports to creditors) on the
basis of the requested taxable year, except
that this requirement shall not apply (1) to
books and records maintained solely for
foreign law purposes (e.g., foreign tax
reporting purposes), or (2) if the
requested taxable year is the corpora-
tion’s required taxable year.
.05Changes in Natural Business Year.
If an electing S corporation changes to a
natural business year that satisfies the
25-percent gross receipts test under this
revenue procedure and that annual
accounting period no longer qualifies as a
natural business year, the taxpayer is
using an impermissible annual accounting
period and should change to a permitted
taxable year or any other taxable year for
which the taxpayer establishes a business
purpose to the satisfaction of the Com-
missioner. Certain S corporations may
qualify for automatic approval to change
their annual accounting period under Rev.
Proc. 2002–38. Other taxpayers must
request approval under Rev. Proc. 2002–
39.
.06Changes in Ownership Taxable
Year. An electing S corporation that
changes to an ownership taxable year
under this revenue procedure must
change to a permitted taxable year or any
other taxable year for which the taxpayer
establishes a business purpose to the sat-
isfaction of the Commissioner, or request
approval to retain its current taxable year,
if, as of the first day of any taxable year,
its ownership taxable year changes. Cer-
tain S corporations may qualify for auto-
matic approval to change or retain their
annual accounting period under Rev.
Proc. 2002–38. Other taxpayers must
request approval under Rev. Proc. 2002–
39.
.0752–53-week Taxable Years.If
applicable, the corporation must comply
with§1.441–2(e) (relating to the timing
of taking items into account in those
cases where the taxable year of a pass-
through entity ends with reference to the
same calendar month as one or more of
its owners).
.08Creation of Net Operating Loss or
Capital Loss. If the corporation generates
a net operating loss (NOL) or capital loss
(CL) in the short period required to effect
a change in annual accounting period, the
corporation may not carry the NOL or CL
2002–22 I.R.B.1035June 3, 2002

back, but must carry it over in accordance
with the provisions of§§172 and 1212,
respectively, beginning with the first tax-
able year after the short period. However,
the short period NOL or CL is carried
back or carried over in accordance with
§§172 or 1212, respectively, if it is
either: (a) $50,000 or less, or (b) results
from a short period of 9 months or longer
and is less than the NOL or CL for a full
12-month period beginning with the first
day of the short period.
.09Creation of General Business
Credits. If there is an unused general
business credit or any other unused credit
generated in the short period, the corpora-
tion must carry that unused credit for-
ward. An unused credit from the short
period may not be carried back.
.10Concurrent Change for Related
Entities. If a corporation’s interest in a
pass-through entity, FSC, or IC-DISC
(related entity) is disregarded pursuant to
section 4.02(2)(a), 4.02(2)(b), or
4.02(3)(a) of this revenue procedure
because the related entity is required to
change its taxable year to the corpora-
tion’s new taxable year (or, if applicable
in the case of a CFC or FPHC, to a tax-
able year beginning one month earlier
than the corporation’s new taxable year),
the related entity must change its taxable
year concurrently with the corporation’s
change in taxable year, either under Rev.
Proc. 2002–38, Rev. Proc. 2002–39, or
this revenue procedure, whichever is
applicable. This related party change is
required notwithstanding the testing date
provisions in§§706(b)(4)(A)(ii),
898(c)(1)(C)(ii),§1.921–1T(b)(6), and
the special provision in§706(b)(4)(B).
SECTION 7. GENERAL
APPLICATION PROCEDURES
.01Approval. Approval is hereby
granted to any corporation within the
scope of this revenue procedure to change
its annual accounting period, provided the
corporation complies with all the appli-
cable provisions of this revenue proce-
dure. Approval is granted beginning with
the first effective year. A corporation
granted approval under this revenue pro-
cedure to change its annual accounting
period is deemed to have established a
business purpose for the change to the
satisfaction of the Commissioner.
.02Filing Requirements.
(1)Where to file. Any corporation
(including the common parent of a con-
solidated group) that wants to change its
annual accounting period pursuant to the
provisions of this revenue procedure must
complete and file a Form 1128 with the
Director, Internal Revenue Service Cen-
ter, Attention: ENTITY CONTROL,
where the corporation files its federal
income tax return. No copies of Form
1128 are required to be sent to the
national office. The corporation also must
attach a copy of the Form 1128 to the
federal income tax return filed for the
short period required to effect the change.
Any corporation completing and filing a
Form 1128 on behalf of a CFC or FPHC
must file the Form 1128 where the corpo-
ration files its federal income tax return.
(2)When to file. A Form 1128 filed
pursuant to this revenue procedure will be
considered timely filed for purposes of
§1.442–1(b)(1) only if it is filed on or
before the due date (including extensions)
for filing the federal income tax return for
the short period required to effect such
change.
(3)Label. In order to assist in the
processing of the change in annual
accounting period, reference to this rev-
enue procedure must be made a part of
the Form 1128 by either typing or legibly
printing the following statement at the top
of page 1 of the Form 1128:“FILED
UNDER REV. PROC. 2002–37.”For a
CFC that is revoking a§898(c)(1)(B)
election under section 4.01(4) of this rev-
enue procedure, the label at the top of
page 1 of the Form 1128 should read
“REVOCATION OF§898(c)(1)(B)
ELECTION FILED UNDER REV.
PROC. 2002–37.”
(4)Signature requirements. The
Form 1128 must be signed on behalf of
the corporation requesting the change of
annual accounting period by an individual
with authority to bind the corporation in
such matters. If the corporation is a mem-
ber of a consolidated group, the Form
1128 must be signed by a duly authorized
officer of the common parent. If an agent
is authorized to represent the corporation
before the Service, to receive the original
or a copy of correspondence concerning
the application, or to perform any other
act(s) regarding the application on behalf
of the corporation, a power of attorney
reflecting such authorization(s) should be
attached to the application. A corpora-
tion’s representative without a power of
attorney to represent the corporation will
not be given any information about the
application.
(5)No user fee. A user fee is not
required for an application filed under
this revenue procedure and, except as
provided in section 8.01 of this revenue
procedure, the receipt of an application
filed under this revenue procedure may
not be acknowledged.
(6)Additional information.Inthe
case of a corporation changing to a natu-
ral business year that satisfies the
25–percent gross receipts test described
in section 5.06 of this revenue procedure,
the corporation must supply the gross
receipts for the most recent 47 months for
itself (or any predecessor) in compliance
with the instructions to Form 1128.
(7)Consolidated application.A
common parent must file a single applica-
tion to change the annual accounting
period of its consolidated group, even if
one or more of the subsidiaries of the
group are requesting to use a 52–53-week
taxable year that ends with reference to
the common parent’s requested taxable
year or the subsidiaries are requesting to
use a taxable year consisting of 12 calen-
dar months that coincides with the refer-
ence month of the common parent’s
requested 52–53-week taxable year.See
§1.1502–76(a)(1) (common parent must
attach a statement to its tax return as
required by Rev. Proc. 89–56, 1989–2
C.B. 643, and comply with Rev. Rul.
72–184, 1972–1 C.B. 289). On the Form
1128 filed on behalf of a common parent
and its subsidiaries, the common parent
corporation must clearly indicate which
corporations in the consolidated group (if
any) are requesting a 52–53-week taxable
year, and which (if any) are requesting a
taxable year consisting of 12 calendar
months. In addition, the common parent
must answer all relevant questions on the
Form 1128 for each member of the con-
solidated group.
SECTION 8. REVIEW OF
APPLICATION
.01Service Center Review. A Service
Center may deny a change of annual
accounting period under this revenue pro-
cedure only if (a) the Form 1128 is not
filed timely, or (b) the corporation fails to
June 3, 200210362002–22 I.R.B.

meet the scope or any term and condition
of this revenue procedure. If the change is
denied, the Service Center will return the
Form 1128 with an explanation for the
denial.
.02Review of Director. The appropri-
ate director may ascertain if the change in
annual accounting period was made in
compliance with all the applicable provi-
sions of this revenue procedure. Corpora-
tions changing their annual accounting
period pursuant to this revenue procedure
without complying with all the provisions
(including the terms and conditions) of
this revenue procedure ordinarily will be
deemed to have initiated the change in
annual accounting period without the
approval of the Commissioner. Upon
examination, a corporation that has initi-
ated an unauthorized change of annual
accounting period may be denied the
change. For example, the corporation
may be required to recompute its taxable
income or loss in accordance with its
former (or required, if applicable) taxable
year.
SECTION 9. EFFECTIVE DATE AND
TRANSITION RULE
.01Effective Date. This revenue proce-
dure generally is effective for all changes
in annual accounting periods for which
the first effective year ends on or after
May 10, 2002. However, if the time
period for filing Form 1128 with respect
to a taxable year set forth in section
7.02(2) of this revenue procedure has not
yet expired, a corporation within the
scope of this revenue procedure may elect
early application of the revenue proce-
dure by providing the notification set
forth in section 7.02(3) on the top of page
1 of Form 1128 and by satisfying the
other procedural requirements of section
7.
.02Transition Rule. If a corporation
within the scope of this revenue proce-
dure filed an application with the national
office and the application is pending with
the national office on May 10, 2002, the
corporation may obtain approval under
this revenue procedure. However, the
national office will process the applica-
tion in accordance with the authority
under which it was filed, unless by the
later of June 25, 2002, or the issuance of
the letter ruling granting or denying
approval for the change, the corporation
notifies the national office that it wants to
use this revenue procedure. If the corpo-
ration timely notifies the national office
that it wants to use this revenue proce-
dure, the national office will require the
corporation to make appropriate modifi-
cations to the application to comply with
the applicable provisions of this revenue
procedure. In addition, any user fee that
was submitted with the application will
be refunded to the corporation.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2000–11 is modified,
amplified, and superseded.
SECTION 11. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under control
number 1545–1786. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless the collection of infor-
mation displays a valid OMB control
number.
The collections of information in this
revenue procedure are found in sections 7
and 10. The information in section 7 is
required in order to determine whether
the taxpayer properly obtained automatic
approval to change its annual accounting
period. The information in section 10 is
required in order to allow a corporation to
apply the provisions of this revenue pro-
cedure to a pending application. The
likely respondents are corporations.
The estimated total annual reporting
burden for the requirements contained in
section 7 of this revenue procedure is
reflected in the burden estimates for Form
1128. The estimated total annual report-
ing burden for the requirement contained
in section 10 of this revenue procedure is
50 hours: the estimated annual burden per
respondent is 30 minutes; the estimated
number of respondents is 100; and the
estimated frequency of response is once.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Roy A. Hirschhorn and
Martin Scully, Jr. of the Office of Assis-
tant Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, contact
Mr. Hirschhorn or Mr. Scully at (202)
622–4960 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I,§§441, 442, 444, 706, 1378; 1.441–1,
1.441–3, 1.442–1, 1.706–1, 1.1378–1.)
Rev. Proc. 2002–38
CONTENTS
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
.01Taxable Year Defined
(1)In general
(2)Annual accounting period
(3)Required taxable year
.02Adoption of a Taxable Year
.03Change in Taxable Year
(1)In general
(2)Annualization of short period
return
(3)No retroactive change in annual
accounting period
.04Retention of a Taxable Year
.05Approval of an Adoption, Change,
or Retention
.06Business Purpose
(1)Sufficient business purposes
(2)Natural business year
.07Section 444 Elections
SECTION 3. SIGNIFICANT CHANGES
SECTION 4. SCOPE
.01Applicability
(1)Required taxable year
(2)Natural business year
(3)Ownership taxable year
(4)Certain 52–52-week taxable
years
(5)Certain changes in ownership of
partnerships
2002–22 I.R.B.1037June 3, 2002

.02Inapplicability
(1)Under examination
(2)Before an area office
(3)Before a federal court
(4)Partnerships and S corporations
(5)Prior change
.03Nonautomatic Changes
SECTION 5. DEFINITIONS
.01Taxpayer
.02Electing S Corporations
.03Required Taxable Year
.04Permitted Taxable Year
.05Natural Business Year
(1)Prior three years gross receipts
(2)Natural business year
(3)Special rules
.06Ownership Taxable Year
.07Grandfathered Fiscal Year
.08First Effective Year
.09Short Period
.10Field Office, Area Office, Director
.11Under Examination
(1)In general
(2)Partnerships and S corporations
subject to TEFRA
.12Issue Under Consideration
(1)During an examination
(2)Before an area office
(3)Before a federal court
.13Personal Service Corporation
SECTION 6. TERMS AND
CONDITIONS
.01In General
.02Short Period Tax Return
.03Subsequent Year Tax Returns
.04Record Keeping/Book Conformity
.05Changes in Natural Business Year
.06Changes in Ownership Taxable
Year
.0752–53-week Taxable Years
.08Creation of Net Operating Loss or
Capital Loss
.09Creation of General Business
Credits
SECTION 7. GENERAL
APPLICATION PROCEDURES
.01Approval
.02Filing Requirements
(1)Where to file
(2)When to file
(3)Label
(4)Signature requirements
(5)No user fee
(6)Additional information
.03Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court
(1)Taxpayers under examination
(2)Taxpayers before an area office
(3)Taxpayers before a federal court
SECTION 8. EFFECT OF APPROVAL
.01Audit Protection
(1)In general
(2)Exceptions
.02Subsequently Required Changes
(1)In general
(2)Retroactive change
SECTION 9. REVIEW OF
APPLICATION
.01Service Center Review
.02Review of Director
SECTION 10. EFFECTIVE DATE AND
TRANSITION RULE
.01Effective Date
.02Transition Rule
SECTION 11. EFFECT ON OTHER
DOCUMENTS
SECTION 12. PAPERWORK
REDUCTION ACT
DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure provides the
exclusive procedures for certain partner-
ships, S corporations, electing S corpora-
tions (as defined in section 5.02), and per-
sonal service corporations (PSCs) to
obtain automatic approval to adopt,
change, or retain their annual accounting
period under§442 of the Internal Rev-
enue Code and§1.442–1(b) of the
Income Tax Regulations. This revenue
procedure clarifies, modifies, amplifies,
and supersedes Rev. Proc. 87–32, 1987–2
C.B. 396. A partnership, S corporation,
electing S corporation, or PSC complying
with the applicable provisions of this rev-
enue procedure will be deemed to have
established a business purpose and
obtained the approval of the Commis-
sioner of the Internal Revenue Service to
adopt, change, or retain its annual
accounting period under§442 and the
regulations thereunder.
SECTION 2. BACKGROUND
.01Taxable Year Defined.
(1)In general. Section 441(b) and
§1.441–1(b)(1) provide that the term
“taxable year”generally means the tax-
payer’s annual accounting period, if it is
a calendar year or fiscal year, or, if appli-
cable, the taxpayer’s required taxable
year.
(2)Annual accounting period. Sec-
tion 441(c) and§1.441–1(b)(3) provide
that the term“annual accounting period”
means the annual period (calendar year or
fiscal year) on the basis of which the tax-
payer regularly computes its income in
keeping its books.
(3)Required taxable year.
(a)In general. Section 1.441–
1(b)(2) provides that certain taxpayers
must use the particular taxable year that is
required under the Code and the regula-
tions thereunder. For example, as
described below, a partnership, S corpora-
tion, or PSC has a required taxable year
that generally conforms to the taxable
year of its owners. H.R. Rep. No. 99–841
(Conf. Rep.), 99th Cong., 2d Sess.,
II–318 (1986), 1986–3 (Vol. 4) C.B. 319.
Exceptions are provided for certain tax-
payers, including a partnership, S corpo-
ration, or PSC, that make an election
under§444, elect to use a 52–53-week
taxable year that ends with reference to
its required taxable year or a taxable year
elected under§444, or establish a busi-
ness purpose for having a different tax-
able year and obtain approval under
§442.
(b)Partnerships. Section 706(b)
and§1.706–1(b)(2) generally provide
that a partnership’s taxable year must be
its required taxable year. However, a part-
nership may have a taxable year other
than its required taxable year if it makes
an election under§444, elects to use a
52–53-week taxable year that ends with
reference to its required taxable year or a
taxable year elected under§444, or
establishes a business purpose for having
a different taxable year and obtains the
approval of the Commissioner under
§442. The required taxable year for a
partnership is:
June 3, 200210382002–22 I.R.B.

(i) the taxable year of one or
more of its partners who have an aggre-
gate interest in partnership profits and
capital of greater than 50 percent;
(ii) if there is no taxable year
described in clause (i), the taxable year of
all the principal partners of the partner-
ship (i.e., all the partners having an inter-
est of 5 percent or more in partnership
profits or capital); or
(iii) if there is no taxable year
described in clause (i) or (ii), the taxable
year that results in the least aggregate
deferral of income to the partners.
(c)S corporations. Section 1378
and§1.1378–1(a) provide that the tax-
able year of an S corporation must be a
permitted year. The term“permitted year”
means (1) the required taxable year (i.e.,
a taxable year ending on December 31),
(2) a taxable year elected under§444, (3)
a52–53-week taxable year ending with
reference to the required taxable year or a
taxable year elected under§444, or (4)
any other accounting period for which the
corporation establishes a business pur-
pose to the satisfaction of the Commis-
sioner.
(d)PSCs. Section 441(i)(1) and
§1.441–3 provide that the taxable year of
a PSC must be the calendar year unless
the PSC makes an election under§444,
elects to use a 52–53-week taxable year
that ends with reference to the calendar
year or a taxable year elected under
§444, or establishes, to the satisfaction of
the Commissioner, a business purpose for
having a different period for its taxable
year.
.02Adoption of a Taxable Year.A
newly-formed partnership, S corporation,
or PSC may adopt its required taxable
year, a taxable year elected under§444,
ora52–53-week taxable year ending with
reference to its required taxable year or a
taxable year elected under§444 without
the approval of the Commissioner pursu-
ant to§441. If, however, a partnership, S
corporation, or PSC wants to adopt any
other taxable year, it must establish a
business purpose and obtain approval
under§442.See§1.441–1(c).
.03Change in Taxable Year.
(1)In general. Section 1.442–1(a)
generally provides that a taxpayer that
wants to change its annual accounting
period and use a new taxable year must
obtain the approval of the Commissioner.
(2)Annualization of short period
return. Section 443(b) and§1.443–
1(b)(1)(i) provide that if a return is made
for a short period resulting from a change
of an annual accounting period, the tax-
able income for the short period must be
placed on an annual basis by multiplying
the income by 12 and dividing the result
by the number of months in the short
period. Unless§443(b)(2) and§1.443–
1(b)(2) apply, the tax for the short period
generally is the same part of the tax com-
puted on an annual basis as the number of
months in the short period is of 12
months. But see§§1.706–1(b)(8)(i)(B)
and 1.1378–1(c)(2) for exceptions to this
general rule for partnerships and S corpo-
rations, respectively.
(3)No retroactive change in annual
accounting period. Unless specifically
authorized by the Commissioner, a tax-
payer may not request, or otherwise
make, a retroactive change in annual
accounting period, regardless of whether
the change is to a required taxable year.
.04Retention of a Taxable Year. In cer-
tain cases, a partnership, S corporation,
electing S corporation, or PSC will be
required to change its taxable year unless
it establishes a business purpose and
obtains the approval of the Commissioner
under§442, or makes an election under
§444, to retain its current taxable year.
See§1.441–1(d). For example, a corpo-
ration on a June 30 fiscal year that either
becomes a PSC or elects to be an S cor-
poration, and as a result is required to use
the calendar year, must obtain the
approval of the Commissioner to retain its
current fiscal year. Similarly, a partner-
ship using a taxable year that corresponds
to its required taxable year generally must
obtain the approval of the Commissioner
to retain that taxable year if its required
taxable year changes as a result of a
change in ownership.But see§706
(b)(4)(B). However, a partnership that has
previously established a business purpose
to the satisfaction of the Commissioner to
use a particular fiscal year is not required
to obtain the approval of the Commis-
sioner to retain such fiscal year if its
required taxable year changes.
.05Approval of an Adoption, Change,
or Retention. Section 1.442–1(b) provides
that in order to secure the approval of the
Commissioner to adopt, change, or retain
an annual accounting period, a taxpayer
must file an application, generally on
Form 1128,Application to Adopt,
Change, or Retain a Tax Year, with the
Commissioner within such time and in
such manner as is provided in administra-
tive procedures published by the Com-
missioner. In general, an adoption,
change, or retention in annual accounting
period will be approved where the tax-
payer establishes a business purpose for
the requested annual accounting period
and agrees to the Commissioner’s pre-
scribed terms, conditions, and adjust-
ments for effecting the adoption, change,
or retention.
.06Business Purpose.
(1)Sufficient business purposes.
Section 1.442–1(b)(2) provides that gen-
erally the requirement of a business pur-
pose will be satisfied, and adjustments to
neutralize any tax consequences will not
be required, if the requested annual
accounting period coincides with the tax-
payer’s required taxable year, ownership
taxable year, or natural business year.
Section 1.442–1(b)(2) also provides that,
in the case of a partnership, S corpora-
tion, electing S corporation, or PSC,
deferral of income to partners, sharehold-
ers, or employee-owners, will not be
treated as a business purpose.
(2)Natural business year. A tax-
payer is deemed to have established a
natural business year if it satisfies the
“25-percent gross receipts test.”SeeRev.
Proc. 83–25, 1983–1 C.B. 689, super-
seded by Rev. Proc. 87–32. The Confer-
ence Report to the Tax Reform Act of
1986 states that the Secretary may pre-
scribe other tests in addition to the
25-percent gross receipts test to be used
to establish the existence of a business
purpose if, in the discretion of the Secre-
tary, such tests are desirable and expedi-
ent towards the efficient administration of
the tax laws.SeeH.R. Rep. No. 99–841
(Conf. Rep.), 99th Cong., 2d Sess.,
II–318 (1986), 1986–3 (Vol. 4) C.B. 319.
.07Section 444 Elections. A partner-
ship, S corporation, electing S corpora-
tion, or PSC generally can elect under
§444 to use a taxable year other than its
required taxable year, but only if the
deferral period of the taxable year elected
is not longer than the shorter of 3 months
or the deferral period of the taxable year
being changed. A partnership and an S
corporation with a§444 election must
2002–22 I.R.B.1039June 3, 2002

make required payments under§7519
that approximate the amount of deferral
benefit and a PSC with a§444 election is
subject to the minimum distribution
requirements of§280H. A taxpayer may
automatically adopt, change to, or retain a
taxable year permitted under§444 by fil-
ing a Form 8716,Election to Have a Tax-
able Year Other Than a Required Taxable
Year.A taxpayer that wants to terminate
its§444 election must follow the auto-
matic procedures under§1.444–1T(a)(5)
to change to its required taxable year or
establish a business purpose for using a
different taxable year pursuant to§442,
the regulations thereunder, and Rev. Proc.
2002–39, 2002–22 I.R.B. 1046, or this
revenue procedure (whichever is appli-
cable).
SECTION 3. SIGNIFICANT CHANGES
Significant changes to Rev. Proc.
87–32 made by this revenue procedure
include:
.01 Section 4.01(1) of this revenue
procedure clarifies that a partnership, S
corporation, electing S corporation, or
PSC may change automatically to its
required taxable year;
.02 Section 4.01(2) of this revenue
procedure allows a partnership, S corpo-
ration, electing S corporation, or PSC to
change automatically to a natural busi-
ness year that satisfies the 25-percent
gross receipts test, regardless of whether
such year results in more deferral of
income than its present taxable year;
.03 Sections 4.01(1), (2), and (3) of
this revenue procedure allow, in appropri-
ate circumstances, a partnership, S corpo-
ration, electing S corporation, or PSC to
adopt, change to, or retain a 52–53-week
taxable year ending with reference to the
required taxable year, natural business
year, or ownership taxable year;
.04 Section 4.01(4) of this revenue
procedure allows any partnership, S cor-
poration, electing S corporation, or PSC
to automatically change from a 52–53-
week taxable year to a non–52–53-week
taxable year that ends with reference to
the same calendar month, and vice versa;
.05 Section 4.01(5) of this revenue
procedure allows a partnership that would
be required to change its taxable year
because of a minor percentage change in
ownership to retain its current taxable
year for one year, subject to certain cir-
cumstances;
.06 Section 4 of this revenue procedure
allows a PSC to automatically change its
taxable year even if the PSC makes an S
corporation election for the taxable year
immediately following the short period;
.07 Sections 4.02(1)-(4) of this rev-
enue procedure generally prevent a part-
nership, S corporation, electing S corpo-
ration, or PSC from using this revenue
procedure to change its annual accounting
period if the taxpayer is under examina-
tion and does not obtain consent from the
appropriate director, or is before an area
office or before a federal court and its
annual accounting period is an issue
under consideration;
.08 Section 4.02(5) of this revenue
procedure reduces the period of time
required between a prior accounting
period change and a change effected
under this revenue procedure from 6 cal-
endar years to 48 months, and provides
that a change to a required or ownership
taxable year, and a change to (or from) a
52–53-week taxable year from (or to) a
non-52–53-week taxable year ending with
reference to the same calendar month,
will not be considered changes within the
most recent 48-month period;
.09 Section 5.06 of this revenue proce-
dure has been expanded to disregard the
interests of certain tax-exempt entities for
purposes of determining the ownership
taxable year of an S corporation or elect-
ing S corporation, unless the S corpora-
tion or electing S corporation is wholly-
owned by such tax-exempt entities;
.10 Section 6.04 of this revenue proce-
dure adds a term and condition requiring
the taxpayer to compute its income and
keep its books and records (including
financial statements) on the basis of the
requested taxable year, except in certain
circumstances;
.11 Section 6.08 of this revenue proce-
dure adds a term and condition to prevent
the carryback of certain capital losses
generated in the short period;
.12 Section 7.02(2) of this revenue
procedure extends the filing requirements
for filing a Form 1128 to the due date of
the taxpayer’s federal income tax return
(including extensions) for the first effec-
tive year; and
.13 Section 8.01 provides audit protec-
tion for partnerships, S corporations,
electing S corporations, or PSCs that
change their annual accounting period
under this revenue procedure.
SECTION 4. SCOPE
.01Applicability. Except as provided
in section 4.02, this revenue procedure,
which is the exclusive procedure for tax-
payers within its scope to secure the
Commissioner’s approval, applies to:
(1)Required taxable year. A part-
nership, S corporation, electing S corpo-
ration, or PSC that wants to change to its
required taxable year (as defined in sec-
tion 5.03 of this revenue procedure), or to
a52–53-week taxable year ending with
reference to such taxable year;
(2)Natural business year. A part-
nership, S corporation, electing S corpo-
ration, or PSC (other than a member of a
tiered structure as defined in§444 and
§1.444–2T) that wants to change to or
retain a natural business year that satisfies
the 25-percent gross receipts test
described in section 5.05 of this revenue
procedure, or to a 52–53-week taxable
year ending with reference to such tax-
able year;
(3)Ownership taxable year.AnS
corporation or electing S corporation that
wants to adopt, change to, or retain its
ownership taxable year (as defined in sec-
tion 5.06 of this revenue procedure), or a
52–53-week taxable year ending with ref-
erence to such taxable year;
(4)Certain 52–53-week taxable
years.A partnership, S corporation,
electing S corporation, or PSC that wants
to change from a 52–53-week taxable
year that references a particular calendar
month to a non–52–53-week taxable year
that ends on the last day of the same cal-
endar month, and vice versa; and
(5)Certain changes in ownership of
partnerships. A partnership that is
required to change its taxable year under
§706(b)(1)(B) because of a change in its
ownership may continue to use its current
taxable year for a period of one taxable
year, provided that:
(A) the change in ownership is
less than 10 percent of all partners’aggre-
gate interests in partnership profits and
capital; and
(B) it is reasonably foreseeable
that, at the end of one taxable year, the
June 3, 200210402002–22 I.R.B.

change in ownership will be reversed. If,
at the end of one taxable year, the partner-
ship cannot meet either section 4.01(1) or
(3) of this revenue procedure for its cur-
rent taxable year, then it must change to
its required or permitted taxable year
under section 4.01(1) of this revenue pro-
cedure.
.02Inapplicability. This revenue pro-
cedure does not apply to:
(1)Under examination. A change or
retention in annual accounting period if
the partnership, S corporation, electing S
corporation, or PSC is under examination,
unless it obtains consent of the appropri-
ate director as provided in section 7.03(1)
of this revenue procedure;
(2)Before an area office. A change
or retention in annual accounting period if
the partnership, S corporation, electing S
corporation, or PSC is before an area
office with respect to any income tax
issue and its annual accounting period is
an issue under consideration by the area
office;
(3)Before a federal court. A change
or retention in annual accounting period if
the partnership, S corporation, electing S
corporation, or PSC is before a federal
court with respect to any income tax issue
and its annual accounting period is an
issue under consideration by the federal
court;
(4)Partnerships and S corpora-
tions. A change or retention in annual
accounting period by a partnership or S
corporation if, on the date the entity
would otherwise file its application with
the Service Center, the entity’s annual
accounting period is an issue under con-
sideration in the examination of a part-
ner’s or shareholder’s federal income tax
return or an issue under consideration by
an area office or by a federal court with
respect to a partner’s or shareholder’s
federal income tax return; or
(5)Prior change. A change to, or
retention of, a natural business year as
described in section 4.01(2) of this rev-
enue procedure if the partnership, S cor-
poration, electing S corporation, or PSC
has changed its annual accounting period
at any time within the most recent
48-month period ending with the last
month of the requested taxable year. For
this purpose, the following changes are
not considered prior changes in annual
accounting period:
(a) a change to a required taxable
year or ownership taxable year;
(b) a change from a 52–53-week
taxable year to a non-52–53-week taxable
year that ends with reference to the same
calendar month, and vice versa; or
(c) a change in accounting period
by an S corporation, electing S corpora-
tion, or PSC, in order to comply with the
common taxable year requirements of
§§1.1502–75(d)(3)(v) and 1.1502–
76(a)(1).
.03Nonautomatic Changes. Any part-
nership, S corporation, electing S corpo-
ration, or PSC that wants to adopt, change
to, or retain an annual accounting period
that cannot do so automatically under this
revenue procedure (because the requested
taxable year is not described in section
4.01, or because of a prior change as
described in section 4.02(5)) or pursuant
to a provision in the Code, regulations, or
other published administrative proce-
dures, must obtain the approval of the
Commissioner.See§1.442–1(b) and Rev.
Proc. 2002–39 for rules relating to nonau-
tomatic changes of annual accounting
periods by partnerships, S corporations,
electing S corporations, and PSCs.
SECTION 5. DEFINITIONS
The following definitions apply solely
for purposes of this revenue procedure:
.01Taxpayer. The term“taxpayer”has
the same meaning as the term“person”as
defined in§7701(a)(1) (e.g., an indi-
vidual, trust, estate, partnership, associa-
tion, or corporation) rather than the mean-
ing of the term“taxpayer”as defined in
§7701(a)(14) (any person subject to tax).
.02Electing S Corporations.“Electing
S corporations”are corporations attempt-
ing to make an S election for the short
period described in section 5.09 of this
revenue procedure. See Rev. Proc. 2002–
37, 2002–22 I.R.B. 1030, superseding
Rev. Proc. 2000–11, 2000–3 I.R.B. 309,
for procedures for automatic approval to
change an annual accounting period by
corporations attempting to make an S
election for the taxable year immediately
following the short period.
.03Required Taxable Year. The
“required taxable year”is the taxable year
determined under§706(b) in the case of
a partnership,§1378 in the case of an S
corporation or an electing S corporation,
or§441(i) in the case of a PSC, without
taking into account any taxable year that
is allowable by reason of a business pur-
pose (including a grandfathered fiscal
year) or a§444 election.
.04Permitted Taxable Year.A“permit-
ted taxable year”is the required taxable
year; a natural business year; the owner-
ship taxable year; a taxable year elected
under§444; a 52–53-week taxable year
that references the required taxable year,
natural business year, ownership taxable
year, or a taxable year elected under
§444; or any other taxable year for which
the taxpayer establishes a business pur-
pose to the satisfaction of the Commis-
sioner.
.05Natural Business Year. A partner-
ship, S corporation, electing S corpora-
tion, or PSC establishes a“natural busi-
ness year”under this revenue procedure
by satisfying the following“25-percent
gross receipts test”:
(1)Prior three years gross receipts.
(a) Gross receipts from sales and
services for the most recent 12-month
period that ends with the last month of
the requested annual accounting period
are totaled and then divided into the
amount of gross receipts from sales and
services for the last 2 months of this
12-month period.
(b) The same computation as in
(1)(a) above is made for the two preced-
ing 12-month periods ending with the last
month of the requested annual accounting
period.
(2)Natural business year.
(a) Except as provided in (b)
below, if each of the three results
described in (1) equals or exceeds 25 per-
cent, then the requested annual account-
ing period is deemed to be the taxpayer’s
natural business year.
(b) The taxpayer must determine
whether any annual accounting period
other than the requested annual account-
ing period also meets the 25-percent test
described in (2)(a). If one or more other
annual accounting periods produce higher
averages of the three percentages
(rounded to 1/100 of a percent) described
in (1) than the requested annual account-
ing period, then the requested annual
accounting period will not qualify as the
taxpayer’s natural business year.
(3)Special rules. (a) To apply the
25-percent gross receipts test for any par-
ticular year, the taxpayer must compute
2002–22 I.R.B.1041June 3, 2002

its gross receipts under the method of
accounting used to prepare its federal
income tax returns for such taxable year.
(b) If a taxpayer has a predecessor
organization and is continuing the same
business as its predecessor, the taxpayer
must use the gross receipts of its prede-
cessor for purposes of computing the
25-percent gross receipts test.
(c) If the taxpayer (including any
predecessor organization) does not have a
47-month period of gross receipts (36-
month period for requested taxable year
plus additional 11-month period for com-
paring requested taxable year with other
potential taxable years), then it cannot
establish a natural business year under
this revenue procedure.
(d) If the requested taxable year is
a52–53-week taxable year, the calendar
month ending nearest to the last day of
the 52–53-week taxable year is treated as
the last month of the requested taxable
year for purposes of computing the
25-percent gross receipts test.
.06Ownership Taxable Year. For an
S corporation or electing S corporation,
an“ownership taxable year”is the taxable
year (if any) that, as of the first day of the
first effective year, constitutes the taxable
year of one or more shareholders (includ-
ing any shareholder that concurrently
changes to such taxable year) holding
more than 50-percent of the corporation’s
issued and outstanding shares of stock.
For this purpose, under principles similar
to§1.706–3T for determining the taxable
year of a partnership, a shareholder that is
tax-exempt under§501(a) is disregarded
if such shareholder is not subject to tax
on any income attributable to the S corpo-
ration. Tax-exempt shareholders are not
disregarded, however, if the S corporation
is wholly-owned by such tax-exempt enti-
ties. A shareholder in an S corporation or
electing S corporation that wants to con-
currently change its taxable year must fol-
low the instructions generally applicable
to taxpayers changing their taxable years
contained in§1.442–1(b), Rev. Proc.
2002–39, or any other applicable admin-
istrative procedure published by the Com-
missioner.
.07Grandfathered Fiscal Year.A
grandfathered fiscal year is a fiscal year
(other than a year that resulted in a three-
month or less deferral of income) that a
partnership or an S corporation received
permission to use on or after July 1, 1974,
by a letter ruling (i.e., not by automatic
approval).
.08First Effective Year. The first
effective year is the first taxable year for
which an adoption, change, or retention in
annual accounting period is effective.
Thus, in the case of a change, the first
effective year is the short period required
to effect the change. The first effective
year is also the first taxable year for com-
plying with all the terms and conditions
set forth in this revenue procedure neces-
sary to effect the adoption, change, or
retention in annual accounting period.
.09Short Period. In the case of a
change in annual accounting period, a
taxpayer’s short period is the period
beginning with the day following the
close of the old taxable year and ending
with the day preceding the first day of the
new taxable year.
.10Field Office, Area Office, Director.
The terms“field office,”“area office,”
and“director”have the same meaning as
those terms have in Rev. Proc. 2002–1,
2002–1 I.R.B. 1 (or any successor).
.11Under Examination.
(1)In general.
(a) Except as provided in section
5.11(2) of this revenue procedure, an
examination of a taxpayer with respect to
a federal income tax return begins on the
date the taxpayer is contacted in any man-
ner by a representative of the Service for
the purpose of scheduling any type of
examination of the return. An examina-
tion ends:
(i) in a case in which the Service
accepts the return as filed, on the date of
the“no change”letter sent to the tax-
payer;
(ii) in a fully agreed case, on the
earliest of the date the taxpayer executes
a waiver of restrictions on assessment or
acceptance of overassessment (for
example, Form 870, 4549, or 4605), the
date the taxpayer makes a payment of tax
that equals or exceeds the proposed defi-
ciency, or the date of the“closing”letter
(for example, Letter 891(IN) or 987(DO))
sent to the taxpayer; or
(iii) in an unagreed or a partially
agreed case, on the earliest of the date the
taxpayer (or its representative) is notified
by an area officer that the case has been
referred to an area office from a field
office, the date the taxpayer files a peti-
tion in the Tax Court, the date on which
the period for filing a petition with the
Tax Court expires, or the date of the
notice of claim disallowance.
(b) An examination does not end
as a result of the early referral of an issue
to an area office under the provisions of
Rev. Proc. 96–9, 1996–1 C.B. 575, or
Rev. Proc. 99–28, 1999–2 C.B. 109.
(c) An examination resumes on
the date the taxpayer (or its representa-
tive) is notified by an appeals officer (or
otherwise) that the case has been referred
to a field office for reconsideration.
(2)Partnerships and S corporations
subject to TEFRA. For an entity (includ-
ing a limited liability company) treated as
a partnership or S corporation that is sub-
ject to the TEFRA unified audit and liti-
gation provisions (note that an S corpora-
tion is not subject to the TEFRA unified
audit and litigation provisions for taxable
years beginning after December 31, 1996,
seeSmall Business Job Protection Act of
1996, Pub. L. No. 104–188,§1317(a),
110 Stat. 1755, 1787 (1996)), an exami-
nation begins on the date that the notice
of the beginning of an administrative pro-
ceeding is sent or personally delivered to
the Tax Matters Partner/Tax Matters Per-
son (TMP). An examination ends:
(a) in a case in which the Service
accepts the partnership or S corporation
return as filed, on the date of the“no
adjustments”letter or the“no change”
notice of final administrative adjustment
sent to the TMP;
(b) in a case in which no formal
notice is given, on the date on which the
period under§6229 expires;
(c) in a fully agreed case, when all
the partners or shareholders execute a
Form 870–P, 870–L, 870–S, or any varia-
tion thereof; or
(d) in an unagreed or a partially
agreed case, on the earliest of the date the
TMP (or its representative) is notified by
an appeals officer that the case has been
referred to an area office from a field
office, the date the TMP (or a partner,
member, or shareholder) requests judicial
review, or the date on which the period
for requesting judicial review expires.
.12Issue Under Consideration.
(1)During an examination. A tax-
payer’s annual accounting period is an
issue under consideration for the taxable
years under examination if the taxpayer
June 3, 200210422002–22 I.R.B.

receives written notification (for example,
by examination plan, information docu-
ment request (IDR), or notification of
proposed adjustments or income tax
examination changes) from the examining
agent(s) specifically citing the taxpayer’s
annual accounting period as an issue
under consideration. For example, a tax-
payer’s annual accounting period is an
issue under consideration as a result of an
examination plan that identifies the pro-
priety of the taxpayer’s annual accounting
period as a matter to be examined. The
question of whether the taxpayer’s annual
accounting period is an issue under con-
sideration may be referred to the national
office as a request for technical advice
under the provisions of Rev. Proc.
2002–2, 2002–1 I.R.B. 82 (or any succes-
sor).
(2)Before an area office. A taxpay-
er’s annual accounting period is an issue
under consideration for the taxable years
before an area office if the taxpayer’s
annual accounting period is included as
an item of adjustment in the examination
report referred to the area office or is spe-
cifically identified in writing to the tax-
payer by the area office.
(3)Before a federal court. A tax-
payer’s annual accounting period is an
issue under consideration for the taxable
years before a federal court if the taxpay-
er’s annual accounting period is an item
included in the statutory notice of defi-
ciency, the notice of claim disallowance,
the notice of final administrative adjust-
ment, the pleadings (for example, the
petition, complaint, or answer) or amend-
ments thereto, or is specifically identified
in writing to the taxpayer by the govern-
ment counsel.
.13Personal Service Corporation. For
purposes of this revenue procedure, a
PSC does not include a corporation that
has a required taxable year under a provi-
sion of the Code other than§441(i) (e.g.,
a specified foreign corporation as defined
in§898(b)(1)).
SECTION 6. TERMS AND
CONDITIONS
.01In General. An adoption, change,
or retention in annual accounting period
filed under this revenue procedure must
be made pursuant to the terms and condi-
tions provided in this revenue procedure.
.02Short Period Tax Return. The tax-
payer generally must file a federal income
tax return for the short period required to
effect a change by the due date of that
return, including extensions, in accor-
dance with§1.443–1(a). In the case of a
PSC, the corporation’s taxable income for
the short period must be annualized and
the tax must be computed in accordance
with the provisions of§443(b) and
§1.443–1(b). However, for changes to (or
from) a 52–53-week taxable year refer-
encing the same month as the current (or
requested) taxable year, see special rules
in§1.441–2.
.03Subsequent Year Tax Returns.
Returns for subsequent taxable years gen-
erally must be made on the basis of a full
12 months (or on a 52–53-week basis)
ending on the last day of the requested
taxable year, unless the taxpayer secures
the approval of the Commissioner to
change that taxable year.
.04Record Keeping/Book Conformity.
The books of the taxpayer must be closed
as of the last day of the first effective
year. Thereafter, the taxpayer must com-
pute its income and keep its books and
records (including financial statements
and reports to creditors) on the basis of
the requested taxable year, except that
this requirement shall not apply (1) to
books and records maintained solely for
foreign law purposes (e.g., foreign tax
reporting purposes), or (2) if the
requested taxable year is either the tax-
payer’s required taxable year or owner-
ship taxable year.
.05Changes in Natural Business Year.
If a partnership, S corporation, electing S
corporation, or PSC changes to or retains
a natural business year under this revenue
procedure and that year no longer quali-
fies as a permitted taxable year, the tax-
payer is using an impermissible annual
accounting period and should change to a
permitted taxable year. Taxpayers qualify-
ing under section 4 of this revenue proce-
dure may request automatic approval for
the change under the provisions of this
revenue procedure. Other taxpayers must
request approval under Rev. Proc. 2002–
39.
.06Changes in Ownership Taxable
Year. An S corporation or electing S cor-
poration that adopts, changes to, or
retains an ownership taxable year under
this revenue procedure must change to a
permitted taxable year, or request
approval to retain its current taxable year,
if, as of the first day of any taxable year,
its ownership taxable year changes. S cor-
porations qualifying under section 4 of
this revenue procedure may request auto-
matic approval for the change or retention
under the provisions of this revenue pro-
cedure. Other taxpayers must request
approval under Rev. Proc. 2002–39.
.0752–53-week Taxable Years.If
applicable, the taxpayer must comply
with§1.441–2(e) (relating to the timing
of taking items into account in those
cases where the taxable year of a pass-
through entity or PSC ends with reference
to the same calendar month as one or
more of its partners, shareholders, or
employee-owners).
.08Creation of Net Operating Loss or
Capital Loss. In the case of a PSC chang-
ing to a natural business year, if the PSC
generates a net operating loss (NOL) or
capital loss (CL) in the short period
required to effect the change in annual
accounting period, the PSC may not carry
the NOL or CL back, but must carry it
over in accordance with the provisions of
§§172 and 1212, respectively, beginning
with the first taxable year after the short
period. However, except as provided in
§280H and the regulations thereunder,
the short period NOL or CL is carried
back or carried over in accordance with
§§172 or 1212, respectively, if it is either
(a) $50,000 or less, or (b) results from a
short period of 9 months or longer and is
less than the NOL or CL for a full
12-month period beginning with the first
day of the short period.
.09Creation of General Business
Credits. In the case of a PSC changing to
a natural business year, if there is an
unused general business credit or any
other unused credit generated in the short
period, the PSC must carry that unused
credit forward. An unused credit from the
short period may not be carried back.
SECTION 7. GENERAL
APPLICATION PROCEDURES
.01Approval. Approval is hereby
granted to any partnership, S corporation,
electing S corporation, or PSC within the
scope of this revenue procedure to adopt,
change, or retain its annual accounting
period, provided the taxpayer complies
with all the applicable provisions of this
2002–22 I.R.B.1043June 3, 2002

revenue procedure. Approval is granted
beginning with the first effective year. A
partnership, S corporation, electing S cor-
poration, or PSC granted approval under
this revenue procedure to adopt, change
to, or retain an annual accounting period
other than its required year is deemed to
have established a business purpose for
the adoption, change, or retention to the
satisfaction of the Commissioner.
.02Filing Requirements.
(1)Where to file. A taxpayer within
the scope of this revenue procedure that
wants to adopt, change, or retain its
annual accounting period under this rev-
enue procedure must complete and file an
application (i.e., a current Form 1128 or
Form 2553,Election by a Small Business
Corporation, in the case of an electing S
corporation) with the Director, Internal
Revenue Service Center, Attention:
ENTITY CONTROL, where the taxpayer
files its federal income tax return. No
copies of Form 1128 (or Form 2553) are
required to be sent to the national office.
The taxpayer also must attach a copy of
the Form 1128 (or Form 2553) to the fed-
eral income tax return filed for the first
effective year.
(2)When to file. The Form 1128
must be filed no earlier than the day fol-
lowing the end of the first effective year
and no later than the due date (including
extensions) for filing the federal income
tax return for the first effective year. For
electing S corporations, the Form 2553
must be filed when the election to be an
Scorporationisfiledpursuantto
§1362(b) and§1.1362–6. Generally,
such election must be filed at any time
during (a) the taxable year that immedi-
ately precedes the taxable year for which
the election is to be effective, or (b) the
taxable year for which the election is to
be effective, provided the election is
made before the 16th day of the third
month of the taxable year.
(3)Label. In order to assist in the
processing of the adoption, change, or
retention in annual accounting period,
taxpayers should write at the top of page
1 of the Form 1128 (Form 2553):“FILED
UNDER REV. PROC. 2002–38.”
(4)Signature requirements.Inthe
case of a partnership, the Form 1128 must
be signed on behalf of the partnership by
a general partner. In the case of a limited
liability company that elects to be treated
as a partnership, the Form 1128 must be
signed by a member-manager who has
personal knowledge of the facts. In all
other cases, the Form 1128 (Form 2553)
must be signed by an authorized corpo-
rate officer. If an agent is authorized to
represent the taxpayer before the Service,
to receive the original or a copy of corre-
spondence concerning the application, or
to perform any other act(s) regarding the
application on behalf of the taxpayer, a
power of attorney reflecting such authori-
zation(s) should be attached to the appli-
cation. A taxpayer’s representative with-
out a power of attorney to represent the
taxpayer will not be given any informa-
tion about the application.
(5)No user fee. A user fee is not
required for applications filed under this
revenue procedure and, except as pro-
vided in section 9.01 of this revenue pro-
cedure, the receipt of an application filed
under this revenue procedure may not be
acknowledged.
(6)Additional information.Inthe
case of a taxpayer changing to a natural
business year that satisfies the 25-percent
gross receipts test described in section
5.05 of this revenue procedure, the tax-
payer must supply the gross receipts for
the most recent 47 months for itself (or
any predecessor) in compliance with the
instructions to Form 1128 (or Form
2553).
.03Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court.
(1)Taxpayers under examination.
(a) A taxpayer under examination
may request approval to change or retain
its annual accounting period under this
revenue procedure only if the appropriate
director consents to the change or reten-
tion. The director will consent to the
change or retention unless, in the opinion
of the director, the taxpayer’s annual
accounting period ordinarily would be
included as an item of adjustment in the
year(s) for which the taxpayer is under
examination. For example, the director
will consent to a change where the tax-
payer is using a permissible annual
accounting period. The director also will
consent to a change from an impermis-
sible annual accounting period where the
period became impermissible (e.g., due to
a change in ownership or a change in the
taxpayer’s business) subsequent to the
years under examination. The question of
whether the taxpayer’s annual accounting
period from which the taxpayer is chang-
ing is permissible or became impermis-
sible subsequent to the years under
examination may be referred to the
national office as a request for technical
advice under the provisions of Rev. Proc.
2002–2.
(b) A taxpayer changing or retain-
ing an annual accounting period under
this revenue procedure with the consent
of the appropriate director must attach to
the application a statement from the
director consenting to the change or
retention. The taxpayer must provide a
copy of the application to the director at
the same time it files the application with
the Service Center. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s).
(2)Taxpayers before an area office.
A taxpayer that is before an area office
must attach to the application a separate
statement signed by the taxpayer certify-
ing that, to the best of the taxpayer’s
knowledge, the taxpayer’s annual
accounting period is not an issue under
consideration by the area office. The tax-
payer must provide a copy of the applica-
tion to the appeals officer at the same
time it files the application with the Ser-
vice Center. The application must contain
the name and telephone number of the
appeals officer.
(3)Taxpayers before a federal
court. A taxpayer that is before a federal
court must attach to the application a
separate statement signed by the taxpayer
certifying that, to the best of the taxpay-
er’s knowledge, the taxpayer’s annual
accounting period is not an issue under
consideration by the federal court. The
taxpayer must provide a copy of the
application to the government counsel at
the same time it files the application with
the Service Center. The application must
contain the name and telephone number
of the government counsel.
SECTION 8. EFFECT OF APPROVAL
.01Audit Protection.
(1)In general. Except as provided
in section 8.01(2) of this revenue proce-
dure, a taxpayer that files an application
in compliance with all the applicable pro-
visions of this revenue procedure will not
be required by the Service to change its
June 3, 200210442002–22 I.R.B.

annual accounting period for a taxable
year prior to the first effective year.
(2)Exceptions. The Service may
change a taxpayer’s annual accounting
period for a prior taxable year if:
(a) the taxpayer fails to implement
the change;
(b) the taxpayer implements the
change but does not comply with all the
applicable provisions of this revenue pro-
cedure; or
(c) there was a misstatement or
omission of material facts.
.02Subsequently Required Changes.
(1)In general. A taxpayer that
adopts, changes, or retains its annual
accounting period pursuant to this rev-
enue procedure may be required to subse-
quently change its annual accounting
period for the following reasons:
(a) the enactment of legislation;
(b) a decision of the United States
Supreme Court;
(c) the issuance of temporary or
final regulations;
(d) the issuance of a revenue rul-
ing, revenue procedure, notice, or other
statement published in the Internal Rev-
enue Bulletin;
(e) the issuance of written notice
to the taxpayer that the change in annual
accounting period was not in compliance
with all the applicable provisions of this
revenue procedure or is not in accord
with the current view of the Service; or
(f) a change in the material facts
on which the approval was granted.
(2)Retroactive change. Except in
rare circumstances, if a taxpayer that
adopts, changes, or retains its annual
accounting period under this revenue pro-
cedure is subsequently required under
section 8.02(1) of this revenue procedure
to change that annual accounting period,
the required change will not be applied
retroactively, provided that:
(a) the taxpayer complied with the
applicable provisions of this revenue pro-
cedure;
(b) there has been no misstate-
ment or omission of material facts;
(c) there has been no change in
the material facts on which the approval
was based;
(d) there has been no change in
the applicable law; and
(e) the taxpayer to which the
approval was granted acted in good faith
in relying on the approval, and applying
the change retroactively would be to the
taxpayer’s detriment.
SECTION 9. REVIEW OF
APPLICATION
.01Service Center Review. A Service
Center may deny an adoption, change, or
retention of an annual accounting period
under this revenue procedure only if (1)
the Form 1128 (or Form 2553) is not filed
timely, or (2) the taxpayer fails to meet
the scope or any term and condition of
this revenue procedure. If the application
is denied, the Service Center will return
the application with an explanation for
the denial. In the case of a denial of an
accounting period request filed on Form
2553, the corporation will be required to
use the calendar year or, if applicable,
make a§444 election, if it chooses to be
an S corporation.
.02Review of Director. The appropri-
ate director may ascertain if the adoption,
change, or retention of annual accounting
period was made in compliance with all
the applicable provisions of this revenue
procedure. Taxpayers adopting, changing,
or retaining their annual accounting
period pursuant to this revenue procedure
without complying with all the provisions
(including the terms and conditions) of
this revenue procedure ordinarily will be
deemed to have initiated the adoption,
change, or retention of annual accounting
period without the approval of the Com-
missioner. Upon examination, a taxpayer
that has initiated an unauthorized adop-
tion, change, or retention of annual
accounting period may be denied the
adoption, change, or retention. For
example, the taxpayer may be required to
recompute its taxable income or loss in
accordance with its former (or required, if
applicable) taxable year.
SECTION 10. EFFECTIVE DATE AND
TRANSITION RULE
.01Effective Date. This revenue proce-
dure generally is effective for adoptions,
changes, or retentions of annual account-
ing periods for which the first effective
year ends on or after May 10, 2002. How-
ever, if the time period for filing Form
1128 (or Form 2553) with respect to a
taxable year set forth in section 7.02(2) of
this revenue procedure has not yet
expired, a taxpayer within the scope of
this revenue procedure may elect early
application of the revenue procedure by
providing the notification set forth in sec-
tion 7.02(3) on the top of page 1 of Form
1128 (or Form 2553) and by satisfying
the other procedural requirements of sec-
tion 7.
.02Transition Rule. If a taxpayer
within the scope of this revenue proce-
dure filed an application with the national
office and the application is pending with
the national office on May 10, 2002, the
taxpayer may obtain approval under this
revenue procedure. However, the national
office will process the application in
accordance with the authority under
which it was filed, unless by the later of
June 25, 2002, or the issuance of the let-
ter ruling granting or denying approval
for the adoption, change, or retention, the
taxpayer notifies the national office that it
wants to use this revenue procedure. If
the taxpayer timely notifies the national
office that it wants to use this revenue
procedure, the national office will require
the taxpayer to make appropriate modifi-
cations to the application to comply with
the applicable provisions of this revenue
procedure. In addition, any user fee that
was submitted with the application will
be refunded to the taxpayer.
SECTION 11. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 87–32 is clarified, modi-
fied, amplified, and superseded.
SECTION 12. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under control
number 1545–1786. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless the collection of infor-
mation displays a valid OMB control
number.
The collections of information in this
revenue procedure are found in sections 7
and 10. The information in section 7 is
required in order to determine whether
the taxpayer properly obtained automatic
2002–22 I.R.B.1045June 3, 2002

approval to adopt, change, or retain its
annual accounting period. The informa-
tion in section 10 is required in order to
allow a taxpayer to apply the provisions
of this revenue procedure to a pending
application. The likely respondents are
the following: partnerships, S corpora-
tions, electing S corporations, and PSCs.
The estimated total annual reporting
burden for the requirements contained in
section 7 of this revenue procedure is
reflected in the burden estimates for
Forms 1128 and 2553. The estimated total
annual reporting burden for the require-
ment contained in section 10 of this rev-
enue procedure is 50 hours: the estimated
annual burden per respondent is 30 min-
utes; the estimated number of respondents
is 100; and the estimated annual fre-
quency of response is once.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Michael F. Schmit and Roy
A. Hirschhorn of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). For further information regarding
this revenue procedure, contact Mr.
Schmit or Mr. Hirschhorn at (202) 622–
4960 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I,§§441, 442, 444, 706, 1378, 1502;
1.441–1, 1.441–3, 1.442–1, 1.706–1, 1.1378–1,
1.1502–76.)
Rev. Proc. 2002–39
CONTENTS
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
.01Taxable Year Defined
(1)In general
(2)Annual accounting period
(3)Required taxable year
.02Adoption of Taxable Year
.03Change in Taxable Year
(1)In general
(2)Annualization of short period
return
(3)No retroactive change in annual
accounting period
.04Retention of Taxable Year
.05Approval of an Adoption, Change,
or Retention
(1)In general
(2)Automatic approval
.06Business Purpose
(1)In general
(2)Sufficient business purposes
(3)Insufficient business purposes
.07Section 444 Elections
SECTION 3. SCOPE
.01Applicability
.02Inapplicability
(1)Automatic approval
(2)Under examination
(3)Before an area office
(4)Before a federal court
(5)Partnerships and S corporations
SECTION 4. DEFINITIONS
.01Taxpayer
.02Corporation
.03Pass-through Entity
.04Required Taxable Year
.05Permitted Taxable Year
.06First Effective Year
.07Short Period
.08Field Office, Area Office, Director
.09Under Examination
(1)In general
(2)Partnerships and S corporations
subject to TEFRA
.10Issue Under Consideration
(1)During an examination
(2)Before an area office
(3)Before a federal court
SECTION 5. BUSINESS PURPOSE
AND TERMS, CONDITIONS, AND
ADJUSTMENTS
.01In General
(1)Approval of requests
(2)Exceptions
.02Business Purpose
(1)Taxpayers that establish a busi-
ness purpose
(2)Taxpayers that are deemed to
have established a business pur-
pose
.03Natural Business Year
(1)Annual business cycle test
(2)Seasonal business test
(3)25–percent gross receipts test
.04General Terms and Conditions
(1)Short period tax return
(2)Subsequent year tax returns
(3)Record keeping/book conformity
(4)Changes in natural business
year
(5)52–53-week taxable years
(6)Creation of net operating loss
or capital loss
(7)Creation of general business
credits
(8)Concurrent change for related
entities
.05Additional Terms, Conditions, and
Adjustments
(1)Substantial distortion
(2)Deferral of substantial pass-
through income
(3)Special rule for certain pass-
through entities
(4)Use of expiring NOLs, CLs, and
credits
(5)Other terms, conditions, and
adjustments
.06Examples
SECTION 6. GENERAL APPLICATION
PROCEDURES
.01What to File
(1)Application
(2)Signature requirement
(3)Additional information regard-
ing prior applications
(4)Additional information for sec-
tion 5.03 (1) and (2)
(5)Additional information for sec-
tion 5.03 (3)
(6)Additional information for sec-
tion 5.04
(7)Additional information for sec-
tion 5.05
.02When to File
(1)In general
(2)Electing S corporations
.03Where to File
(1)In general
(2)Electing S corporations
(3)Exempt organizations
.04User Fee
.05Consolidated Groups—Separate
Forms 1128 Not Required
.06Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court
(1)Certain taxpayers under exami-
nation
June 3, 200210462002–22 I.R.B.

(2)Certain taxpayers before an
area office
(3)Certain taxpayers before a fed-
eral court
SECTION 7. PROCESSING OF APPLI-
CATION
.01Service Discretion
.02Applicability of Rev. Proc. 2002–1,
Rev. Proc. 2002–4, and Any Successor
Revenue Procedures
.03Incomplete Application - 21 Day
Rule
.04Conference in the National Office
.05Letter Ruling
.06Effect of Noncompliance
.07Effect on Other Offices of the Ser-
vice
SECTION 8. EFFECT OF APPROVAL
.01Audit Protection
(1)In general
(2)Exceptions
.02Subsequently Required Changes
(1)In general
(2)Retroactive change or modifica-
tion
SECTION 9. REVIEW BY DIRECTOR
.01In General
.02National Office Consideration
SECTION 10. EFFECTIVE DATE AND
TRANSITION RULE
.01In General
.02Transition Rule for Pending Appli-
cations
SECTION 11. EFFECT ON OTHER
DOCUMENTS
SECTION 12. PAPERWORK REDUC-
TION ACT
DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure provides the
general procedures under§442 of the
Internal Revenue Code and§1.442–1(b)
of the Income Tax Regulations for estab-
lishing a business purpose and obtaining
the approval of the Commissioner of
Internal Revenue to adopt, change, or
retain an annual accounting period for
federal income tax purposes. This rev-
enue procedure also describes the terms,
conditions, and adjustments that the Com-
missioner may deem necessary to effect
the adoption, change, or retention.
SECTION 2. BACKGROUND
.01Taxable Year Defined.
(1)In general. Section 441(b) and
§1.441–1(b)(1) provide that the term
“taxable year”generally means the tax-
payer’s annual accounting period, if it is a
calendar or fiscal year, or, if applicable,
the taxpayer’s required taxable year.
(2)Annual accounting period. Sec-
tion 441(c) and§1.441–1(b)(3) provide
that the term“annual accounting period”
means the annual period (calendar year or
fiscal year) on the basis of which the tax-
payer regularly computes its income in
keeping its books.
(3)Required taxable year. Section
1.441–1(b)(2) provides that certain tax-
payers must use the particular taxable
year that is required under the Code and
the regulations thereunder. For example, a
partnership, S corporation, or personal
service corporation (PSC) has a required
taxable year that generally conforms to
the taxable years of its partners, share-
holders, or employee-owners pursuant to
§§706(b), 1378, and 441(i), respectively.
Similarly, a specified foreign corporation
has a required taxable year that generally
represents the taxable year of its majority
U.S. shareholder pursuant to§898. How-
ever,§1.441–1(b)(2)(ii) describes excep-
tions under which certain taxpayers may
use a taxable year other than their
required taxable year. For example, a
partnership, S corporation, electing S cor-
poration, or PSC may have a taxable year
other than its required taxable year if it
makes an election under§444, elects to
usea52–53-week taxable year that refer-
ences its required taxable year or a tax-
able year elected under§444, or estab-
lishes a business purpose and obtains
approval under§442 for that taxable
year.See also§§706(b), 1378, and
441(i).
.02Adoption of Taxable Year. Gener-
ally, a taxpayer may adopt any taxable
year that satisfies§441 and the regula-
tions thereunder without the approval of
the Commissioner. However, a partner-
ship, electing S corporation, or PSC that
wants to adopt a taxable year other than
its required taxable year, a taxable year
elected under§444, or a 52–53-week
taxable year that references its required
taxable year or a taxable year elected
under§444 must establish a business
purpose and obtain approval under§442.
See§1.441–1(c).
.03Change in Taxable Year.
(1)In general. Section 1.442–
1(a)(1) generally provides that a taxpayer
that wants to change its annual account-
ing period and use a new taxable year
must obtain approval of the Commis-
sioner.
(2)Annualization of short period
return. Section 443(b) and§1.443–
1(b)(1)(i) provide that if a return is made
for a short period resulting from a change
of an annual accounting period, the tax-
able income for the short period must be
placed on an annual basis by multiplying
the income by 12 and dividing the result
by the number of months in the short
period. Unless§443(b)(2) and§1.443–
1(b)(2) apply, the tax for the short period
generally is the same part of the tax com-
puted on an annual basis as the number of
months in the short period is of 12
months. But see, for example,§§1.706–
1(b)(8)(i)(B), 1.852–3(e), 1.857–2(a)(4),
1.1378–1(c)(2), and 1.1502–76 for excep-
tions to this general rule for a partnership,
a regulated investment company (RIC), a
real estate investment trust (REIT), an S
corporation, and a subsidiary ceasing to
be a member of a consolidated group,
respectively.
(3)No retroactive change in annual
accounting period. Unless specifically
authorized by the Commissioner, a tax-
payer may not request, or otherwise
make, a retroactive change in annual
accounting period, regardless of whether
the change is to a required taxable year.
.04Retention of Taxable Year. In cer-
tain cases, a partnership, S corporation,
electing S corporation, or PSC will be
required to change its taxable year unless
it establishes a business purpose and
obtains the approval of the Commissioner
under§442, or makes an election under
§444, to retain its current taxable year.
See§1.441–1(d). For example, a corpo-
ration using a June 30 fiscal year that
either becomes a PSC or elects to be an S
corporation, and as a result is required to
use the calendar year, must obtain the
approval of the Commissioner to retain its
current fiscal year. Similarly, a partner-
ship using a taxable year that corresponds
2002–22 I.R.B.1047June 3, 2002

to its required taxable year generally must
obtain the approval of the Commissioner
to retain that taxable year if its required
taxableyearchangesasaresult
of a change in ownership.But see
§706(b)(4)(B). However, a partnership
that has previously established a business
purpose to the satisfaction of the Com-
missioner to use a particular fiscal year is
not required to obtain the approval of the
Commissioner to retain such fiscal year if
its required taxable year changes.
.05Approval of an Adoption, Change,
or Retention.
(1)In general. Section 1.442–1(b)
provides that in order to secure the
approval of the Commissioner to adopt,
change, or retain an annual accounting
period, a taxpayer must file an applica-
tion, generally on Form 1128,Application
to Adopt, Change, or Retain a Tax Year,
with the Commissioner within such time
and in such manner as is provided in
administrative procedures published by
the Commissioner. In general, an adop-
tion, change, or retention in annual
accounting period will be approved where
the taxpayer establishes a business pur-
pose for the requested annual accounting
period and agrees to the Commissioner’s
prescribed terms, conditions, and adjust-
ments for effecting the adoption, change,
or retention.
(2)Automatic approval. Under the
Code and regulations, certain taxpayers
are allowed to change their annual
accounting periods without approval or
with automatic approval (see,e.g.,
§§444, 859(b), and§1.442–1(c) and
(d)). In addition, the Service has issued
revenue procedures that enable certain
taxpayers to obtain automatic approval to
adopt, change, or retain their annual
accounting periods.See, for example,
Rev. Proc. 2002–37, 2002–22 I.R.B. 1030
(or any successor) for corporations; Rev.
Proc. 2002–38, 2002–22 I.R.B. 1037 (or
any successor) for partnerships, S corpo-
rations, electing S corporations, and
PSCs; and Rev. Proc. 66–50, 1966–2 C.B.
1260 (or any successor) for individuals.
.06Business Purpose.
(1)In general. Section 1.442–1(b)
provides that in determining whether a
taxpayer has established a business pur-
pose and which terms, conditions, and
adjustments will be required, consider-
ation will be given to all the facts and cir-
cumstances relating to the adoption,
change, or retention, including the tax
consequences resulting therefrom.See
alsoH.R. Rep. No. 99–841, 99th Cong.,
2d Sess., II–318, 1986–3 (Vol. 4) C.B.
319.
(2)Sufficient business purposes.
Section 1.442–1(b)(2) provides that gen-
erally the requirement of a business pur-
pose will be satisfied, and adjustments to
neutralize any tax consequences will not
be required, if the requested annual
accounting period coincides with the tax-
payer’s required taxable year, ownership
taxable year, or natural business year. A
taxpayer generally is deemed to have
established a natural business year if it
satisfies the“25-percent gross receipts
test.”SeeRev. Proc. 83–25, 1983–1 C.B.
689, superseded by Rev. Proc. 87–32,
1987–2 C.B. 396, superseded by Rev.
Proc. 2002–38, 2002–22 I.R.B. 1037. In
Rev. Rul. 87–57, 1987–2 C.B. 117, the
Service determined that a partnership, S
corporation, or PSC established, to the
satisfaction of the Secretary, a business
purpose for adopting, retaining, or chang-
ing its taxable year in the following four
situations:
(a) the taxpayer established that
the taxable year satisfied the 25-percent
gross receipts test and resulted in less
deferral than its other natural business
year;
(b) the taxpayer would have estab-
lished a natural business year under the
25-percent gross receipts test, except that
a labor strike closed the taxpayer’s busi-
ness during a period that included its nor-
mal peak season;
(c) the taxpayer, for the past 10
years, had a three-month period of insig-
nificant gross receipts during which, due
to weather conditions, its business was
not operational; and
(d) the taxpayer, which previously
used the cash receipts and disbursements
method and changed to an accrual
method, would have established a natural
business year under the 25-percent gross
receipts test if it had calculated its gross
receipts under an accrual method.
(3)Insufficient business purposes.
Section 1.442–1(b) provides that, in the
case of a partnership, S corporation, elect-
ing S corporation, or PSC, deferral of
income to partners, shareholders, or
employee-owners will not be treated as a
business purpose for using a taxable year
other than its required taxable year. In
addition, the legislative history to the Tax
Reform Act of 1986 provides that the fol-
lowing reasons ordinarily will not be suf-
ficient for a partnership, S corporation, or
PSC to establish that the business purpose
requirement for a particular taxable year
has been met:
(a) the use of a particular year for
regulatory or financial accounting pur-
poses;
(b) the hiring patterns of a particu-
lar business,e.g., the fact that a firm typi-
cally hires staff during certain times of
the year;
(c) the use of a particular year for
administrative purposes, such as the
admission or retirement of partners or
shareholders, promotion of staff, and
compensation or retirement arrangements
with staff, partners, or shareholders; and
(d) the fact that a particular busi-
ness involves the use of price lists, model
years, or other items that change on an
annual basis.
Although the above items are not them-
selves sufficient to establish a business
purpose, they may be considered in con-
nection with other items by the Commis-
sioner in determining whether a taxpayer
has a business purpose for a particular
taxable year. H.R. Rep. No. 99–841, 99th
Cong., 2d Sess., II–318, 1986–3 (Vol. 4)
C.B. 319
.07Section 444 Elections. A partner-
ship, S corporation, electing S corpora-
tion, or PSC generally can elect under
§444 to use a taxable year other than its
required taxable year, but only if the
deferral period of the taxable year elected
is not longer than the shorter of 3 months
or the deferral period of the taxable year
being changed. A partnership and an S
corporation with a§444 election must
make required payments under§7519
that approximate the amount of the defer-
ral benefit and a PSC with a§444 elec-
tion is subject to the minimum distribu-
tion requirements of§280H. A taxpayer
may automatically adopt, change to, or
retain a taxable year permitted by§444
by filing a Form 8716,Election to Have
a Taxable Year Other Than a Required
Taxable Year.A taxpayer that wants to ter-
minate its§444 election must follow the
automatic procedures under§1.444–
June 3, 200210482002–22 I.R.B.

1T(a)(5) to change to its required taxable
year or establish a business purpose for
using a different taxable year pursuant to
§442, the regulations thereunder, and
Rev. Proc. 2002–38 or this revenue proce-
dure (whichever is applicable).
SECTION 3. SCOPE
.01Applicability. Except as provided
in section 3.02 of this revenue procedure,
this revenue procedure applies to any tax-
payer requesting the Commissioner’s
approval to adopt, change, or retain an
annual accounting period for federal
income tax purposes.
.02Inapplicability. This revenue pro-
cedure does not apply to:
(1)Automatic approval. An adop-
tion, change, or retention of annual
accounting period that is permitted to be
made pursuant to a provision of the Code
or regulations or a published automatic
approval procedure. Before submitting an
application pursuant to this revenue pro-
cedure, taxpayers are encouraged to
review the automatic approval procedures
referenced in§1.442–1 and the following
revenue procedures: Rev. Proc. 2002–37
(for corporations); Rev. Proc. 2002–38
(for partnerships, S corporations, electing
S corporations, and PSCs); Rev. Proc.
66–50, as modified by Rev. Proc. 81–40,
1981–2 C.B. 604 (for individuals); Rev.
Proc. 85–58, 1985–2 C.B. 740, and Rev.
Proc. 76–10, 1976–1 C.B. 548, as modi-
fied by Rev. Proc. 79–3, 1979–1 C.B. 483
(for exempt organizations); Rev. Proc.
87–27, 1987–1 C.B. 769 (for employee
retirement plans and employee trusts);
and Rev. Proc. 85–15, 1985–1 C.B. 516
(for changes to comply with§441(g)).
(2)Under examination. A taxpayer
with a required taxable year that is under
examination, unless the taxpayer obtains
the consent of the appropriate director as
provided in section 6.06(1) of this rev-
enue procedure.
(3)Before an area office. A tax-
payer with a required taxable year that is
before an area office with respect to any
income tax issue if its annual accounting
period is an issue under consideration by
the area office.
(4)Before a federal court. A tax-
payer with a required taxable year that is
before a federal court with respect to any
income tax issue if its annual accounting
period is an issue under consideration by
the federal court.
(5)Partnerships and S corpora-
tions. A partnership or S corporation if,
on the date the entity would otherwise file
its application with the Service Center,
the entity’s annual accounting period is an
issue under consideration in the examina-
tion of a partner’s or shareholder’s federal
income tax return or an issue under con-
sideration by an area office or by a fed-
eral court with respect to a partner’sor
shareholder’s federal income tax return.
SECTION 4. DEFINITIONS
.01Taxpayer. The term“taxpayer”has
the same meaning as the term“person”as
defined in§7701(a)(1) (e.g., an indi-
vidual, trust, estate, partnership, associa-
tion, or corporation) rather than the mean-
ing of the term“taxpayer”as defined in
§7701(a)(14) (any person subject to tax).
.02Corporation. The term“corpora-
tion”includes each member of a consoli-
dated group. However, the common par-
ent of a consolidated group may change
the group’s annual accounting period
under this revenue procedure if every
member of the consolidated group meets
all the requirements and complies with all
the conditions of this revenue procedure.
.03Pass-through Entity. For purposes
of this revenue procedure, the term“pass-
through entity”means a partnership; an S
corporation (as defined in§1361); an
electing S corporation (i.e., a corporation
attempting to make an S election for the
first effective year); a trust; an estate; a
common trust fund (as defined in§584);
a controlled foreign corporation (CFC)
(as defined in§957), but only to the
extent the taxpayer is a U.S. shareholder
(as defined in§951(b)); a foreign per-
sonal holding company (FPHC) (as
defined in§552), but only to the extent
the taxpayer is a U.S. shareholder (as
defined in§551(a)); a passive foreign
investment company (PFIC), but only to
the extent the taxpayer has elected to treat
the PFIC as a qualified electing fund (as
defined in§1295); a closely-held REIT
(as defined in§6655(e)(5)(B)), but only
ifthetaxpayerisdescribedin
§6655(e)(5)(A)); or any other similar
entity.
.04Required Taxable Year. The
“required taxable year”is the particular
taxable year that certain taxpayers are
required to use under the Code or regula-
tions thereunder. For example, the
“required taxable year”is the taxable year
determined under§706(b) in the case of
a partnership,§1378 in the case of an S
corporation or an electing S corporation,
and§441(i) in the case of a PSC, with-
out taking into account any taxable year
that is allowable by reason of a§444
election.See generally§1.441–1(b)(2)
(providing examples of other entities with
required taxable years).
.05Permitted Taxable Year. The term
“permitted taxable year”means the
required taxable year; a natural business
year; the ownership taxable year; a tax-
able year elected under§444; a 52–53-
week taxable year that references the
required taxable year, natural business
year, ownership taxable year, or taxable
year elected under§444; or any other
taxable year for which the taxpayer estab-
lishes a business purpose to the satisfac-
tion of the Commissioner.
.06First Effective Year. The first
effective year is the first taxable year for
which an adoption, change, or retention in
annual accounting period is effective.
Thus, in the case of a change, the first
effective year is the short period required
to effect the change. The first effective
year is also the first taxable year for com-
plying with all the terms and conditions
set forth in the letter ruling granting per-
mission to effect the adoption, change, or
retention of the taxpayer’s annual
accounting period.
.07Short Period. In the case of a
change in annual accounting period, a
taxpayer’s short period is the period
beginning with the day following the
close of the old taxable year and ending
with the day preceding the first day of the
new taxable year.
.08Field Office, Area Office, Director.
The terms“field office,”“area office,”
and“director”have the same meaning as
those terms have in Rev. Proc. 2002–1,
2002–1 I.R.B. 1 (or any successor).
.09Under Examination.
(1)In general.
(a) Except as provided in section
4.08(2) of this revenue procedure, an
examination of a taxpayer with respect to
a federal income tax return begins on the
date the taxpayer is contacted in any man-
ner by a representative of the Service for
2002–22 I.R.B.1049June 3, 2002

the purpose of scheduling any type of
examination of the return. An examina-
tion ends:
(i) in a case in which the Service
accepts the return as filed, on the date of
the“no change”letter sent to the tax-
payer;
(ii) in a fully agreed case, on the
earliest of the date the taxpayer executes
a waiver of restrictions on assessment or
acceptance of overassessment (for
example, a Form 870, 4549, or 4605), the
date the taxpayer makes a payment of tax
that equals or exceeds the proposed defi-
ciency, or the date of the“closing”letter
(for example, Letter 891(IN) or 987(DO))
sent to the taxpayer; or
(iii) in an unagreed or a partially
agreed case, on the earliest of the date the
taxpayer (or its representative) is notified
by an appeals officer that the case has
been referred to an area office from a
field office, the date the taxpayer files a
petition in the Tax Court, the date on
which the period for filing a petition with
the Tax Court expires, or the date of the
notice of claim disallowance.
(b) An examination does not end
as a result of the early referral of an issue
to an area office under the provisions of
Rev. Proc. 96–9, 1996–1 C.B. 575, or
Rev. Proc. 99–28, 1999–2 C.B. 109.
(c) An examination resumes on
the date the taxpayer (or its representa-
tive) is notified by an appeals officer (or
otherwise) that the case has been referred
to a field office for reconsideration.
(2)Partnerships and S corporations
subject to TEFRA. For an entity (includ-
ing a limited liability company) treated as
a partnership or an S corporation that is
subject to the TEFRA unified audit and
litigation provisions (note that an S cor-
poration is not subject to the TEFRA uni-
fied audit and litigation provisions for
taxable years beginning after December
31, 1996,seeSmall Business Job Protec-
tion Act of 1996, Pub. L. No. 104–188,
§1317(a), 110 Stat. 1755, 1787 (1996)),
an examination begins on the date of the
notice of the beginning of an administra-
tive proceeding sent or personally deliv-
ered to the Tax Matters Partner/Tax Mat-
ters Person (TMP). An examination ends:
(a) in the case in which the Ser-
vice accepts the partnership or S corpora-
tion return as filed, on the date of the“no
adjustments”letter or the“no change”
notice of the final administrative adjust-
ment sent to the TMP;
(b) in a case in which no formal
notice is given, on the date on which the
period under§6229 expires;
(c) in a fully agreed case, when all
the partners or shareholders execute a
Form 870–P, 870–L, 870–S, or any varia-
tion thereof; or
(d) in an unagreed or a partially
agreed case, on the earliest of the date the
TMP (or its representative) is notified by
an appeals officer that the case has been
referred to an area office from a field
office, the date the TMP (or a partner or
shareholder) requests judicial review, or
the date on which the period for request-
ing judicial review expires.
.10Issue Under Consideration.
(1)During an examination. A tax-
payer’s annual accounting period is an
issue under consideration for the taxable
years under examination if the taxpayer
receives written notification (for example,
by examination plan, information docu-
ment request (IDR), or notification of
proposed adjustments or income tax
examination changes) from the examining
officer(s) specifically citing the taxpay-
er’s annual accounting period as an issue
under consideration. For example, a tax-
payer’s annual accounting period is an
issue under consideration as a result of an
examination plan that identifies the pro-
priety of the taxpayer’s annual accounting
period as a matter to be examined. The
question of whether the taxpayer’s annual
accounting period is an issue under con-
sideration may be referred to the national
office as a request for technical advice
under the provisions of Rev. Proc.
2002–2, 2002–1 I.R.B. 82 (or any succes-
sor), or, for exempt organizations, Rev.
Proc. 2002–5, 2002–1 I.R.B. 173 (or any
successor).
(2)Before an area office. A taxpay-
er’s annual accounting period is an issue
under consideration for the taxable years
before an area office if the taxpayer’s
annual accounting period is included as
an item of adjustment in the examination
report referred to an area office or is spe-
cifically identified in writing to the tax-
payer by an area office.
(3)Before a federal court. A tax-
payer’s annual accounting period is an
issue under consideration for the taxable
years before a federal court if the taxpay-
er’s annual accounting period is an item
included in the statutory notice of defi-
ciency, the notice of claim disallowance,
the notice of final administrative adjust-
ment, the pleadings (for example, the
petition, complaint, or answer) or amend-
ments thereto, or is specifically identified
in writing to the taxpayer by the govern-
ment counsel.
SECTION 5. BUSINESS PURPOSE
AND TERMS, CONDITIONS, AND
ADJUSTMENTS
.01In General.
(1)Approval of requests. Except as
provided in section 5.01(2) of this rev-
enue procedure, a request to adopt,
change, or retain an annual accounting
period ordinarily will be approved if the
taxpayer:
(a) establishes a business purpose
(within the meaning of section 5.02 of
this revenue procedure) for the requested
annual accounting period; and
(b) agrees to the Commissioner’s
prescribed terms, conditions, and adjust-
ments (as described in sections 5.04 and
5.05 of this revenue procedure) under
which the adoption, change, or retention
will be effected.
(2)Exceptions. Notwithstanding the
general rule of section 5.01(1)(a) of this
revenue procedure, a taxpayer with a
required taxable year (other than a part-
nership, S corporation, electing S corpo-
ration, or PSC) will not be granted
approval under this revenue procedure to
adopt, change, or retain a taxable year
other than its required taxable year or, in
appropriate circumstances, a 52–53-week
taxable year that ends with reference to
its required taxable year. In addition, a
partnership, S corporation, electing S cor-
poration, or PSC will be granted approval
to adopt, change, or retain an annual
accounting period only if it establishes a
business purpose under section 5.02(1)
for that annual accounting period. Not-
withstanding the general rule of section
5.01(1)(b) of this revenue procedure, the
Service may determine that, based on the
unique facts of a particular case and in
the interest of sound tax administration,
terms, conditions, and adjustments that
differ from those provided in this revenue
procedure are more appropriate for an
adoption, change, or retention made
under this revenue procedure.
June 3, 200210502002–22 I.R.B.

.02Business Purpose.
(1)Taxpayers that establish a busi-
ness purpose. Taxpayers that establish a
business purpose for the requested annual
accounting period under this section
5.02(1) ordinarily will be granted
approval to adopt, change, or retain that
annual accounting period under this rev-
enue procedure subject only to the gen-
eral terms and conditions described in
section 5.04 of this revenue procedure.
(a)Natural business year. A tax-
payer (including a partnership, S corpora-
tion, electing S corporation, or PSC)
requesting to adopt, change, or retain an
annual accounting period that is the tax-
payer’s natural business year (as
described in section 5.03 of this revenue
procedure) has established a business pur-
pose to the satisfaction of the Commis-
sioner.
(b)Facts and circumstances.A
taxpayer (including a partnership, S cor-
poration, electing S corporation, or PSC)
may establish a business purpose for the
requested taxable year based on all the
relevant facts and circumstances. How-
ever, the Service anticipates that a tax-
payer will be granted permission to adopt,
change, or retain an annual accounting
period under this facts and circumstances
test only in rare and unusual circum-
stances. For this purpose, deferral of
income to owners will not be treated as a
business purpose. In addition, administra-
tive and convenience business reasons
such as those described in Rev. Rul.
87–57 and the following will not be suf-
ficient to establish a business purpose
under this section:
(i) the use of a particular year for
regulatory or financial accounting pur-
poses;
(ii) the hiring patterns of a par-
ticular business,e.g., the fact that a firm
typically hires staff during certain times
of the year;
(iii) the use of a particular year
for administrative purposes, such as the
admission or retirement of partners or
shareholders, promotion of staff, and
compensation or retirement arrangements
with staff, partners, or shareholders;
(iv) the fact that a particular
business involves the use of price lists,
model years, or other items that change
on an annual basis;
(v) the use of a particular year
by related entities; and
(vi) the use of a particular year
by competitors.
(2)Taxpayers that are deemed to
have established a business purpose.A
taxpayer other than a partnership, S cor-
poration, electing S corporation, or PSC
that does not establish a business purpose
for the requested annual accounting
period under section 5.02(1) of this rev-
enue procedure generally will be deemed
to have established a business purpose if
it provides a non-tax reason for the
requested annual accounting period and
agrees to the additional terms, conditions,
and adjustments described in section 5.05
of this revenue procedure, which are
intended to neutralize the tax effects of
any resulting substantial distortion of
income. For this purpose, non-tax reasons
for the requested annual accounting
period may include administrative and
convenience business reasons such as
those described in section 5.02(1)(b) that
Congress intended, and the Service has
held, to be insufficient to satisfy the busi-
ness purpose requirement for a partner-
ship, S corporation, electing S corpora-
tion, or PSC to adopt, change to, or retain
a taxable year other than its required tax-
able year. The Service anticipates that an
individual taxpayer that is not a sole pro-
prietor will be able to establish a non-tax
reason for a fiscal year only in rare and
unusual circumstances.
.03Natural Business Year. A natural
business year is the annual accounting
period encompassing all related income
and expenses. The natural business year
of a taxpayer may be determined under
any of the following tests (taking into
account the principles of Rev. Rul.
87–57):
(1)Annual business cycle test.
(a)In general. If the taxpayer’s
gross receipts from sales and services for
the short period and the three immedi-
ately preceding taxable years indicate that
the taxpayer has a peak and a non-peak
period of business, the taxpayer’s natural
business year is deemed to end at, or soon
after, the close of the highest peak period
of business. A business whose income is
steady from month to month throughout
the year will not satisfy this test. A tax-
payer that has not been in existence for a
sufficient period to provide gross receipts
information for the three immediately
preceding taxable years may provide
information other than gross receipts to
demonstrate a peak and non-peak period
of business, such as a description of its
business and/or reasonable estimates of
future gross receipts.
(b)Safe harbor. For purposes of
section 5.03(1)(a) of this revenue proce-
dure, 1 month will be deemed to be“soon
after”the close of the highest peak period
of business.
(c)Example. A, a corporation, operates a
retail business. The highest peak of A’s annual busi-
ness cycle occurs in December each year. In Janu-
ary, a significant amount of the merchandise that
was purchased by A’s customers in December is
either returned or exchanged. A’s natural business
year is deemed to end at (December 31st), or soon
after (January 31st), the close of the highest peak
period of business in December. Accordingly, under
the provisions of this revenue procedure, a request
by A for a taxable year ending either December 31st
or January 31st would be granted, subject to the
general terms and conditions of section 5.04 of this
revenue procedure.
(2)Seasonal business test.
(a)In general. If the taxpayer’s
gross receipts from sales and services for
the short period and the three immedi-
ately preceding taxable years indicate that
the taxpayer’s business is operational for
only part of the year (e.g., due to weather
conditions) and, as a result, the taxpayer
has insignificant gross receipts during the
period the business is not operational, the
taxpayer’s natural business year is
deemed to end at, or soon after, the opera-
tions end for the season. A taxpayer that
has not been in existence for a sufficient
period to provide gross receipts informa-
tion for the three immediately preceding
taxable years may provide information
other than gross receipts to demonstrate
that it satisfies the requirements of a sea-
sonal business, such as a description of its
business and/or reasonable estimates of
future gross receipts.
(b)Safe Harbor. For purposes of
section 5.03(2)(a) of this revenue proce-
dure, an amount equal to less than 10 per-
cent of the taxpayer’s total gross receipts
for the year will be deemed to be“insig-
nificant,”and 1 month will be deemed to
be“soon after”the close of operations.
(c)Example. B, a partnership,
operates a ski resort from November
2002–22 I.R.B.1051June 3, 2002

through March of each year. During Sep-
tember and October, and during April,
employees prepare the resort for the ski
season, and close it down for the season,
respectively. The resort earns less than 10
percent of its annual gross receipts during
the period of April through October, when
it is closed to guests. B’s natural business
year is deemed to end at (March 31st), or
soon after (April 30th), the close of the
resort operations. Accordingly, under the
provisions of this revenue procedure, a
request by B for a taxable year ending
either March 31st or April 30th would be
granted, subject to the general terms and
conditions of section 5.04 of this revenue
procedure.
(3)25-percent gross receipts test.A
natural business year may be established
by any taxpayer other than a member of a
tiered structure (as defined in§444 and
§1.444–2T) using the 25-percent gross
receipts test. The 25-percent gross
receipts test is determined as follows:
(a)Priorthreeyears’gross
receipts.
(i) Gross receipts from sales and
services for the most recent 12-month
period that ends with the last month of
the requested annual accounting period
are totaled and then divided into the
amount of gross receipts from sales and
services for the last 2 months of this
12-month period.
(ii) The same computation as in
(a)(i) above is made for the two preceding
12-month periods ending with the last
month of the requested annual accounting
period.
(b)Natural business year.
(i) Except as provided in (b)(ii)
below, if each of the three results
described in (a) equals or exceeds 25 per-
cent, the requested annual accounting
period is deemed to be the taxpayer’s
natural business year.
(ii) The taxpayer must determine
whether any annual accounting period
other than the requested annual account-
ing period also meets the 25-percent gross
receipts test of paragraph (b)(i). If one or
more annual accounting periods produce
higher averages of the three percentages
(rounded to the 1/100 of a percent)
described in (a) than the requested annual
accounting period, then the requested
annual accounting period will not qualify
as the taxpayer’s natural business year
under the 25-percent gross receipts test.
(c)Special rules.
(i) To apply the 25-percent gross
receipts test for any particular taxable
year, the taxpayer must compute its gross
receipts under the method of accounting
used to prepare its federal income tax
returns for such taxable year.
(ii) Regardless of the taxpayer’s
method of accounting, the taxpayer’s
share of income from a pass-through
entity generally must be reported as gross
receipts in the month that the pass-
through entity’s taxable year ends.
(iii) If a taxpayer has a predeces-
sor organization and is continuing the
same business as its predecessor, the tax-
payer must use the gross receipts of its
predecessor for purposes of computing
the 25-percent gross receipts test.
(iv) If the taxpayer (including
any predecessor organization) does not
have a 47-month period of gross receipts
(36-month period for requested taxable
year plus additional 11-month period for
comparing requested taxable year with
other potential taxable years), then it can-
not establish a natural business year using
the 25-percent gross receipts test.
(v) If the requested taxable year
isa52–53-week taxable year, the calen-
dar month ending nearest to the last day
of the 52–53-week taxable year is treated
as the last month of the requested taxable
year for purposes of computing the
25-percent gross receipts test.
.04General Terms and Conditions.
The following general terms and condi-
tions apply to all taxpayers that obtain
approval under this revenue procedure to
adopt, change, or retain an annual
accounting period:
(1)Short period tax return. The tax-
payer must file a federal income tax
return for the short period required to
effect a change in annual accounting
period by the due date of that return,
including extensions pursuant to§1.443–
1(a). The taxpayer’s taxable income for
the short period generally must be annu-
alized and the tax must be computed in
accordancewiththeprovisionsof
§443(b) and§1.443–1(b). However, for
changes to (or from) a 52–53-week tax-
able year referencing the same month as
the current (or requested) taxable year,
see special rules in§1.441–2. See also,
for example,§§1.706–1(b)(8)(i)(B),
1.852–3(e), 1.857–2(a)(4), 1.1378–
1(c)(2), and 1.1502–76 for exceptions to
the annualization rule for a partnership,
RIC, REIT, S corporation, and subsidiary
corporation ceasing to be a member of a
consolidated group, respectively.
(2)Subsequent year tax returns.
Returns for subsequent taxable years gen-
erally must be made on the basis of a full
12 months (or on a 52–53-week basis)
ending on the last day of the requested
taxable year, unless the taxpayer secures
the approval of the Commissioner to
change its requested taxable year.
(3)Record keeping/book confor-
mity. The books of the taxpayer must be
closed as of the last day of the first effec-
tive year. Thereafter, the taxpayer must
compute its income and keep its books
and records (including financial state-
ments and reports to creditors) on the
basis of the requested taxable year, except
that this requirement shall not apply (1) to
books and records maintained solely for
foreign law purposes (e.g., foreign tax
reporting purposes), or (2) if the
requested taxable year is either the tax-
payer’s required taxable year or owner-
ship taxable year.
(4)Changes in natural business
year. If a partnership, S corporation,
electing S corporation, or PSC changes to
or retains a natural business year under
this revenue procedure and that annual
accounting period no longer qualifies as a
permitted taxable year, the taxpayer is
using an impermissible annual accounting
period and should change to a permitted
taxable year. Certain partnerships, S cor-
porations, electing S corporations, and
PSCs may qualify for automatic approval
to change their annual accounting period
under Rev. Proc. 2002–38. Other taxpay-
ers must request approval under this rev-
enue procedure.
(5)52–53-week taxable years.If
applicable, the taxpayer must comply
with§1.441–2(e) (relating to the timing
of taking items into account in those
cases where the taxable year of a pass-
through entity or PSC ends with reference
to the same calendar month as one or
more of its partners or shareholders or
employee-owners).
(6)Creation of net operating loss
or capital loss. If the taxpayer generates a
net operating loss (NOL) or capital loss
June 3, 200210522002–22 I.R.B.

(CL) in the short period required to effect
a change in annual accounting period, the
taxpayer may not carry the NOL or CL
back, but must carry it over in accordance
with the provisions of§§172 and 1212,
respectively, beginning with the first tax-
able year after the short period. However,
except as otherwise provided in the Code
or regulations (e.g.,§280H and the regu-
lations thereunder in the case of a PSC)
the short period NOL or CL is carried
back or carried over in accordance with
§§172 or 1212, respectively, if it is
either: (a) $50,000 or less, or (b) results
from a short period of 9 months or longer
and is less than the NOL or CL for a full
12-month period beginning with the first
day of the short period.
(7)Creation of general business
credits. If there is an unused general busi-
ness credit or any other unused credit
generated in the short period, the taxpayer
must carry that unused credit forward. An
unused credit from the short period may
not be carried back.
(8)Concurrent change for related
entities. In appropriate cases, if a taxpayer
owns a majority interest in a pass-through
entity, the entity will be required to con-
currently change its annual accounting
period as a term and condition of the
approval of the taxpayer’s request to
change its annual accounting period, not-
withstanding the testing date provisions
in§§706(b)(4)(A)(ii), 898(c)(1)(C)(ii),
§1.921–1T(b)(6), and the special provi-
sion in§706(b)(4)(B). If this condition
applies, the pass-through entity must
comply with the appropriate procedures
to obtain approval for the change.See,
e.g., Rev. Proc. 2002–37 and Rev. Proc.
2002–38.
.05Additional Terms, Conditions, and
Adjustments. The additional terms, condi-
tions, and adjustments described in this
section 5.05 apply to taxpayers that
obtain approval under this revenue proce-
dure to change an annual accounting
period and that establish a business pur-
pose under section 5.02(2) of this revenue
procedure. These additional terms, condi-
tions, and adjustments are necessary to
neutralize the tax effects of a substantial
distortion of income that otherwise would
result from the change, including: a defer-
ral of a substantial portion of the taxpay-
er’s income, or shifting of a substantial
portion of deductions, from one taxable
year to another; a similar deferral or shift-
ing in the case of any other person, such
as a beneficiary of an estate; the creation
of a short period in which there is a sub-
stantial NOL, CL, or credit (including a
general business credit), or the creation of
a short period in which there is a substan-
tial amount of income to offset an expir-
ing NOL, CL, or credit.
(1)Substantial distortion. Distor-
tion of income will not be considered
substantial, and no adjustments under this
section 5.05 will be required for such dis-
tortion, if the amount of the distortion is
less than both:
(i) five percent of the taxpayer’s
estimated gross receipts for its current
taxable year (computed as if the taxpayer
remained on its existing taxable year);
and
(ii) $500,000.
(2)Deferral of substantial pass-
through income.
(a)In general. An adjustment will
be required under this section 5.05(2) if
the change creates a substantial distortion
of income as a result of increasing the
deferral of the taxpayer’s distributive
share of income from a pass-through
entity between the taxable year of the
pass-through entity and the taxpayer’s
taxable year. For this purpose, if the pass-
through entity’s taxable year is deter-
mined based on the taxable year of its
owners, the taxpayer must compare the
existing deferral period (i.e., between the
pass-through entity’s and the taxpayer’s
current taxable years) with the proposed
deferral period (i.e., between the taxable
year of the pass-through entity that would
be required after the requested change
and the taxpayer’s requested taxable year)
to determine whether the deferral period
is increased. If the taxpayer indirectly
owns an interest in a pass-through entity
through one or more other pass-through
entities, the existing and proposed defer-
ral periods generally must be determined
by comparing the taxable year of the
directly-owned pass-through entity with
the taxpayer’s taxable year. However, if
the proposed change does not increase the
deferral period between the taxable year
of the directly-owned pass-through entity
and the taxpayer’s taxable year, the exist-
ing and proposed deferral periods must be
determined by comparing the taxable year
of the next lower-tier indirectly-owned
pass-through entity with the taxpayer’s
taxable year until either: (1) an increase
in the deferral period is found or (2) the
next lower-tier entity either does not exist
or is not a pass-through entity.
(b)Computing deferral. The
amount of deferral that results from the
change is the taxpayer’s allocable share
of income from each pass-through entity
described in (a), including ordinary
income or loss, capital gain or loss, rents,
royalties, interest, dividends, and the
deduction equivalents of credits that
accrue during the taxpayer’s first effec-
tive year. In the case of a partnership, the
taxpayer’s share of income also includes
guaranteed payments to the taxpayer that
are both deductible by the partnership
under its method of accounting during the
partnership’s first taxable year ending
after the taxpayer’s first effective year
and attributable (on a ratable basis) to the
taxpayer’s first effective year. A taxpayer
must aggregate the deferral of income
from each pass-through entity described
in (a). However, if the aggregate deferral
of income from all pass-through entities
described in (a) is negative (i.e., an aggre-
gate loss), there is no deferral of income.
For this purpose, the taxpayer may use
reasonable estimates to determine the
income that accrues during the first effec-
tive year. The Service may, on examina-
tion, use any available data, including
information on previous years’Schedules
K–1, to verify the reasonableness of the
taxpayer’s estimates.
(c)Adjustment. If the deferral of
income computed in section 5.05(2)(b) of
this revenue procedure represents a sub-
stantial distortion of income (as defined
in section 5.05(1)), the taxpayer must
include the entire amount of the distortion
(and not merely the excess over the
amounts specified in section 5.05(1)) as
ordinary income for the first effective
year. The taxpayer also must report its
allocable share of income from the pass-
through entity in the taxable year follow-
ing the first effective year in accordance
with general tax principles (e.g.,§706).
The taxpayer must establish a suspense
account for the amount included in ordi-
nary income for the first effective year
and deduct this amount ratably over the
2002–22 I.R.B.1053June 3, 2002

four taxable years immediately succeed-
ing the first effective year. Notwithstand-
ing the preceding sentence, if all or a por-
tion of the suspense account is
attributable to an interest in a pass-
through entity that is subsequently dis-
posed of, any amount so attributable that
remains in the suspense account in the
year of the disposition may be deducted
in that year. In all cases, the deduction
under this paragraph will be treated as an
ordinary deduction. The adjustments
described in this section do not affect the
taxpayer’s basis in the pass-through entity
(such as basis in a partnership determined
under§705).SeeExamples 1, 2, and 3,
section 5.06 of this revenue procedure.
(3)Special rule for certain pass-
through entities. An adjustment similar to
that described in this paragraph 5.05(2)
will be required in the case of a deferral
of income or shifting of deductions to
another taxpayer, such as a beneficiary of
an estate.
(4)Use of expiring NOLs, CLs, and
credits. An adjustment will be required
under this section 5.05(4) if the change
creates a substantial distortion of income
as a result of the creation of income in the
short period (or the shifting of foreign
taxes paid or accrued) to offset expiring
NOLs, CLs, or credits (including general
business credits). The amount of distor-
tion that results from a change is the
amount by which any NOL, CL, and
credit that is carried over to the first
effective year and that expires in that year
exceeds the NOL, CL, and credit that
could have been used to offset income in
the taxpayer’s current taxable year (com-
puted as if the taxpayer remained on its
existing taxable year). If this distortion is
substantial (as defined in section 5.05(1)),
any NOL, CL, or credit carried over to
the first effective year will be allowed to
offset income in the first effective year
only to the extent that such NOL, CL, or
credit could have been used to offset
income in the taxpayer’s current taxable
year.SeeExample 4, section 5.06 of this
revenue procedure.
(5)Other terms, conditions, and
adjustments. In addition to the terms, con-
ditions, and adjustments described in this
section 5.05, the Service may impose any
other term, condition, or adjustment that
it deems appropriate under the circum-
stances.
.06Examples. The following examples
illustrate the additional terms, conditions,
and adjustments that may be required
under section 5.05 of this revenue proce-
dure to obtain the Commissioner’s
approval for a change of an annual
accounting period. In all examples, the
taxpayer is within the scope of this rev-
enue procedure, the taxpayer has estab-
lished a business purpose under section
5.02(2) of this revenue procedure, and
any distortion of income resulting from
the change is substantial.
Example 1. P, a foreign corporation, maintains
its books and files its foreign country tax returns on
the basis of a taxable year ending on May 31st. In
2001, P acquires all the stock of S, a domestic cor-
poration, that maintains its books and files its tax
returns on the calendar year. S has a minority inter-
est in a partnership that uses the calendar year. In
order to facilitate the filing of consolidated financial
statements for P and S, S applies for approval to
change its taxable year to a taxable year ending on
May 31st beginning on May 31, 2002. The change
will create a substantial distortion of income as a
result of increasing the deferral of S’s distributive
share of income from its partnership interest. Con-
sequently, S will be required, under section 5.05(2)
of this revenue procedure, to report the partnership
income that accrues between January 1 and May 31,
2002, as an ordinary income adjustment on its short
period tax return as a term, condition, and adjust-
ment of the change. Thereafter, on subsequent tax
returns filed for its taxable year ending on May 31st
(beginning May 31, 2003), S must report the part-
nership income for the partnership’s taxable year
ending December 31 based on the Schedule K–1in
accordance with§706. To take into account S’s
double inclusion of the 5 months of partnership
income from January 1 to May 31, 2002, S must
recognize an ordinary deduction adjustment in each
of the four taxable years following the first effective
year equal to one-fourth of the ordinary income
adjustment amount included on S’s short period tax
return. Neither adjustment will affect S’s basis in the
partnership.
Example 2. D is a domestic corporation that cur-
rently maintains its books and files its tax returns on
the calendar year, but applies in 2002 for approval
to change its taxable year to a year ending on May
31st. D owns a majority interest in a partnership,
PS1, which in turn owns a minority interest in
another partnership, PS2. PS1 and PS2 have taxable
years ending on December 31st and September 30th,
respectively, as required by the majority interest rule
of§706(b)(1)(b)(i). If D changes its annual
accounting period to May 31st, and the first effec-
tive year ends on May 31, 2002, PS1 will be
required to conform its taxable year with D using a
first effective year of May 31, 2002, as required
under section 5.04(8) of this revenue procedure.
Accordingly, D’s requested change in its taxable
year would not increase the deferral of D’s distribu-
tive share of income or gain from PS1. However,
PS2 will retain its September 30th taxable year;
thus, D’s requested change will increase the deferral
of D’s distributive share of income and gain from
PS2, which is passed through to D from PS1.
Assuming the deferral results in a substantial distor-
tion of income, D will be required, under section
5.05(2) of this revenue procedure, to report its dis-
tributive share of PS2’s income and gain accruing
between January 1, 2002, and May 31, 2002, as an
ordinary income adjustment on its tax return for the
short period ending May 31st as a term and condi-
tion of the change in D’s taxable year.
Example 3. The facts are the same as in Example
2, except that PS2 owns a minority interest in part-
nership PS3, which has a December 31st taxable
year. Because D will be required as a term and con-
dition of the change in D’s taxable year to report its
distributive share of PS2’s income and gain accruing
between January 1, 2002, and May 31, 2002, and
because that distributive share will include a portion
of PS2’s distributive share of income from PS3, D
does not need to make any additional ordinary
income adjustment to take account of any increased
deferral from PS3.
Example 4. Y, a domestic corporation that files
its tax returns on the calendar year, applies in 2002
for consent to change its taxable year to a year end-
ing on May 31st. Y has a general business credit
carryover of $100x that will expire in the current
taxable year. Y reasonably expects to incur on June
30, 2002, a substantial amount that is deductible for
federal income tax purposes. If Y changes its annual
accounting period to May 31st, and the first effec-
tive year ends on May 31, 2002, Y reasonably
expects it would be able to use $90x of the $100x
credit. However, if Y continues to use the calendar
year for 2002, Y reasonably estimates that it would
be able to use only $25x of the expiring credit.
Under section 5.05(4) of this revenue procedure, Y
will be allowed to use only $25x of the credit to
offset income in the first effective year as a term,
condition, and adjustment of the change.
SECTION 6. GENERAL
APPLICATION PROCEDURES
.01What to File.
(1)Application. To request the
Commissioner’s approval to adopt,
change, or retain an annual accounting
period under this revenue procedure, a
taxpayer (other than an electing S corpo-
ration) must complete, sign, and file a
June 3, 200210542002–22 I.R.B.

current Form 1128,Application to Adopt,
Change, or Retain a Tax Year.An electing
S corporation requesting to adopt,
change, or retain an annual accounting
period must complete the appropriate sec-
tion of, and sign and file, a current Form
2553,Election by a Small Business Cor-
poration.
(2)Signature requirement. The
application must be signed by the tax-
payer or on behalf of the taxpayer
requesting the adoption, change, or reten-
tion of annual accounting period by an
individual with authority to bind the tax-
payer in such matters. For example, an
officer must sign on behalf of a corpora-
tion, a general partner on behalf of a state
law partnership, a member-manager on
behalf of a limited liability company, a
trustee on behalf of a trust, or an indi-
vidual taxpayer on behalf of a sole propri-
etorship. If the taxpayer is a member of a
consolidated group, a Form 1128 submit-
ted on behalf of the taxpayer must be
signed by a duly authorized officer of the
common parent. If an agent is authorized
to represent the taxpayer before the Ser-
vice, receive the original or a copy of the
correspondence concerning the request, or
perform any other act(s) regarding the
application filed on behalf of the tax-
payer, a power of attorney reflecting such
authorization(s) must be attached to the
application. A taxpayer’s representative
without a power of attorney to represent
the taxpayer as indicated in this section
will not be given any information regard-
ing the application.
(3)Additional information regard-
ing prior applications.
(a)Accounting period changed.If
a taxpayer changed its annual accounting
period at any time within the most recent
48-month period ending with the last
month of the requested taxable year
(under either an automatic change proce-
dure or a procedure requiring prior
approval), a copy of the application for
the previous change, the ruling letter, and
any other related correspondence from
the Service must be attached to the appli-
cation filed for the requested taxable year.
(b)Accountingperiodnot
changed. If a prior application (filed
under either an automatic change proce-
dure or a procedure requiring prior
approval) was withdrawn, not perfected,
or denied, or if the change in annual
accounting period was not made, and the
taxpayer files another application to
change its annual accounting period
within the most recent 48-month period
ending with the last month of the
requested taxable year, a copy of the ear-
lier application, together with any related
correspondence from the Service, must be
attached to the application filed for the
requested taxable year. An explanation
must be furnished stating why the earlier
application was withdrawn or not per-
fected or why the change in annual
accounting period was not made. The Ser-
vice will consider the explanation in
determining whether the subsequent
request for a change in the taxpayer’s
annual accounting period will be granted.
(4)Additional information for sec-
tion 5.03(1) and (2). If the taxpayer
requests to establish a natural business
year under section 5.03(1) or (2) of this
revenue procedure, it must provide its
gross receipts from sales or services and
approximate inventory costs (where
applicable) for each month in the
requested short period and for each month
of the three immediately preceding tax-
able years.
(5)Additional information for sec-
tion 5.03(3). In the case of a taxpayer
requesting to change to a natural business
year that satisfies the 25-percent gross
receipts test described in section 5.03(3)
of this revenue procedure, the taxpayer
must supply the gross receipts for the
most recent 47 months for itself (or any
predecessor) in compliance with the
instructions to Form 1128.
(6)Additional information for sec-
tion 5.04. The taxpayer must indicate
whether it has an NOL or CL in the short
period required to effect the change and
provide the type and amount of any cred-
its generated in the short period.
(7)Additional information for sec-
tion 5.05. If a taxpayer requests to change
an annual accounting period and estab-
lishes a business purpose under section
5.02(2) of this revenue procedure, the tax-
payer must provide the following addi-
tional information necessary to determine
whether a substantial distortion of income
(within the meaning of section 5.05(1))
exists and, thus, whether the additional
terms, conditions, and adjustments of sec-
tion 5.05 apply:
(a) if the taxpayer has an interest
in a pass-through entity:
(i) reasonable estimates of the
taxpayer’s taxable income for its current
taxable year (computed as if the taxpayer
remained on its existing taxable year);
(ii) a comparison of the existing
deferral period of any pass-through entity
in which the taxpayer has a direct or, as
appropriate, indirect interest (i.e., the
period between the pass-through entity’s
and the taxpayer’s current taxable years)
with the proposed deferral period for such
pass-through entity (i.e., the period
between the taxable year of the pass-
through entity that would be required
after the requested change and the taxpay-
er’s requested taxable year); and
(iii) reasonable estimates of the
aggregate deferral of income from all
pass-through entities described in section
5.05(1)(a);
(b) the amount of any NOL, CL,
or credit carried over to the first effective
year and the taxable year in which such
NOL, CL, or credit was generated; and
(c) identification of any partner-
ship, specified foreign corporation (as
defined in§898), foreign sales corpora-
tion (as defined in former§922), or
domestic international sales corporation
(as defined in§992) in which the tax-
payer has a majority interest.
.02When to File.
(1)In general. Except as provided
in section 6.02(2) of this revenue proce-
dure, a taxpayer must file a Form 1128 no
earlier than the day following the end of
the first effective year and no later than
the due date (not including extensions) of
the federal income tax return for the first
effective year. However, the Service rec-
ommends that the Form 1128 be filed as
early as possible to provide the Service
adequate time to respond to the request
prior to the due date (including exten-
sions) of the taxpayer’s federal income
tax return for the first effective year. In
the case of a change that results in a short
period of six days or less, the Form 1128
also must be filed no earlier than the day
following the end of the short period and
no later than the due date (not including
extensions) of the federal income tax
return for the short period, even though
the short period is not treated as a sepa-
rate taxable year under§1.441–2(b)(2). A
taxpayer that fails to file a Form 1128
2002–22 I.R.B.1055June 3, 2002

within the time period prescribed in this
section 6.02(1) may request an extension
of time to file under§301.9100 of the
Procedure and Administration Regula-
tions. Under§301.9100–3, a Form 1128
filed within 90 days after the time period
prescribed in this section 6.02(1) may be
considered as timely filed if the taxpayer
establishes that the taxpayer acted reason-
ably and in good faith and that granting
relief will not prejudice the interests of
the government. If a Form 1128 is filed
more than 90 days after this period, preju-
dice to the interests of the government
will be presumed and such requests will
be approved only in unusual and compel-
ling circumstances.See§301.9100–
3(c)(3).
(2)Electing S corporations.An
electing S corporation must file a Form
2553 when the election to be an S corpo-
ration is filed pursuant to§1362(b) and
§1.1362–6. Generally, such election must
be filed at any time during (a) the taxable
year that immediately precedes the tax-
able year for which the election is to be
effective or (b) the taxable year for which
the election is to be effective, provided
the election is made before the 16th day
of the third month of the taxable year.
.03Where to File.
(1)In general. A taxpayer, other
than an electing S corporation or exempt
organization, applying for an adoption,
change, or retention in annual accounting
period pursuant to this revenue procedure
must file its Form 1128, together with the
appropriate user fee, with the Service at
the following address: Internal Revenue
Service, Associate Chief Counsel (Income
Tax & Accounting), Attention: CC:PA:
T:CRU, P.O. Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044 (or, in the
case of a designated private delivery ser-
vice: Internal Revenue Service, Associate
Chief Counsel (Income Tax & Account-
ing), Attention: CC:PA:T:CRU, Room
6561,1111Constitution Avenue, N.W.,
Washington, DC 20224).
(2)Electing S corporations.An
electing S corporation requesting to
adopt, change, or retain an annual
accounting period pursuant to this rev-
enue procedure must file its Form 2553
with the appropriate Service Center des-
ignated in the instructions to the Form
2553. The taxpayer should not include the
user fee with the Form 2553 mailed to the
Service Center. The Service Center will
send the Form 2553 to the national office
of the Service, which will then notify the
taxpayer that the fee is due.
(3)Exempt organizations.An
exempt organization applying for a
change in annual accounting period pur-
suant to this revenue procedure must file
its Form 1128, together with the appropri-
ate user fee, with the Service at the fol-
lowing address: Internal Revenue Service,
Attention: T:EO:RA, P.O. Box 27720,
McPherson Station, Washington, DC
20038.
.04User Fee. Taxpayers are required
to pay user fees for requests to adopt,
change, or retain an annual accounting
period under this revenue procedure. Rev.
Proc. 2002–1 and, for tax-exempt organi-
zations, Rev. Proc. 2002–8, 2002–1 I.R.B.
259 (or any successors) contain the
schedule of user fees and provide guid-
ance for complying with the user fee
requirements.
.05Consolidated Groups—Separate
Forms 1128 Not Required. A common
parent of a consolidated group files a
single Form 1128 on behalf of the con-
solidated group and pays only a single
user fee. The common parent must indi-
cate that the Form 1128 is for the com-
mon parent and all its subsidiaries and
answer all relevant questions on the appli-
cation for each member of the consoli-
dated group. If one or more of the mem-
bers of the group is requesting to use a
52–53-week taxable year that ends within
the same 7-day period of the other mem-
bers’requested taxable year, the parent
must attach a statement to its tax return
for the first effective year as required by
Rev. Proc. 89–56, 1989–2 C.B. 643 (or
any successor). The consolidated group
must also comply with all of the provi-
sions of Rev. Rul. 72–184, 1972–1 C.B.
289 (or any successor).See§1.1502–
76(a)(1).
.06Additional Procedures If Under
Examination, Before an Area Office, or
Before a Federal Court.
(1)Certain taxpayers under exami-
nation.
(a) A partnership, S corporation,
electing S corporation, or PSC that is
under examination may apply for
approval to change or retain its annual
accounting period under this revenue pro-
cedure only if the appropriate director
consents to the change or retention. The
director will consent to the change or
retention unless in the opinion of the
director, such entity’s annual accounting
period ordinarily would be included as an
item of adjustment in the year(s) for
which the entity is under examination.
For example, the director will consent to
a change where the entity is using a per-
missible annual accounting period. The
director also will consent to a change
from an impermissible annual accounting
period where the period became imper-
missible (e.g., due to a change in owner-
ship or a change in the entity’s business)
subsequent to the years under examina-
tion. The question of whether the annual
accounting period from which the entity
is changing is permissible or became
impermissible subsequent to the years
under examination may be referred to the
national office as a request for technical
advice under the provisions of Rev. Proc.
2002–2 (or any successor) or, for tax-
exempt organizations, Rev. Proc. 2002–5
(or any successor).
(b) A partnership, S corporation,
electing S corporation, or PSC changing
or retaining an annual accounting period
under this revenue procedure with the
consent of the appropriate director must
attach to the application a statement from
the director consenting to the change or
retention. The partnership, S corporation,
electing S corporation, or PSC must pro-
vide a copy of the application to the
director at the same time it files the appli-
cation with the national office. The appli-
cation must contain the name(s) and tele-
phone number(s) of the examining
agent(s).
(2)Certain taxpayers before an
area office. A partnership, S corporation,
electing S corporation, or PSC that is
before an area office must attach to the
application a separate statement signed by
an appropriate person certifying that, to
the best of that person’s knowledge, the
entity’s annual accounting period is not
an issue under consideration by the area
office. The entity must provide a copy of
the application to the appeals officer at
the same time it files the application with
the national office. The application must
contain the name and telephone number
of the appeals officer.
(3)Certain taxpayers before a fed-
eral court. A partnership, S corporation,
June 3, 200210562002–22 I.R.B.

electing S corporation, or PSC that is
before a federal court must attach to the
application a separate statement signed by
an appropriate person certifying that, to
the best of that person’s knowledge, the
entity’s annual accounting period is not
an issue under consideration by the fed-
eral court. The entity must provide a copy
of the application to the government
counsel at the same time it files the appli-
cation with the national office. The appli-
cation must contain the name and tele-
phone number of the government counsel.
SECTION 7. PROCESSING OF
APPLICATION
.01Service Discretion. Notwithstand-
ing any other provision of this revenue
procedure, the Service reserves the right
to decline to process any application filed
under this revenue procedure in situations
in which it would not be in the best inter-
est of sound tax administration to permit
the requested adoption, change, or reten-
tion. In this regard, the Service will con-
sider whether the adoption, change, or
retention in annual accounting period
would clearly and directly frustrate com-
pliance efforts of the Service in adminis-
tering the income tax laws.
.02Applicability of Rev. Proc. 2002–1,
Rev. Proc. 2002–4, and Any Successor
Revenue Procedures. Rev. Proc. 2002–1
or, for tax-exempt organizations, Rev.
Proc. 2002–4, 2002–1 I.R.B. 127 (or any
successors) will apply to any request
made under this revenue procedure to
adopt, change, or retain an annual
accounting period.
.03Incomplete Application—21 Day
Rule. If the Service receives an applica-
tion that is not completed properly in
accordance with the instructions on the
Form 1128 (or Form 2553) and the provi-
sions of this revenue procedure, or if
supplemental information is needed, the
Service will notify the taxpayer. The noti-
fication will specify the information that
needs to be provided, and the taxpayer
will be permitted 21 days from the date of
the notification to furnish the necessary
information. The Service reserves the
right to impose shorter reply periods if
subsequent requests for additional infor-
mation are made. If the required informa-
tion is not submitted to the Service within
the reply period, the application will not
be processed. A reasonable additional
period to furnish information may be
granted to a taxpayer. Any request for an
extension of time to furnish necessary
information must be made in writing and
submitted within the 21-day period. If the
extension request is denied, there is no
right of appeal.
.04Conference in the National Office.
The taxpayer must complete the appropri-
ate line on the Form 1128, or attach a
statement to the Form 2553, to request a
conference of right if an adverse response
is contemplated by the Service. If the tax-
payer does not complete the appropriate
line on the Form 1128, attach a statement
to the Form 2553, or request a conference
in a later written communication, the Ser-
vice will presume that the taxpayer does
not desire a conference. If requested, a
conference will be arranged in the
national office prior to the Service’s for-
mal reply to the taxpayer’s application.
For taxpayers other than exempt organi-
zations, see section 11 of Rev. Proc.
2002–1 (or any successor). For exempt
organizations, see section 12 of Rev.
Proc. 2002–4 (or any successor).
.05Letter Ruling. Unless otherwise
specifically provided, the Commissioner’s
approval to adopt, change, or retain a tax-
payer’s annual accounting period will be
set forth in a letter ruling from the
national office that identifies the taxpay-
er’s former annual accounting period; the
annual accounting period the taxpayer is
adopting, changing to, or retaining; the
short period necessary to effect a change;
and the terms, conditions, and adjust-
ments under which the adoption, change,
or retention is to be effected.See§1.
442–1(b). A copy of the letter ruling must
be attached to the taxpayer’s federal
income tax return for the first effective
year.
.06Effect of Noncompliance. If a tax-
payer adopts, changes, or retains an
annual accounting period without authori-
zation or without complying with all of
the provisions of this revenue procedure
and the letter ruling granting permission
for the change, the taxpayer has initiated
an adoption, change, or retention of
annual accounting period without obtain-
ing the approval of the Commissioner as
required by§§441(i), 442, 706(b), and
1378. Upon examination, a taxpayer that
has initiated an unauthorized adoption,
change, or retention of annual accounting
period may be denied the adoption,
change, or retention. For example, the
taxpayer may be required to recompute its
taxable income or loss in accordance with
its former (or required, if applicable) tax-
able year.
.07Effect on Other Offices of the Ser-
vice. The provisions of this revenue pro-
cedure are not intended to preclude an
appropriate representative of the Service
(for example, an appeals officer with del-
egated settlement authority) from settling
a particular taxpayer’s case involving an
accounting period issue by agreeing to
terms, conditions, and adjustments that
differ from those that might be provided
under this revenue procedure when it is in
the best interest of the government to do
so.
SECTION 8. EFFECT OF APPROVAL
.01Audit Protection.
(1)In general. Except as provided
in section 8.01(2) of this revenue proce-
dure, a partnership, S corporation, elect-
ing S corporation, or PSC that files an
application in compliance with all the
applicable provisions of this revenue pro-
cedure will not be required by the Service
to change its annual accounting period for
a taxable year prior to the first effective
year.
(2)Exceptions. The Service may
change the annual accounting period of a
taxpayer described in section 8.01(1) of
this revenue procedure for a prior taxable
year if:
(a) the taxpayer withdraws or does
not perfect its request;
(b) the national office denies the
request;
(c) the taxpayer declines to imple-
ment the change;
(d) the taxpayer implements the
change but does not comply with all the
applicable provisions of this revenue pro-
cedure and the letter ruling granting per-
mission for the change; or
(e) the national office modifies or
revokes the ruling because there has been
a misstatement or omission of material
facts.
.02Subsequently Required Changes.
(1)In general. A taxpayer described
in section 8.01(1) of this revenue proce-
dure that adopts, changes, or retains its
annual accounting period pursuant to this
revenue procedure may be required to
2002–22 I.R.B.1057June 3, 2002

subsequently change its annual account-
ing period for the following reasons:
(a) the enactment of legislation;
(b) a decision of the United States
Supreme Court;
(c) the issuance of temporary or
final regulations;
(d) the issuance of a revenue rul-
ing, revenue procedure, notice, or other
statement published in the Internal Rev-
enue Bulletin;
(e) the issuance of written notice
to the taxpayer that the change in
accounting period was granted in error or
is not in accord with the current views of
the Service; or
(f) a change in the material facts
on which the approval was based.
(2)Retroactive change or modifica-
tion. Except in rare or unusual circum-
stances, if a taxpayer described in section
8.01(1) of this revenue procedure
adopted, changed, or retained its annual
accounting period under this revenue pro-
cedure and is subsequently required under
section 8.02(1) of this revenue procedure
to change its annual accounting period,
the required change will not be applied
retroactively provided that:
(a) the taxpayer complied with all
the applicable provisions of the letter rul-
ing granting permission for the change
and this revenue procedure;
(b) there has been no misstate-
ment or omission of material facts;
(c) there has been no change in
the material facts on which the approval
was based;
(d) there has been no change in
the applicable law; and
(e) the taxpayer to whom approval
was granted acted in good faith in relying
on the approval and applying the change
retroactively would be to the taxpayer’s
detriment.
SECTION 9. REVIEW BY DIRECTOR
.01In General. A director must apply
a ruling obtained under this revenue pro-
cedure in determining the taxpayer’s tax
liability unless the director recommends
that the ruling should be modified or
revoked. The director will ascertain if:
(1) the representations on which the
ruling was based reflect an accurate state-
ment of the material facts;
(2) the amount of the adjustments
required to effect the change, if any, were
properly determined;
(3) the adoption, change, or reten-
tion of annual accounting period was
implemented as proposed in accordance
with the terms and conditions of the letter
ruling and this revenue procedure;
(4) there has been any change in the
material facts on which the ruling was
based during the period that the new or
retained annual accounting period was
used; and
(5) there has been any change in the
applicable law during the period the new
or retained annual accounting period was
used.
.02National Office Consideration.Ifa
director recommends that the ruling
(other than the amount of the adjustments
required to effect the change) should be
modified or revoked, the director will for-
ward the matter to the national office for
consideration before any further action is
taken. Such a referral to the national
office will be treated as a request for tech-
nical advice, and the provisions of Rev.
Proc. 2002–2 or, for tax-exempt organiza-
tions, Rev. Proc. 2002–5 will be followed.
SECTION 10. EFFECTIVE DATE AND
TRANSITION RULE
.01In General. Except as provided in
section 10.02 of this revenue procedure,
this revenue procedure is effective for
applications filed on or after May 10,
2002.
.02Transition Rule for Pending Appli-
cations. If a taxpayer filed an application
before May 10, 2002, and the application
is pending with the national office on
May 10, 2002, the taxpayer may request
that the application be processed in accor-
dance with this revenue procedure. How-
ever, the national office will process
applications filed before May 10, 2002, in
accordance with prior authorities unless,
prior to the later of June 25, 2002, or the
issuance of the letter ruling granting or
denying consent to the adoption, change,
or retention, the taxpayer notifies the
national office that it requests that its
application be processed in accordance
with this revenue procedure.
SECTION 11. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 85–16 and Rev. Proc.
74–33 are superseded.
SECTION 12. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under control
number 1545–1786. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless the collection of infor-
mation displays a valid OMB control
number.
The collections of information in this
revenue procedure are found in sections
6, 7, and 10. The information in section 6
is required in order to determine whether
the taxpayer’s annual accounting period
will result in a distortion of income. This
information will be used by the Service to
determine which terms, conditions, and
adjustments will be necessary to effect
the adoption, change, or retention of
annual accounting period. The informa-
tion in section 7 is required in order to
determine whether the taxpayer desires a
conference of right if an adverse response
to its application is contemplated. The
information in section 10 is required in
order to allow a taxpayer to apply the
provisions of this revenue procedure to a
pending application. The likely respon-
dents are the following: individuals, cor-
porations, associations, trusts, estates,
partnerships, farms, business or other for-
profit organizations, non-profit organiza-
tions, and small businesses or organiza-
tions.
Except for the burdens contained in
sections 6.01(5), 6.01(6), 7.04 (Forms
2553 only), and 10.02, the total annual
reporting burden for the requirements
contained in this revenue procedure is
reflected in the burden estimates for
Forms 1128 and 2553.
June 3, 200210582002–22 I.R.B.

The estimated total annual reporting
burden for the requirements contained in
sections 6.01(5), 6.01(6), 7.04, and 10.02
of this revenue procedure is 600 hours:
the estimated average annual burden per
respondent is 1.2 hours; the estimated
number of respondents is 500; and the
estimated frequency of response is on
occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The author of this revenue procedure
is Martin Scully, Jr. of the Office of Asso-
ciate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, contact
Mr. Scully at (202) 622–4960 (not a toll-
free call).
2002–22 I.R.B.1059June 3, 2002

Part IV. Items of General Items
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Guidance Regarding the
Definition of Foreign Personal
Holding Company Income
REG–154920–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations that provide that
gain or loss arising from certain com-
modities hedging transactions and cur-
rency gain or loss arising from certain
interest-bearing liabilities do not consti-
tute (or are not netted against) foreign
personal holding company income. This
treatment is proposed because the appli-
cable commodities hedging transactions
and interest-bearing liabilities typically
offset transactions that do not generate
foreign personal holding company
income. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written or electronic comments
must be received by August 21, 2002.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for September 11,
2002, at 10 a.m. must be submitted by
August 21, 2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–154920–01), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU, REG–154920–01, Couri-
er’s Desk, Internal Revenue Service,1111
Constitution Avenue, NW, Washington,
DC. Alternatively, taxpayers may submit
comments electronically directly to the
IRS Internet site at:www.irs.gov/regs.
The public hearing will be held in room
4718, Internal Revenue Building,1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Kenneth Christman or Ted Setzer at
(202) 622–3870; concerning submission
and delivery of comments and the public
hearing, Treena Garrett, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 954(c)(1)(C) of the Internal
Revenue Code provides thatforeign per-
sonal holding company incomeof acon-
trolled foreign corporation(a CFC) gen-
erally includes the excess of gains over
losses from transactions in commodities.
An exception to this treatment is pro-
vided, however, for gains and losses that
arise out of“bona fidehedging transac-
tions”entered into by a producer, proces-
sor, merchant or handler of commodities.
Section 954(c)(1)(C)(i). On September 7,
1995, final regulations (T.D. 8618,
1995-2 C.B. 89) were published in the
Federal Register(60 FR 46500, as cor-
rected at 60 FR 62024) under section 954
governing the definition of a CFC and the
definitions offoreign base company
incomeandforeign personal holding
company incomeof a CFC. These regula-
tions address, among other matters, the
circumstances in which income from
transactions in commodities will be
treated as foreign personal holding com-
pany income. In particular, the regula-
tions provide that income from a“quali-
fied hedging transaction”is excluded
from the definition of foreign personal
holding company income.§1.954–
2(f)(1)(ii). A qualified hedging transaction
is defined in the regulations generally as
abona fidehedging transaction with
respect to a sale of commodities in the
active conduct of a commodities business
by a CFC if substantially all of the CFC’s
business is as an active producer, proces-
sor, merchant or handler of commodities.
§§1.954–2(f)(2)(iii) and (iv).
Following the publication of the final
regulations, some taxpayers have com-
mented that the regulations inappropri-
ately characterize as foreign personal
holding company income any gain arising
from hedging transactions entered into by
a manufacturer to protect itself from fluc-
tuations in the prices of commodities
associated with the products that it manu-
factures. Because the manufacturer would
not be considered to be selling the com-
modities in the active conduct of a com-
modities business, transactions entered
into by the manufacturer could not
qualify for the“qualified hedging transac-
tion”exception under the regulations.
The regulations also address the treat-
ment of currency gain or loss for pur-
poses of subpart F. Although the regula-
tions provide that foreign personal
holding company income generally
includes the excess of foreign currency
gains over foreign currency losses, an
exception is provided for foreign cur-
rency gain or loss“directly related to the
business needs of the controlled foreign
corporation.”§1.954–2(g)(2)(ii). Not-
withstanding this“business needs”excep-
tion, the regulations provide that currency
gain or loss arising from an interest-
bearing liability must be allocated and
apportioned between subpart F and non-
subpart F income in the same manner that
interest expense associated with the
liability is allocated and apportioned
between subpart F and non-subpart F
income under§§1.861–9T and 1.861–
12T.§1.954–2(g)(2)(iii).
Some taxpayers have commented that
the final regulations inappropriately char-
acterize a portion of foreign currency gain
on certain interest-bearing liabilities as
foreign personal holding company
income. In particular, these taxpayers
have noted that securities dealers com-
monly utilize a technique known as
“match funding”to manage currency
exposures associated with their dealer
assets. Rather than borrowing in their
functional currency to meet their business
needs, dealers who utilize this technique
attempt to manage their exposure to for-
eign currencies on their dealer assets by
borrowing the funds needed for their
business in the currency in which the
dealer assets are denominated. As a result,
the foreign currency exposure on the
dealer assets is offset economically by the
June 3, 200210602002–22 I.R.B.

foreign currency exposure on the interest-
bearing liabilities incurred by the dealer.
Under the regulations, foreign currency
gain on the dealer assets would qualify
for the“business needs”exception and
therefore would not be classified as for-
eign personal holding company income.
If the foreign currency gain arose on the
offsetting interest-bearing liabilities, how-
ever, a portion of the foreign currency
gain likely would be treated as subpart F
income under the regulations.
Explanation of Provisions
The proposed regulations address each
of these issues by refining the relevant
exceptions to foreign personal holding
company income.
Commodities Hedging Transactions
Section 1.954–2(f)(2)(v), as proposed,
would provide that a hedging transaction
entered into by a CFC with respect to its
business as a producer, processor, mer-
chant or handler of commodities may be
a qualified hedging transaction although
the hedging transaction is not a hedge
with respect to a sale of commodities in
the active conduct of a commodities busi-
ness by a CFC substantially all of whose
business is as an active producer, proces-
sor, merchant or handler of commodities.
The proposed regulation also provides
that, for purposes of satisfying the quali-
fied hedging transaction requirements, a
producer, processor, merchant or handler
of commodities includes (but is not lim-
ited to) a CFC that regularly uses com-
modities in a manufacturing, construc-
tion, utilities, or transportation business.
Similar to the regulations currently in
effect, the proposed regulations provide
that a corporation is not a producer, pro-
cessor, merchant or handler of commodi-
ties (and therefore cannot satisfy the
qualified hedging transaction require-
ments) if its business is primarily finan-
cial.
Foreign Currency Gain or Loss on
Interest-bearing Liabilities
Section 1.954–2(g)(2)(ii)(C)(2), as
proposed, would provide that interest-
bearing liabilities of a CFC will be treated
as dealer property if the liabilities are
denominated in a currency so as to man-
age the CFC’s currency risk with respect
to dealer property held by the CFC. This
provision would apply only to interest-
bearing liabilities identified on the date
the liability is incurred. The result of the
proposed rule would be to exclude cur-
rency gain or loss on interest-bearing
liabilities that manage the CFC’s currency
risk with respect to dealer property from
the computation of foreign personal hold-
ing company income.
Proposed Effective Dates
Section 1.954–2(f)(2)(v) is proposed to
apply to gain or loss realized by a CFC
with respect to a qualified hedging trans-
action entered into on or after the date
proposed§1.954–2(f)(2)(v) is published
as a final regulation in theFederal Reg-
ister. Section 1.954–2(g)(2)(ii)(C)(2)is
proposed to apply to gain or loss from an
interest-bearing liability entered into by a
CFC on or after the date proposed
§1.954–2(g)(2)(ii)(C)(2) is published as a
final regulation in theFederal Register.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations and, because these regu-
lations do not impose on small entities a
collection of information requirement, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department specifically request com-
ments on the clarity of the proposed regu-
lations and how they can be made easier
to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for September 11, 2002, at 10 a.m. in
room 4718, Internal Revenue Building,
1111Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the Constitu-
tion Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to
attend the hearing, see the“FOR FUR-
THER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing
must submit electronic or written com-
ments and an outline of the topics to be
discussed and the time to be devoted to
each topic (signed original and eight (8)
copies) by August 21, 2002. A period of
10 minutes will be allotted to each person
for making comments. An agenda show-
ing the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the agenda
will be available free of charge at the
hearing.
Drafting Information
The principal authors of these regula-
tions are Kenneth Christman and Ted Set-
zer of the Office of the Associate Chief
Counsel (International). However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
2002–22 I.R.B.1061June 3, 2002

Par.2.In§1.954–0, paragraph (b) is
amended by:
1. Removing the entry for§1.954–
2(f)(2)(iii)(E).
2. Revising the entry for§1.954–
2(f)(2)(iv).
3. Adding entries for§1.954–
2(f)(2)(iv)(C), (f)(2)(v) and (f)(2)(vi).
4. Revising the entry for§1.954–
2(g)(2)(ii)(C).
The additions and revisions read as
follows::
§1.954–0 Introduction.
*****
(b)***
§1.954–2 Foreign personal holding
company income.
*****
(f)***
(2)***
(iv) Qualified hedging transaction entered
into prior to the date§1.954–2(f)(2)(v)
is published as a final regulation in the
Federal Register.
*****
(C) Effective date.
(v) Qualified hedging transaction entered
into on or after the date§1.954–
2(f)(2)(v) is published as a final regula-
tion in theFederal Register.
(A) In general.
(B) Exception.
(C) Examples.
(D) Effective date.
(vi) Financial institutions not a pro-
ducer, etc.
(g)***
(2)***
(ii)***
(C) Regular dealers.
(1) General rule.
(2) Certain interest-bearing liabilities
treated as dealer property.
(i) In general.
(ii) Failure to identify certain liabilities.
(iii) Effective date.
*****
Par. 3. Section 1.954–2 is amended by:
1. Removing paragraph (f)(2)(iii)(E).
2. Revising the heading of paragraph
(f)(2)(iv).
3. Adding paragraphs (f)(2)(iv)(C),
(f)(2)(v), and (f)(2)(vi).
4. Revising paragraphs (g)(2)(C) and
(g)(2)(iii).
The revisions and additions read as
follows:
§1.954–2 Foreign personal holding
company income.
*****
(f)***
(2)***
(iv) Qualified hedging transaction
entered into prior to the date§1.954–
2(f)(2)(v) is published as a final regula-
tion in theFederal Register.
*****
(C)Effective date. This paragraph
(f)(2)(iv) applies to gain or loss realized
by a controlled foreign corporation with
respect to a qualified hedging transaction
entered into prior to the date§1.954–
2(f)(2)(v) is published as a final regula-
tion in theFederal Register.
(v)Qualified hedging transaction
entered into on or after the date§1.954–
2(f)(2)(v) is published as a final regula-
tion in theFederal Register—(A)In gen-
eral.Thetermqualifiedhedging
transactionmeans abona fidehedging
transaction, as defined in paragraph
(a)(4)(ii) of this section, with respect to
one or more commodities transactions
reasonably necessary to the conduct of
any business by a producer, processor,
merchant or handler of commodities in a
manner in which such business is custom-
arily and usually conducted by others. For
purposes of this paragraph (f)(2)(v), a
producer, processor, merchant or handler
of commodities includes a controlled for-
eign corporation that regularly uses com-
modities in a manufacturing, construc-
tion, utilities, or transportation business.
(B)Exception. The termqualified
hedging transactiondoes not include a
transaction described in section 988(c)(1)
(withoutregardtosection
988(c)(1)(D)(i)).
(C)Examples. The following examples
illustrate the provisions of this paragraph
(f)(2)(v):
Example 1. CFC1 is a controlled foreign corpo-
ration located in country A. CFC1 manufactures and
sells machinery in country B using aluminum and
component parts purchased from third parties that
contain significant amounts of aluminum. CFC1
conducts its manufacturing business in a manner in
which such business is customarily and usually con-
ducted by others. To protect itself against increases
in the price of aluminum used in the machinery it
manufactures, CFC1 enters into futures purchase
contracts for the delivery of aluminum. These
futures purchase contracts arebona fidehedging
transactions. As CFC1 purchases aluminum and
component parts containing significant amounts of
aluminum in the spot market for use in its business,
it closes out an equivalent amount of aluminum
futures purchase contracts by entering into offsetting
aluminum futures sales contracts. The aluminum
futures purchase contracts are qualified hedging
transactions as defined in paragraph (f)(2)(v)(A) of
this section. Accordingly, any gain or loss on such
aluminum futures purchase contracts is excluded
from the computation of foreign personal holding
company income.
Example 2. CFC2 is a controlled foreign corpo-
ration located in country B. CFC2 operates an air-
line business within country B in a manner in which
such business is customarily and usually conducted
by others. To protect itself against increases in the
price of aviation fuel, CFC2 enters into forward
contracts for the purchase of aviation fuel. These
forward purchase contracts arebona fidehedging
transactions. As CFC2 purchases aviation fuel in the
spot market for use in its business, it closes out an
equivalent amount of its forward purchase contracts
for cash pursuant to a contractual provision that per-
mits CFC2 to terminate the contract and make or
receive a one-time payment representing the con-
tract’s fair market value. The aviation fuel forward
purchase contracts are qualified hedging transac-
tions as defined in paragraph (f)(2)(v)(A) of this
section. Accordingly, any gain or loss on such avia-
tion fuel forward purchase contracts is excluded
from the computation of foreign personal holding
company income.
(D)Effective date. This paragraph
(f)(2)(v) applies to gain or loss realized
by a controlled foreign corporation with
respect to a qualified hedging transaction
entered into on or after the date§1.954–
2(f)(2)(v) is published as a final regula-
tion in theFederal Register.
(vi)Financial institutions not a pro-
ducer, etc. For purposes of this paragraph
(f), a corporation is not a producer, pro-
cessor, merchant or handler of commodi-
ties if its business is primarily financial.
For example, the business of a controlled
foreign corporation is primarily financial
if its principal business is making a mar-
ket in notional principal contracts based
on a commodities index.
*****
(g)***
(2)***
(ii)***
(C)Regular dealers—(1)General
rule. Transactions in dealer property (as
defined in paragraph (a)(4)(v) of this sec-
tion) described in section 988(c)(1)(B) or
(C) that are entered into by a controlled
foreign corporation that is a regular dealer
(as defined in paragraph (a)(4)(iv) of this
section) in such property in its capacity as
June 3, 200210622002–22 I.R.B.

a dealer will be treated as directly related
to the business needs of the controlled
foreign corporation under paragraph
(g)(2)(ii)(A) of this section.
(2)Certain interest-bearing liabilities
treated as dealer property—(i)In gen-
eral. For purposes of this paragraph
(g)(2)(ii)(C), an interest-bearing liability
incurred by a controlled foreign corpora-
tion that is denominated in (or determined
by reference to) a non-functional cur-
rency shall be treated as dealer property if
the liability, by being denominated in
such currency, reduces the controlled for-
eign corporation’s currency risk with
respect to dealer property, and the liabil-
ity is identified on the controlled foreign
corporation’s records as a liability treated
as dealer property before the close of the
day on which the liability is incurred.
(ii)Failure to identify certain liabili-
ties. If a controlled foreign corporation
identifies certain interest-bearing liabili-
ties as liabilities treated as dealer property
under the previous paragraph but fails to
so identify other interest-bearing liabili-
ties that manage its currency risk with
respect to assets held that constitute
dealer property, the Commissioner may
treat such other liabilities as dealer prop-
erty if the Commissioner determines that
the failure to identify such other liabilities
had as one of its principal purposes the
avoidance of federal income tax.
(iii)Effective date. This paragraph
(g)(2)(ii)(C)(2) applies only to gain or
loss from an interest-bearing liability
entered into by a controlled foreign cor-
poration on or after the date§1.954–
2(g)(2)(ii)(C)(2) is published as a final
regulation in theFederal Register.
*****
(iii)Special rule for foreign currency
gain or loss from an interest-bearing
liability. Except as provided in paragraph
(g)(2)(ii)(C)(2) or (g)(5)(iv) of this sec-
tion, foreign currency gain or loss arising
from an interest-bearing liability is char-
acterized as subpart F income and non-
subpart F income in the same manner that
interest expense associated with the
liability would be allocated and appor-
tioned between subpart F income and
non-subpart F income under§§1.861–
9T and 1.861–12T.
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on May
10, 2002, 8:45 a.m., and published in the issue of
the Federal Register for May 13, 2002, 67 F.R.
31995)
Deletions From Cumulative
List of Organizations
Contributions to Which are
Deductible Under Section 170
of the Code
Announcement 2002–51
The name of an organization that no
longer qualifies as an organization
described in section 170(c)(2) of the
Internal Revenue Code of 1986 is listed
below.
Generally, the Service will not disal-
low deductions for contributions made to
a listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not pre-
cluded from disallowing a deduction for
any contributions made after an organiza-
tion ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory judg-
ment under section 7428 and if the con-
tributor (1) had knowledge of the revoca-
tion of the ruling or determination letter,
(2) was aware that such revocation was
imminent, or (3) was in part responsible
for or was aware of the activities or omis-
sions of the organization that brought
about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on March 18, 2002,
and would end on the date the court first
determines that the organization is not
described in section 170(c)(2) as more
particularly set forth in section 7428
(c)(1). For individual contributors, the
maximum deduction protected is $1,000,
with a husband and wife treated as one
contributor. This benefit is not extended
to any individual, in whole or in part, for
the acts or omissions of the organization
that were the basis for revocation.
Crisis at Home Intervention Center
San Bruno, CA
Changes in Annual
Accounting Period
Announcement 2002–53
PURPOSE
This announcement discusses some of
the more significant issues raised in con-
nection with finalizing Notice 2001–34,
2001–23 I.R.B. 1302, and Notice 2001–
35, 2001–23 I.R.B. 1314, which proposed
procedures for obtaining the Commis-
sioner’s approval to adopt, change, or
retain an annual accounting period under
§§441 and 442 of the Internal Revenue
Code and the regulations thereunder.
BACKGROUND
Notice 2001–34 proposed procedures
for obtaining the Commissioner’s prior
approval to adopt, change, or retain an
annual accounting period, applicable to a
taxpayer that is not within the scope of
any automatic approval procedure. Notice
2001–35 proposed new automatic
approval procedures for partnerships, S
corporations, electing S corporations, and
personal service corporations (PSCs).
Both notices requested comments from
the public in connection with the pro-
posed procedures. At the same time that
the Service published these notices, it
also issued new proposed regulations
(REG–106917–99, 2001–27 I.R.B. 4)
under§§441, 442, 706, and 1378, relat-
ing to annual accounting periods, which
also requested public comments.
Rev. Proc. 2002–39, finalizing Notice
2001–34, and Rev. Proc 2002–38, finaliz-
ing Notice 2001–35, appear elsewhere in
this Bulletin, along with Rev. Proc. 2002–
37, which provides updated automatic
approval procedures for corporations.
These revenue procedures, together with
final regulations (T.D. 8996, published in
the May 17, 2002, Federal Register (67
FR 35009)) under§§441, 442, 706, and
1378, issued concurrently, are intended to
provide comprehensive guidance on the
adoption, change, and retention of an
2002–22 I.R.B.1063June 3, 2002

annual accounting period. The most sig-
nificant comments received in connection
with Notice 2001–34 and Notice 2001–
35, along with certain other changes to
the proposed procedures, are discussed
below. Comments specific to the pro-
posed regulations are discussed in the
preamble to the final regulations.
CHANGES TO NOTICE 2001–34
(PRIOR APPROVAL PROCEDURES)
A.Natural Business Year
One commentator suggested that the
final revenue procedure clarify the terms
“peak and nonpeak periods,”“at or soon
after,”and“insignificant gross receipts,”
in connection with the annual business
cycle and seasonal business tests. Rev.
Proc. 2002–39 provides clarification by
including safe harbor rules for adminis-
trative convenience, as well as examples.
One safe harbor provides that 1 month
will be deemed to be“soon after”the end
of a peak period (in the case of the annual
business cycle test) or the close of opera-
tions (in the case of the seasonal business
test). Under a second safe harbor, gross
receipts will be deemed to be“insignifi-
cant”for purposes of the seasonal busi-
ness test if they are less than 10 percent
of the taxpayer’s total gross receipts for
the year. The examples illustrate the
application of these safe harbor rules.
Taxpayers that do not meet the safe har-
bor rules nevertheless may establish that
their requested taxable year meets the
annual business cycle test or seasonal
business test using all of the facts and cir-
cumstances.
Notice 2001–34 provided that a tax-
payer seeking to establish a natural busi-
ness year under section 5.03 must provide
information about its gross receipts for
the three taxable years immediately pre-
ceding the first effective year. Although
Rev. Proc. 2002–39 continues to require
this information, and to require that the
annual business cycle, seasonal business,
or 25-percent gross receipts test be met
for each of the three preceding years for
taxpayers that have been in existence for
that length of time, the Service and Trea-
sury realize that newly formed taxpayers
may be uncertain about whether and how
they can establish a natural business year
under these tests. Accordingly, Rev. Proc.
2002–39 clarifies that a taxpayer that has
not been in existence for 3 taxable years
may satisfy the annual business cycle or
seasonal business test by providing infor-
mation other than prior years’gross
receipts, such as a description of its busi-
ness and reasonable estimates of its gross
receipts. However, the Service and Trea-
sury believe that the more objective
25-percent gross receipts test should con-
tinue to apply only to established taxpay-
ers that can produce actual gross receipts
information for the required 3-year
period.
B.Additional Acceptable Business
Purposes
Section 5.02(1)(b) of Notice 2001–34
provides that a taxpayer, including a part-
nership, S corporation, electing S corpo-
ration, or PSC, may establish a business
purpose for a requested taxable year for
purposes of section 5.02(1) (to which
only general terms and conditions apply)
based on all of the facts and circum-
stances. A commentator requested that the
Service provide examples of the kinds of
facts and circumstances that would be
sufficient for a taxpayer to demonstrate a
sufficient business purpose. The commen-
tator further suggested that the final rev-
enue procedure explain whether and how
facts such as a taxpayer’s gross receipts
would be evaluated to determine whether
the taxpayer has demonstrated a sufficient
business purpose under the facts and cir-
cumstances test of section 5.02(1)(b). The
Service and Treasury intend for the facts
and circumstances test of section
5.02(1)(b) to apply only in rare and
unusual circumstances. Rev. Proc.
2002–39 has been clarified to that effect.
Accordingly, examples such as those sug-
gested by the commentator have not been
included in Rev. Proc. 2002–39.
It should be noted that, if a taxpayer
(other than a taxpayer with a required tax-
able year) fails to satisfy one of the three
alternative tests for showing a natural
business year (annual business cycle, sea-
sonal business, or 25-percent gross
receipts), then the taxpayer still may
obtain approval for the change if it dem-
onstrates some nontax reason for the
change and accepts additional terms and
conditions that are necessary to eliminate
substantial distortion created by the
change. Under Rev. Proc. 2002–39, this
nontax reason can be a reason not hereto-
fore accepted by the Service as a suffi-
cient business purpose in cases where
substantial distortion is present, and can
be based on criteria, such as gross
receipts, that are also the focus of the
natural business year tests. For example,
such a business purpose could include
having significant gross receipts in the
last months of the requested taxable year,
albeit less than 25 percent of the taxpay-
er’s annual gross receipts.
C.Changes Within 48 Months
Some taxpayers have expressed con-
cern that the Service will deny most, or
even all, applications to change or retain
an annual accounting period under the
final prior approval procedures if the tax-
payer made a change within the previous
48 months (“prior change”). Although a
prior change may disqualify a taxpayer
for automatic approval of a change or
retention, the Service expects that, for the
vast majority of applications under Rev.
Proc. 2002–39, approval will not be
denied because of a prior change. How-
ever, in certain cases, approval may be
denied because of the taxpayer’s account-
ing period history (for example, where
there exists a pattern of prior changes).
See generallysection 7.01 of Rev. Proc.
2002–39.
D.Director Consent/Audit Protection
Notice 2001–34 proposed to offer
audit protection to all taxpayers that
received prior approval under the final
revenue procedure to retain or change an
annual accounting period. Consistent with
procedures of the Service in the account-
ing method area, taxpayers under exami-
nation were required to secure the consent
of the Director to the change or retention.
One commentator argued that the require-
ment to obtain the Director’s consent was
burdensome, particularly for corporate
taxpayers for whom an annual accounting
period ordinarily would not be an issue
under consideration. The commentator
suggested either that all taxpayers under
examination be permitted to provide a
representation (under penalties of perjury)
that their annual accounting period is not
an issue under consideration, in lieu of a
letter of consent from the Director, or that
audit protection be limited to taxpayers
that provide the letter of consent.
June 3, 200210642002–22 I.R.B.

After carefully weighing the benefits
of audit protection against the burden of
obtaining the requisite Director consent,
the Service and Treasury Department
have determined that it is appropriate to
extend audit protection only to certain
taxpayers with required taxable years,
namely, partnerships, S corporations,
electing S corporations, and PSCs.
Accordingly, other corporate taxpayers,
and taxpayers with required taxable years
other than those identified above, that are
under examination or before an area
office or a federal court will not be
required to obtain Director consent as a
prerequisite to applying for a change
under Rev. Proc. 2002–39, and will not be
offered audit protection. Similarly, no
consent letter is required, and no audit
protection is offered, by Rev. Proc. 2002–
37, which provides automatic consent
procedures for corporations.
E.Failure to Satisfy Natural Business
Year Test in Future Years
Notice 2001–34 provides that if a part-
nership, S corporation, electing S corpo-
ration, or PSC changes to a natural busi-
ness year, and that year later fails to
qualify as a permitted year, the taxpayer
must then change to a permitted year.
One commentator objected to this condi-
tion, arguing that it effectively mandates
annual monitoring of the taxpayer’s con-
tinued compliance with the natural busi-
ness year requirement, and as such is
overly burdensome. The commentator
suggested that the final procedures
instead adopt a 3-year testing period.
The Service and Treasury Department
believe that a 3-year testing period is
inconsistent with the statutory framework
imposing required years on such taxpay-
ers, and that the taxpayer’s year must
continue to be a permitted year in order
for the taxpayer to retain it. It should be
noted, however, that even if the requested
taxable year fails in some later year to
qualify as a permitted year under the
original test for which approval was
granted (for example, the 25-percent
gross receipts test), the taxpayer need not
change its existing taxable year if the tax-
payer can demonstrate that the year is a
permitted year under some other test (for
example, the annual business cycle test).
The same would be true for a taxpayer
that changed to or retained a natural busi-
ness year under one of the automatic
approval revenue procedures.
F.Substantial Distortion of Income
Notice 2001–34 provides that, for pur-
poses of determining whether the addi-
tional terms and conditions of section
5.05 apply, distortion of income resulting
from the requested taxable year change
will not be considered substantial if the
amount of the distortion is less than both:
(1) 5 percent of the taxpayer’s estimated
gross receipts for its current taxable year;
and (2) $500,000. The amount of the dis-
tortion or deferral is the taxpayer’s allo-
cable share of income from a pass-
through entity, including ordinary income
or loss, rents, royalties, interest, divi-
dends, and deduction equivalents of cred-
its. A similarde minimisrule is provided
in Rev. Proc. 2000–11 (applied to each of
the 3 prior taxable years) for determining
whether a corporation with an interest in
a pass-through entity is within the scope
of that automatic approval revenue proce-
dure.
One commentator suggested that the
final prior approval procedures eliminate
the $500,000 floor. The commentator
believes that, in the case of prior approval
applications processed by the national
office, it is more appropriate for the Ser-
vice to determine on a case-by-case basis
whether an estimated amount of distor-
tion isde minimis.
The Service and Treasury Department
believe that the $500,000 floor is appro-
priate in order to promote consistency of
results and facilitate the administration of
prior approval applications. Thus, the
$500,000 floor is retained in Rev. Proc.
2002–39. Similarly, the $500,000 floor
contained in Rev. Proc. 2000–11 is
retained in Rev. Proc. 2002–37.
The commentator also recommended
that, regardless of thede minimisdistor-
tion test, the additional terms and condi-
tions of section 5.05 of Notice 2001–34
not apply if the taxpayer’s interest in the
pass-through entity is less than 5 percent
of the entity’s profits and capital. The
Service and Treasury do not believe that
such a rule would be appropriate, as even
a 1 percent interest in profits and capital
can potentially result in a significant
amount of distortion.
CHANGES TO NOTICE 2001–35
(AUTOMATIC APPROVAL
PROCEDURES FOR PASS-THROUGH
ENTITIES)
A.Natural Business Year
One commentator suggested that the
final procedures for obtaining automatic
approval by a pass-through entity clarify
whether a taxpayer changing to or from a
52–53-week taxable year ending with ref-
erence to its existing natural business year
is required to recompute the 25-percent
gross receipts test. Section 7.02(6) of
Rev. Proc. 2002–38 requires only a tax-
payer changing to a natural business year
using the 25-percent gross receipts test to
provide the gross receipts information
with its application, in compliance with
the instructions for Form 1128,Applica-
tion to Adopt, Change, or Retain a Tax
Year. A taxpayer changing to or from a
52–53-week taxable year ending with ref-
erence to its existing natural business year
is not required to provide this informa-
tion. However, as discussed above, for a
taxpayer with a required year to continue
to use a fiscal year, that year must con-
tinue to be a permitted year.
B.Ownership Taxable Year
Notice 2001–35 provided that, for pur-
poses of determining the ownership tax
year of an S corporation or electing S cor-
poration, a shareholder that is tax-exempt
under§501(a) is disregarded if such
shareholder is not subject to tax on any
income attributable to the S corporation.
One commentator suggested that tax-
exempt shareholders should not be disre-
garded if the S corporation is wholly
owned by such shareholders. This sugges-
tion has been adopted in Rev. Proc. 2002–
38.
C.Certain Minor Changes in Ownership
of Partnerships
To alleviate taxpayer burden associ-
ated with temporary and minor changes in
ownership of a partnership that result in a
new required year under§706(b), a new
rule has been added to Rev. Proc. 2002–
38. The rule provides that a partnership
required under§706(b) to change its tax-
able year due to a change of less than 10
percent of the aggregate interests of all
2002–22 I.R.B.1065June 3, 2002

partners in the partnership’s profits and
capital may continue to use its current
taxable year for one taxable year if it is
foreseeable that the change in ownership
will be reversed after one taxable year.
CHANGES TO REV. PROC. 2000–11
A.Automatic Changes to Natural
Business Year
Rev. Proc. 2000–11 did not allow cor-
porations with disqualifying interests in
pass-through entities to change automati-
cally to a natural business year under the
25-percent gross receipts test. Under the
final prior approval procedures of Rev.
Proc. 2002–39, a corporation qualifying
to change to a natural business year based
on the 25-percent gross receipts test gen-
erally would receive approval to do so
(subject only to general terms and condi-
tions) notwithstanding any resulting
deferral or distortion attributable to an
interest in a pass-through entity. Accord-
ingly, the Service and Treasury Depart-
ment believe that it is appropriate to pro-
vide automatic approval for corporations
to change to a natural business year,
based on the 25-percent gross receipts
test, notwithstanding their interest in a
pass-through entity. Rev. Proc. 2002–37
reflects this change.
B.Conforming Changes
Certain conforming changes have been
made to Rev. Proc. 2002–37, consistent
with the rules set forth in the final regu-
lations, Rev. Proc. 2002–38, and Rev.
Proc. 2002–39. For example, the limita-
tion on changes within 6 years has been
reduced to the most recent 48 months,
corporations that are shareholders of a
closely-held real estate investment trust
are considered to have an interest in a
pass-through entity for purposes of the
scope limitations of Rev. Proc. 2002–37,
and certain scope limitations are waived
for changes to (or from) certain 52–53-
week taxable years that reference the
same calendar month. In addition, Rev.
Proc. 2002–37 has been modified to pro-
vide that ade minimisinterest in a con-
trolled foreign corporation, foreign per-
sonal holding company, or passive
foreign investment company may be dis-
regarded under section 4 of that revenue
procedure for purposes of determining
whether a corporation is within the scope
of Rev. Proc. 2002–37, similar to the
treatment ofde minimisinterests in part-
nerships.
FURTHER INFORMATION
For further information regarding this
announcement, contact Martin Scully, Jr.
or Michael F. Schmit of the Office of the
Associate Chief Counsel (Income Tax and
Accounting) at (202) 622–4960 (not a
toll-free call).
June 3, 200210662002–22 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Intemal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2002–22 I.R.B.iJune 3, 2002

Numerical Finding List
1
Bulletins 2002–1 through 2002–21
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
2002–6, 2002–5 I.R.B.458
2002–7, 2002–5 I.R.B.459
2002–8, 2002–6 I.R.B.494
2002–9, 2002–7 I.R.B.536
2002–10, 2002–7 I.R.B.539
2002–11, 2002–6 I.R.B.494
2002–12, 2002–8 I.R.B.553
2002–13, 2002–7 I.R.B.540
2002–14, 2002–7 I.R.B.540
2002–15, 2002–7 I.R.B.540
2002–16, 2002–7 I.R.B.541
2002–17, 2002–8 I.R.B.561
2002–18, 2002–10 I.R.B.621
2002–19, 2002–8 I.R.B.561
2002–20, 2002–8 I.R.B.561
2002–21, 2002–8 I.R.B.562
2002–22, 2002–8 I.R.B.562
2002–23, 2002–8 I.R.B.563
2002–24, 2002–9 I.R.B.606
2002–25, 2002–10 I.R.B.621
2002–26, 2002–11 I.R.B.629
2002–27, 2002–11 I.R.B.629
2002–28, 2002–11 I.R.B.630
2002–29, 2002–11 I.R.B.631
2002–30, 2002–11 I.R.B.632
2002–31, 2002–15 I.R.B.747
2002–32, 2002–12 I.R.B.664
2002–33, 2002–12 I.R.B.666
2002–34, 2002–13 I.R.B.702
2002–35, 2002–12 I.R.B.667
2002–36, 2002–13 I.R.B.703
2002–37, 2002–13 I.R.B.703
2002–38, 2002–14 I.R.B.738
2002–39, 2002–14 I.R.B.738
2002–40, 2002–15 I.R.B.747
2002–41, 2002–14 I.R.B.739
2002–42, 2002–14 I.R.B.739
2002–43, 2002–16 I.R.B.792
2002–44, 2002–17 I.R.B.809
2002–45, 2002–18 I.R.B.833
2002–46, 2002–18 I.R.B.834
2002–47, 2002–18 I.R.B.844
2002–48, 2002–17 I.R.B.809
2002–49, 2002–19 I.R.B.919
2002–50, 2002–18 I.R.B.845
2002–52, 2002–19 I.R.B.919
Court Decisions:
2073, 2002–14 I.R.B.718
2074, 2002–20 I.R.B.954
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–7, 2002–6 I.R.B.489
2002–8, 2002–4 I.R.B.398
2002–9, 2002–5 I.R.B.450
2002–10, 2002–6 I.R.B.490
2002–11, 2002–7 I.R.B.526
2002–12, 2002–7 I.R.B.526
2002–13, 2002–8 I.R.B.547
2002–14, 2002–8 I.R.B.548
2002–15, 2002–8 I.R.B.548
2002–16, 2002–9 I.R.B.567
2002–17, 2002–9 I.R.B.567
2002–18, 2002–12 I.R.B.644
2002–19, 2002–10 I.R.B.619
2002–20, 2002–17 I.R.B.796
2002–21, 2002–14 I.R.B.730
2002–22, 2002–14 I.R.B.731
2002–23, 2002–15 I.R.B.742
2002–24, 2002–16 I.R.B.785
2002–25, 2002–15 I.R.B.743
2002–26, 2002–15 I.R.B.743
2002–27, 2002–18 I.R.B.814
2002–28, 2002–16 I.R.B.785
2002–29, 2002–17 I.R.B.797
2002–30, 2002–17 I.R.B.797
2002–31, 2002–19 I.R.B.908
2002–32, 2002–21 I.R.B.989
2002–33, 2002–21 I.R.B.989
2002–34, 2002–21 I.R.B.990
2002–35, 2002–21 I.R.B.992
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–209114–90, 2002–9 I.R.B.576
REG–104762–00, 2002–18 I.R.B.825
REG–105369–00, 2002–18 I.R.B.828
REG–107100–00, 2002–7 I.R.B.529
REG–107184–00, 2002–20 I.R.B.967
REG–107366–00, 2002–12 I.R.B.645
REG–118861–00, 2002–12 I.R.B.651
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–115054–01, 2002–7 I.R.B.530
REG–119436–01, 2002–3 I.R.B.377
REG–120135–01, 2002–8 I.R.B.552
REG–125450–01, 2002–5 I.R.B.457
REG–125626–01, 2002–9 I.R.B.604
REG–136193–01, 2002–21 I.R.B.995
REG–142299–01, 2002–4 I.R.B.418
REG–159079–01, 2002–6 I.R.B.493
REG–161424–01, 2002–21 I.R.B.1010
REG–163892–01, 2002–20 I.R.B.968
REG–165706–01, 2002–16 I.R.B.787
Proposed Regulations:—Continued:
REG–167648–01, 2002–16 I.R.B.790
REG–102740–02, 2002–13 I.R.B.701
REG–108697–02, 2002–19 I.R.B.918
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.401
2002–11, 2002–7 I.R.B.526
2002–12, 2002–3 I.R.B.374
2002–13, 2002–8 I.R.B.549
2002–14, 2002–5 I.R.B.450
2002–15, 2002–6 I.R.B.490
2002–16, 2002–9 I.R.B.572
2002–17, 2002–13 I.R.B.676
2002–18, 2002–13 I.R.B.678
2002–19, 2002–13 I.R.B.696
2002–20, 2002–14 I.R.B.732
2002–21, 2002–19 I.R.B.911
2002–22, 2002–14 I.R.B.733
2002–23, 2002–15 I.R.B.744
2002–24, 2002–17 I.R.B.798
2002–25, 2002–17 I.R.B.800
2002–26, 2002–15 I.R.B.746
2002–27, 2002–17 I.R.B.802
2002–28, 2002–18 I.R.B.815
2002–31, 2002–19 I.R.B.916
2002–32, 2002–20 I.R.B.959
2002–33, 2002–20 I.R.B.963
2002–36, 2002–21 I.R.B.993
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
2002–4, 2002–4 I.R.B.389
2002–5, 2002–6 I.R.B.461
2002–6, 2002–6 I.R.B.460
2002–7, 2002–8 I.R.B.543
2002–8, 2002–9 I.R.B.564
2002–9, 2002–10 I.R.B.614
2002–10, 2002–10 I.R.B.616
2002–11, 2002–10 I.R.B.608
2002–12, 2002–11 I.R.B.624
2002–13, 2002–12 I.R.B.637
2002–14, 2002–12 I.R.B.636
2002–15, 2002–13 I.R.B.668
2002–16, 2002–15 I.R.B.740
2002–17, 2002–14 I.R.B.716
2002–18, 2002–16 I.R.B.779
2002–19, 2002–16 I.R.B.778
2002–20, 2002–17 I.R.B.794
2002–21, 2002–17 I.R.B.793
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
June 3, 2002ii2002–22 I.R.B.

Revenue Rulings:—Continued:
2002–22, 2002–19 I.R.B.849
2002–23, 2002–18 I.R.B.811
2002–24, 2002–19 I.R.B.848
2002–25, 2002–19 I.R.B.904
2002–26, 2002–19 I.R.B.906
2002–27, 2002–20 I.R.B.925
2002–28, 2002–20 I.R.B.941
2002–29, 2002–20 I.R.B.940
2002–30, 2002–21 I.R.B.971
Tax Conventions:
2002–14 I.R.B.725
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8972, 2002–5 I.R.B.443
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
8976, 2002–5 I.R.B.421
8977, 2002–6 I.R.B.463
8978, 2002–7 I.R.B.500
8979, 2002–6 I.R.B.466
8980, 2002–6 I.R.B.477
8981, 2002–7 I.R.B.496
8982, 2002–8 I.R.B.544
8983, 2002–9 I.R.B.565
8984, 2002–13 I.R.B.668
8985, 2002–14 I.R.B.707
8986, 2002–16 I.R.B.780
8987, 2002–19 I.R.B.852
8988, 2002–20 I.R.B.929
8989, 2002–20 I.R.B.920
8990, 2002–20 I.R.B.947
8991, 2002–21 I.R.B.972
8992, 2002–21 I.R.B.981
2002–22 I.R.B.iiiJune 3, 2002

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–21
Announcements:
2001–83
Modified by
Ann. 2002–36, 2002–13 I.R.B.703
2002–9
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–35, 2002–12 I.R.B.667
Notices:
90–24
Modified and superseded by
Notice 2002–24, 2002–16 I.R.B.785
98–31
Supplemented by
Ann. 2002–37, 2002–13 I.R.B.703
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2001–61
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2001–68
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2002–14
Modified and superseded by
Rev. Proc. 2002–28, 2002–18 I.R.B.815
Proposed Regulations:
REG–209135–88
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–251502–96
Withdrawn by
Ann. 2002–33, 2002–12 I.R.B.666
REG–105316–98
Withdrawn by
REG–161424–01, 2002–21 I.R.B.1010
REG–113526–98
Withdrawn by
REG–105369–00, 2002–18 I.R.B.828
Proposed Regulations:—Continued
REG–107100–00
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–107566–00
Withdrawn by
REG–163892–01, 2002–20 I.R.B.968
REG–105344–01
Corrected by
Ann. 2002–7, 2002–5 I.R.B.459
REG–112991–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–38, 2002–14 I.R.B.738
REG–115054–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–119436–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–120135–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125450–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125626–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–126485–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–137519–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–142299–01
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–142686–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–159079–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
Revenue Procedures:—Continued
84–57
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.401
89–45
Superseded by
Rev. Proc. 2002–23, 2002–15 I.R.B.744
91–71
Clarified and superseded by
Rev. Proc. 2002–32, 2002–20 I.R.B.959
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
97–27
Modified and amplified by
Rev. Proc. 2002–19, 2002–13 I.R.B.696
98–49
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2000–46
Superseded by
Rev. Proc. 2002–22, 2002–14 I.R.B.733
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
June 3, 2002iv2002–22 I.R.B.

Revenue Procedures:—Continued
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–16
Modified by
Ann. 2002–26, 2002–11 I.R.B.629
2001–27
Supplemented by
Rev. Proc. 2002–20, 2002–14 I.R.B.732
2001–35
Obsoleted, except as provided in section 5.02 by
Rev. Proc. 2002–24, 2002–17 I.R.B.798
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2002–3
Modified by
Rev. Proc. 2002–22, 2002–14 I.R.B.733
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
Rev. Proc. 2002–21, 2002–19 I.R.B.911
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–9
Modified and clarified by
Ann. 2002–17, 2002–8 I.R.B.561
Modified and amplified by
Rev. Rul. 2002–9, 2002–10 I.R.B.614
Rev. Proc. 2002–17, 2002–13 I.R.B.676
Rev. Proc. 2002–19, 2002–13 I.R.B.696
Rev. Proc. 2002–27, 2002–17 I.R.B.802
Rev. Proc. 2002–28, 2002–18 I.R.B.815
Rev. Proc. 2002–33, 2002–20 I.R.B.963
Rev. Proc. 2002–36, 2002–21 I.R.B.993
2002–10
Modified by
Ann. 2002–49, 2002–19 I.R.B.919
Revenue Rulings:
55–261
Distinguished by
Rev. Rul. 2002–19, 2002–16 I.R.B.778
Revenue Rulings:—Continued
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
73–304
Superseded by
Rev. Proc. 2002–26, 2002–15 I.R.B.746
73–305
Superseded by
Rev. Proc. 2002–26, 2002–15 I.R.B.746
76–270
Amplified and superseded by
Rev. Rul. 2002–20, 2002–17 I.R.B.794
79–151
Distinguished by
Rev. Rul. 2002–19, 2002–16 I.R.B.778
79–284
Superseded by
Rev. Proc. 2002–26, 2002–15 I.R.B.746
80–218
Superseded by
Rev. Rul. 2002–23, 2002–18 I.R.B.811
87–112
Clarified by
Rev. Rul. 2002–22, 2002–19 I.R.B.849
89–29
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
92–19
Supplemented in part by
Rev. Rul. 2002–12, 2002–11 I.R.B.624
2002–7
Corrected by
Ann. 2002–13, 2002–7 I.R.B.540
Treasury Decisions:
8971
Corrected by
Ann. 2002–20, 2002–8 I.R.B.561
8972
Corrected by
Ann. 2002–23, 2002–8 I.R.B.563
Treasury Decisions:—Continued
8973
Corrected by
Ann. 2002–14, 2002–7 I.R.B.540
8975
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8976
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8978
Corrected by
Ann. 2002–39, 2002–14 I.R.B.738
2002–22 I.R.B.vJune 3, 2002

INDEX
Internal Revenue Bulletins
2002–1 through 2002–21
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page num-
ber on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Cafeteria plan elections (RR 27) 20,925
Contributions by employer to accident
and health plans (RR 3) 3,316
Determination letters:
Issuing procedures (RP 6) 1,203
Temporary use of draft Form 8717
(Ann 1) 2,304
User fees (Notice 1) 2,283
EGTRRA, section 401(k) hardship distri-
butions; section 414(v) catch-up contri-
butions (Notice 4) 2,298
Employee stock ownership plans, divi-
dend elections (Notice 2) 2,285
EMPLOYEE PLANS—
Cont.
Family and Medical Leave Act and caf-
eteria plans (Ann 4) 2,306
Fringe benefit plans, filing requirement
(Notice 24) 16,785
Full funding limitations:
Weighted average interest rate for:
January 2002 (Notice 9) 5,450
February 2002 (Notice 16) 9,567
First quarter 2002 (Notice 26)
15,743
April 2002 (Notice 28) 16,785
May 2002 (Notice 32) 21,989
Individual retirement arrangements:
Model forms (Ann 49) 19,919
Simplified employee pension plans,
etc., opinion letters (RP 10) 4,401
Late filing of Form 5500, relief from
penalties (Notice 23) 15,742
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
Minimum funding standards, terrorist
attack relief (Notice 7) 6,489
Nonbank trustees and custodians,
approval list (Ann 12) 8,553
Notice of significant reduction in the rate
of future benefit accrual (REG–
136193–01) 21,995
Prohibited transactions, proposed class
exemption (Ann 31) 15,747
Proposed Regulations:
26 CFR 1.401(a)(9)–6, added; required
distributions from retirement plans
(REG–108697–02) 19,918
26 CFR 1.411(d)–6, removed;
54.4980F–1, added; notice of sig-
nificant reduction in the rate of
future benefit accrual (REG–
136193–01) 21,995
Qualified retirement plans:
Catch-up contributions, change of date
of public hearing for REG–
142499–01 (Ann 24) 9,606
Determination letter program, exten-
sion of comment period (Ann 36)
13,703
Eligible rollover distributions, safe
harbor explanation (Notice 3) 2,
289; (in Spanish) (Ann 46) 18,834
Minimum distributions, reporting
(Notice 27) 18,814
EMPLOYEE PLANS—
Cont.
Professional employer organizations,
plan qualification (RP 21) 19,911
Required minimum distributions (TD
8987) 19,852; (REG–108697–02)
19,918
Regulations:
26 CFR 1.125–3; effect of the Family
and Medical Leave Act on the
operation of cafeteria plans; correc-
tion (Ann 4) 2,306
26 CFR 1.401(a)(9)–0 through–9,
added; 1.403(b)–3, added; 1.408–8,
added; 54.4974–2, added; 602.101,
amended; required distributions
from retirement plans (TD 8987) 19,
852
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
User fees, request for letter rulings
(RP 8) 1,252
EMPLOYMENT TAX
Application of partial undesignated pay-
ments to assessed tax, penalty, and
interest (RP 26) 15,746
Contributions by employer to accident
and health plans (RR 3) 3,316
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Form W-2, extension of time for employ-
ers to furnish to household employees
(Ann 19) 8,561
Frequent flyer miles attributable to busi-
ness or official travel (Ann 18) 10,621
Levy restrictions during installment
agreements (REG–104762–00) 18,825
Notice of Determination of Worker Clas-
sification, procedures (Notice 5) 3,320
Options and nonqualified deferred com-
pensation transferred pursuant to a
divorce, taxation and reporting (Notice
31) 19,908
June 3, 2002vi2002–22 I.R.B.

EMPLOYMENT TAX—
Cont.
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (REG–104762–00) 18,825
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Statutory stock options:
Change in hearing date for REG–
142686–01 (Ann 11) 6,494
Extension of deadline for comments to
Notices 2001–72 and 2001–73 (Ann
8) 6,494
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
ESTATE TAX
Application of partial undesignated pay-
ments to assessed tax, penalty, and
interest (RP 26) 15,746
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Levy restrictions during installment
agreements (REG–104762–00) 18,825
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (REG–104762–00) 18,825
ESTATE TAX—
Cont.
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
EXCISE TAX
Amended quarterly federal excise tax
return, new Form 720X (Ann 10)
7,539
Amendments to regulations governing
Chapter 42 excise taxes, comments
requested (Ann 47) 18,844
Application of partial undesignated pay-
ments to assessed tax, penalty, and
interest (RP 26) 15,746
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01) 2,
302; correction (Ann 7) 5,459
Excise taxes on excess benefit transac-
tions (TD 8978) 7,500; correction
(Ann 39) 14,738
Forms:
720, time for filing by eligible air car-
riers (TD 8983) 9,565
720X, Amended Quarterly Federal
Excise Tax Return, new (Ann 10)
7,539
Gambling-related taxes, Indian Gaming
Regulatory Act (CD 2073) 14,718
Golden parachute payments (REG–
209114–90) 9,576
Levy restrictions during installment
agreements (REG–104762–00) 18,825
Liability for the foreign insurer or rein-
surer excise tax (REG–125450–01)
5,457
Nonconventional source fuel credit,
inflation-adjustment factor, reference
price for CY 2001 (Notice 30) 17,797
Prohibited transactions, proposed class
exemption (Ann 31) 15,747
EXCISE TAX—
Cont.
Proposed Regulations:
26 CFR 1.280G–1, added; golden
parachute payments (REG–209114–
90) 9,576
26 CFR 1.401(a)(9)–6, added; required
distributions from retirement plans
(REG–108697–02) 19,918
26 CFR 46.4374–1, revised; liability
for insurance premium excise tax
(REG–125450–01) 5,457
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (REG–104762–00) 18,825
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
Qualified retirement plans:
Required minimum distributions (TD
8987) 19,852; (REG–108697–02)
19,918
Regulations:
26 CFR 1.401(a)(9)–0 through–9,
added; 1.403(b)–3, added; 1.408–8,
added; 54.4974–2, added; 602.101,
amended; required distributions
from retirement plans (TD 8987) 19,
852
26 CFR 40.6071(a)–3, added; time for
eligible air carriers to file the third
calendar quarter 2001 Form 720 (TD
8983) 9,565
26 CFR 53.4958–0 through–8, added;
53.4958–0T through–8T, removed;
301.7611–1, revised; 602.101,
amended; excise taxes on excess
benefit transactions (TD 8978) 7,
500; correction (Ann 39) 14,738
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
Valuation of stock options for golden
parachute payments (RP 13) 8,549
2002–22 I.R.B.viiJune 3, 2002

EXEMPT
ORGANIZATIONS
Advance letter rulings and determination
letters, areas which will not be issued
from, Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TE/GE) (RP 3) 1,117
Amendments to regulations governing
Chapter 42 excise taxes, comments
requested (Ann 47) 18,844
Electronic filing system for exempt orga-
nization returns, development (Ann 27)
11,629
Excise taxes on excess benefit transac-
tions (TD 8978) 7,500; correction
(Ann 39) 14,738
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
List of organizations classified as private
foundations (Ann 16) 7,541; (Ann 25)
10,621; (Ann 28) 11,630; (Ann 32)
12,664; (Ann 50) 18,845
Obligations of state and local govern-
ments, refunding issue (REG–165706–
01) 16,787
Political organizations, voluntary compli-
ance program to promote disclosure
(Notice 34), 21,990
Proposed Regulations:
26 CFR 1.150–1, amended; obliga-
tions of states and political subdivi-
sions (REG–165706–01) 16,787
Qualified 501(c)(3) bonds, gross proceeds
(Notice 10) 6,490
Regulations:
26 CFR 1.170A–9, amended;
1.509(a)–3, amended; 1.512(a)–1,
amended; 1.513–4, added; taxation
of tax-exempt organizations’income
from corporate sponsorship (TD
8991) 21972
26 CFR 53.4958–0 through–8, added;
53.4958–0T through–8T, removed;
301.7611–1, revised; 602.101,
amended; excise taxes on excess
benefit transactions (TD 8978) 7,
500; correction (Ann 39) 14,738
Revocations (Ann 29) 11,631
Taxation of tax-exempt organizations’
income from corporate sponsorship
(TD 8991) 21,972
EXEMPT
ORGANIZATIONS—
Cont.
Tax-exempt bonds, hospital refinancing
bonds, refunding issues (Ann 43) 16,
792
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
Termination of private foundation status,
transfer of assets (RR 28) 20,941
User fees, request for letter rulings (RP 8)
1,252
GIFT TAX
Application of partial undesignated pay-
ments to assessed tax, penalty, and
interest (RP 26) 15,746
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Levy restrictions during installment
agreements (REG–104762–00) 18,825
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (REG–104762–00) 18,825
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33) 12,
666
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
Accounting, unit livestock price method
(REG–125626–01) 9,604
INCOME TAX—
Cont.
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Advance Pricing Agreement (APA) pro-
gram for 2001 (Ann 40) 15,747
Agent, definition for certain purposes
(REG–120135–01) 8,552
Allocation of loss with respect to stock
and other personal property (TD 8973)
4,391; correction (Ann 14) 7,540
Application of partial undesignated pay-
ments to assessed tax, penalty, and
interest (RP 26) 15,746
Arbitrage and private activity restrictions,
investment-type property (prepayment),
private loan (prepayment) (REG–
105369–00) 18,828
Automobile owners and lessees, determi-
nation of correct tax liability, 2002
inflation adjustment (RP 14) 5,450
Averaging of farm income (TD 8972) 5,
443; correction (Ann 23) 8,563
Bonds, tax and revenue anticipation, safe
harbor (RP 31) 19,916
Cafeteria plan elections (RR 27) 20,925
Capitalized costs, impact fees (RR 9) 10,
614
Charitable contributions, substantiation
requirements relief (Notice 25) 15,743
Classification of certain business entities,
check-the-box regulations (TD 8970)
2,281
Combat zone personnel, tax relief (Notice
17) 9,567
Consolidated returns:
Loss disallowance, duplicated loss
(Notice 11) 7,526; (Notice 18) 12,
644
Waiver on ban on reconsolidation after
disaffiliation (RP 32) 20,959
Contributions by employer to accident
and health plans (RR 3) 3,316
Corporations, distributions of stock or
securities in connection with an acqui-
sition, recognition of gain (TD 8988)
20,929; (REG–163892–01) 20,968
June 3, 2002viii2002–22 I.R.B.

INCOME TAX—
Cont.
Credits:
Low-income housing credit:
Resident population estimates, 2002
(Notice 13) 8,547
Satisfactory bond,“bond factor”
amounts for the period:
January through March 2002 (RR
8) 9,564
April through June 2002 (RR 24)
19,848
Tax-exempt bond financing (RR 21)
17,793
New markets tax credit (TD 8971)
3,308; correction (Ann 20) 8,561;
(REG–119436–01) 3,377
Nonconventional source fuel credit,
inflation adjustment factor, reference
price for CY 2001 (Notice 30) 17,
797
Damage actions for unlawful collections
(REG–107366–00) 12,645
Dealers in securities futures contracts, let-
ter rulings (RP 11) 7,526
Deduction and capitalization of expendi-
tures, rules and standards, public com-
ment (Ann 9) 7,536; correction (Ann
35) 12,667
Deemed sale or acquisition of an insur-
ance company’s assets, application of
section 338 (REG–118861–00) 12,651
Disallowance of deductions and credits
for failure to file timely return (TD
8981) 7496; (REG–107100–00)
7,529
Disaster relief for September 11, 2001,
terrorist attack for:
Tentative carryback adjustments; post-
ponement of time to apply (Notice
15) 8,548
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01) 2,
302; correction (Ann 7) 5,459
Electronic and magnetic filing, specifica-
tions for questionable Forms W-4,
updated information (Ann 26) 11,629
Electronic filing of Form 1040, elimina-
tion of regulatory impediments (TD
8989) 20,920; (REG–107184–00) 20,
967
Enrolled agent renewal (Ann 41) 14,739
Entity classification election, relief (RP
15) 6,490
Equity options with flexible terms (TD
8990) 20,947
INCOME TAX—
Cont.
Extension for filing Form 1042-S (Ann
34) 13,702
Forms:
1040, electronic filing, elimination of
regulatory impediments (TD 8989)
20,920; (REG–107184–00) 20,967
1042-S, reporting to nonresident
aliens, withholding agents, filing
extension (Ann 34) 13,702
1098–E, filing requirements (TD
8992) 21,981
1098–T, filing requirements (REG–
161424–01) 21,1010
8850, electronic submission (Ann 44)
17,809
8851, Summary of Archer MSAs,
updated information (Ann 52) 19,
919
Frequent flyer miles attributable to busi-
ness or official travel (Ann 18) 10,621
Gain recognition, section 469 (Notice 29)
17,797
Golden parachute payments (REG–
209114–90) 9,576
Gross income, transfers of property inci-
dent to divorce (RR 22) 19,849
Guidance priority list, comments (Notice
22) 14,731
Hedging transactions (TD 8985) 14,707
Home-based business tax avoidance
schemes (Ann 48) 17,809
Industry Issue Resolution (IIR) Program,
establishment for resolution of tax
issues (Notice 20) 17,796
Inflation-adjusted items for 2001, expa-
triation, correction (Ann 5) 4,420
Information reporting:
Payments of interest on qualified edu-
cation loans, magnetic media filing
requirements (TD 8992) 21,981
Qualified tuition and related expenses,
magnetic media filing requirements
(REG–161424–01) 21,1010
Insurance companies:
Computation of life insurance reserves
for annuity contracts using NAIC
Actuarial Guideline 33, changes
basis subject to section 807(f) (RR 6)
6,460
Interest rate tables (RR 12) 11,624
Tentative differential earnings rate and
tentative recomputed differential
earnings rate (Notice 19) 10,619
INCOME TAX—
Cont.
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2002 (RR 2),271;
correction (Ann 13) 7,540
February 2002 (RR 5) 6,461
March 2002 (RR 10) 10,616
April 2002 (RR 17) 14,716
May 2002 (RR 25) 19,904
Rates:
Farm real property, special use
value (RR 26) 19,906
Underpayments and overpayments,
quarter beginning:
April 1, 2002 (RR 13) 12,367
Inventory:
Automobile dealers, replacement cost
method of accounting (RP 17) 13,
676
Dollar-value LIFO and inventory price
index computation (IPIC) methods
(TD 8976) 5,421; correction (Ann
22) 8,562
LIFO:
Price indexes used by department
stores for:
November 2001 (RR 4) 4,389
December 2001 (RR 7) 8,543
January 2002 (RR 14) 12,636
February 2002 (RR 18) 16,779
March 2002 (RR 29) 20,940
Letter rulings, Determination letters, and
information letters issued by Associates
Chief Counsel and Division Counsel/
Associate Chief Counsel (TE/GE) (RP
1) 1,1
Levy restrictions during installment
agreements (REG–104762–00) 18,825
Life insurance companies, suspension of
filing Form 8390 in 2002 and 2003
(Notice 33) 21,989
Like-kind exchanges, definition of dis-
qualified person (TD 8982) 8,544
Lookback period, pendency of a prior
bankruptcy petition (CD 2074) 20,954
Loss limitation rules (TD 8984) 13,668;
(REG–102740–02) 13,701
Major disaster and emergency areas list-
ing (RR 11) 10,608
Materials and supplies, restaurant small-
wares (RP 12) 3,374
2002–22 I.R.B.ixJune 3, 2002

INCOME TAX—
Cont.
Medical expense deduction, weight-loss
program (RR 19) 16,778
Methods of accounting:
Additional first year depreciation (RP
33) 20,963
Automatic consent to change:
Cash receipts and disbursements
method (RP 28) 18,815
Certain methods of accounting (RP
9) 3,327; correction (Ann 17)
8,561
To the cash method and the materi-
als and supplies method (Notice
14) 8,547
Cash receipts and disbursements
method (Ann 45) 18,833
Depreciation of tires, safe harbor
method, original tire capitalization
method (RP 27) 17,802
Involuntary changes, discussion of
issues (Ann 37) 13,703
Prior consent, automatic consent to
changes in (RP 19) 13,696
Service-imposed changes (RP 18) 13,
678
Taxable year of inclusion (RP 36) 21,
993
Miscellaneous federal tax matters, correc-
tion of language referring taxpayers to
the IRS Internet site for several pro-
posed regulations (Ann 30) 11,632
Mortgage bonds and credit certificates,
median income figures–2002 (RP 24)
17,798
Notice and opportunity for hearing:
Before levy (TD 8980) 6,477
Upon filing of notice of federal tax
lien (TD 8979) 6,466
Notional principal contract:
Contingent and noncontingent nonpe-
riodic payment (RR 30) 21,971
Nonperiodic payment, listed transac-
tion (Notice 35) 21,992
Obligations of state and local govern-
ments, refunding issue (REG–165706–
01) 16,787
Partnerships:
Basis adjustments upon the sale of a
corporate partner’s stock (TD 8986)
16,780; (REG–167648–01) 16,790
Form 1065 electronic filing waiver
request (Ann 3) 2,305
Optional election to make monthly
section 706(a) computations (RP 16)
9,572
INCOME TAX—
Cont.
Patriots’Day, filing date (Notice 12)
7,526
Payment of internal revenue taxes by
credit card and debit card (TD 8969)
2,276
Private foundations, organizations now
classified as (Ann 16) 7,541; (Ann 25)
10,621; (Ann 28) 11,630; (Ann 32)
12,664; (Ann 50) 18,845
Proposed Regulations:
26 CFR Parts 1, 31, 46, and 301; mis-
cellaneous federal tax matters; cor-
rection of language referring taxpay-
ers to the IRS Internet site for
several proposed regulations (Ann
30) 11,632
26 CFR 1.41–0,–3,–8, amended;
1.41–4, revised; credit for increasing
research activities (REG–112991–
01) 4,404; correction (Ann 38) 14,
738
26 CFR 1.45D–1, added; new markets
tax credit (REG–119436–01) 3,377
26 CFR 1.48–12, revised; 1.152–3,
revised; 1.611–3, revised; 1.852–9,
revised; 301.6011–1, revised;
301.6903–1(b), added; guidance
necessary to facilitate electronic tax
administration (REG–107184–00)
20,967
26 CFR 1.66–1 through–5, added;
treatment of community income for
certain individuals not filing joint
returns (REG–115054–01) 7,530
26 CFR 1.141–5, amended; 1.148–1,
revised; arbitrage and private activ-
ity restrictions applicable to tax-
exempt bonds issued by state and
local governments, investment-type
property (prepayment), private loan
(prepayment) (REG–105369–00) 18,
828
26 CFR 1.150–1, amended; obliga-
tions of states and political subdivi-
sions (REG–165706–01) 16,787
26 CFR 1.197–0, revised; 1.197–2,
amended; 1.338–0,–1, amended;
1.338–11, added; 1.381(c)(22)–1,
amended; 1.1060–1, amended;
application of section 338 to insur-
ance companies (REG–118861–00)
12,651
26 CFR 1.280G–1, added; golden
parachute payments (REG–209114–
90) 9,576
INCOME TAX—
Cont.
26 CFR 1.337(d)–2, added; 1.1502–
20(i), added; 1.1502–32(b)(4)(v),
added; loss limitation rules (REG–
102740–02) 13,701
26 CFR 1.337(d)–6,–7, added; certain
transfers of property to regulated
investment companies (RICs) and
real estate investment trusts (REITs)
(REG–142299–01, REG–209135–
88) 4,418; notice of public hearing
(Ann 6) 5,458; correction (Ann 15)
7,540
26 CFR 1.355–0, amended; 1.355–7,
added; recognition of gain on certain
distributions of stock or securities in
connection with an acquisition
(REG–163892–01) 20,968
26 CFR 1.471–6, amended; unit live-
stock price method (REG–125626–
01) 9,604
26 CFR 1.705–1,–2, amended;
amendments to rules for determina-
tion of basis of partner’s interest,
special rules (REG–167648–01) 16,
790
26 CFR 1.874–1, amended; 1.882–4,
amended; disallowance of deduc-
tions and credits for failure to file
timely return (REG–107100–00)
7,529
26 CFR 1.1441–1, amended;
301.6109–1, amended; taxpayer
identification number rule where
taxpayer claims treaty rate and is
entitled to an unexpected payment
(REG–159079–01) 6,493
26 CFR 1.6050S–0, amended;
301.6011–2, amended; information
reporting for qualified tuition and
related expenses, magnetic media
filing requirements for information
returns (REG–161424–01) 21,1010
26 CFR 301.6103(1)–1, added;
301.6103(m)–1, added; definition of
agent for certain purposes (REG–
120135–01) 8,552
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
June 3, 2002x2002–22 I.R.B.

INCOME TAX—
Cont.
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (REG–104762–00) 18,825
26CFR301.7426–2,added;
301.7430–1,–2,–3,–6, amended;
301.7430–8, added; 301.7433–1,
amended; 301.7433–2, added; civil
cause of action for damages caused
by unlawful tax collection actions,
including actions taken in violation
of section 362 or section 524 of the
bankruptcy code (REG–107366–00),
12,645
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33) 12,666
Publication 1245, Specifications for Fil-
ing Form W-4, Employee’s Withhold-
ing Allowance Certificate, Magneti-
cally or Electronically, updated
information for questionable Forms
W-4 (Ann 26) 11,629
Qualified 501(c)(3) bonds, gross proceeds
(Notice 10) 6,490
Qualified covered calls (TD 8990) 20,
947
Qualified research, credit computation
(REG–112991–01) 4,404; correction
(Ann 38) 14,738
Qualified zone academy bonds, limitation
for 2002 (RP 25) 17,800
Regulations:
26 CFR 1.45D–1T, added; 602.101(b),
amended; new markets tax credit
(TD 8971) 3,308; correction (Ann
20) 8,561
26 CFR 1.48–12(d)(7)(iii), added;
1.48–12T, revised; 1.152–3,
amended; 1.611–3, amended;
1.852–9, amended; 301.6011–1,
removed; 301.6903–1, amended;
guidance necessary to facilitate elec-
tronic tax administration (TD 8989)
20,920
26 CFR 1.337(d)–2, amended;
1.337(d)–2T, added; 1.1502–20(i),
added; 1.1502–20T, added; 1.1502–
32, amended; 1.1502–32T, added;
602.101, amended; loss limitation
rules (TD 8984) 13,668
INCOME TAX—
Cont.
26 CFR 1.337(d)–5T, amended;
1.337(d)–6T,–7T, added; 602.101,
amended; certain transfers of prop-
erty to regulated investment compa-
nies (RICs) and real estate invest-
ment trusts (REITs) (TD 8975) 4,
379; correction (Ann 21) 8,562
26 CFR 1.355–0, amended; 1.355–7T,
revised; recognition of gain on cer-
tain distributions of stock or securi-
ties in connection with an acquisi-
tion (TD 8988) 20,929
26 CFR 1.472–8, amended; 602.101,
revised; dollar-value LIFO regula-
tions; inventory price index compu-
tation (IPIC) method (TD 8976) 5,
421; correction (Ann 22) 8,562
26 CFR 1.705–1, amended; 1.705–2,
added; determination of basis of
partner’s interest, special rules (TD
8986) 16,780
26 CFR 1.861–8,–8T, amended;
1.865–1, added; 1.865–1T,–2T,
removed; 1.865–2, amended;
1.904–4, amended; allocation of loss
with respect to stock and other per-
sonal property (TD 8973) 4,391;
correction (Ann 14) 7,540
26 CFR 1.874–1, amended; 1.874–1T,
added; 1.882–4, amended; 1.882–
4T, added; disallowance of deduc-
tions and credits for failure to file
timely return (TD 8981) 7,496
26 CFR 1.1031(k)–1, revised; defini-
tion of disqualified person (TD
8982) 8,544
26 CFR 1.1092(c)–1 through–4,
added; equity options with flexible
terms, qualified covered call treat-
ment (TD 8990) 20,947
26CFR1.1221–2,revised;
1.1256(e)–1, revised; 602.101,
amended; hedging transactions (TD
8985) 14,707
26 CFR 1.1301–1, added; 602.101,
amended; averaging of farm income
(TD 8972) 5,443; correction (Ann
23) 8,563
26 CFR 1.1441–6, amended; 1.1441–
1T,–6T, added; 301.6109–1,
revised; 301.6109–1T, added; tax-
payer identification number rule
where taxpayer claims treaty rate
and is entitled to an unexpected pay-
ment (TD 8977) 6,463
INCOME TAX—
Cont.
26 CFR 1.6050I–0,–1, amended; cross
referencing section 5331 of title 31
relating to reporting of certain cur-
rency transactions by nonfinancial
trades or businesses under the Bank
Secrecy Act (TD 8974) 3,318
26 CFR 1.6050S–0,–3, added;
1.6050S–2T,–4T, amended;
301.6011–2, amended; 602.101,
amended; information reporting for
payments of interest on qualified
education loans; magnetic media fil-
ing requirements for information
returns (TD 8992) 21,981
26 CFR 301.6103(k)(9)–1, added;
301.6103(k)(9)–1T, removed;
301.6311–1, revised; 301.6311–2,
added; 301.6311–2T, removed; pay-
ment by credit card and debit card
(TD 8969) 2,276
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
26CFR301.6320–1,added;
301.6320–1T, removed; notice and
opportunity for hearing upon filing
of notice of federal tax lien (TD
8979) 6,466
26CFR301.6330–1,added;
301.6330–1T, removed; notice and
opportunity for hearing before levy
(TD 8980) 6,477
26 CFR 301.7701–3, amended; classi-
fication of certain business entities,
check-the-box regulations (TD
8970) 2,281
Renewal of continuing professional edu-
cation sponsor agreements (Ann 42) 14,
739
Rental real estate, undivided fractional
interests (RP 22) 14,733
Reporting of certain currency transactions
by nonfinancial trades or businesses to
the IRS and FinCEN (TD 8974) 3,318
Restrictions on disclosure and use of tax
return information by tax return prepar-
ers (Notice 6) 3,326
Revocations, exempt organizations (Ann
29) 11,631
Section 911(d)(4) waiver, 2001 update
(RP 20) 14,732
2002–22 I.R.B.xiJune 3, 2002

INCOME TAX—
Cont.
Spin-offs, employee stock options and
restricted stock (RR 1) 2,268
Split-dollar life insurance arrangements
(Notice 8) 4,398
Standard Industry Fare Level (SIFL) for-
mula (RR 15) 13,668
Tax conventions:
Election to defer U.S. income tax on
certain Canadian pension plans (RP
23) 15,744
Netherlands income tax convention,
investment yield tax (RR 16) 15,
740
Shipping and aircraft agreement,
Republic of Ghana, 14,725
Tax shelters, tax avoidance using inflated
basis (Notice 21) 14,730
Tax-exempt bonds, hospital refinancing
bonds, refunding issues (Ann 43) 16,
792
Taxpayer identifying number, rule for cer-
tain foreign individuals claiming treaty
benefits (TD 8977) 6,463; (REG–
159079–01) 6,493
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
Timely filing of federal tax returns,
claims for refund, statements or other
documents from a foreign country (RR
23) 18,811
Transfers of property to RICs and REITs
(TD 8975) 4,379; (REG–142299–01,
REG–209135–88) 4,418; notice of
public hearing (Ann 6) 5,458; correc-
tion (Ann 15) 7,540; correction (Ann
21) 8,562
Treatment of community income for cer-
tain individuals not filing joint returns
(REG–115054–01) 7,530
Trust, charitable remainder unitrust (RR
20) 17,794
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
Valuation of stock options for golden
parachute payments (RP 13) 8,549
Waiver of accuracy-related penalty for
disclosure of tax shelter treatment (Ann
2) 2,304
SELF-EMPLOYMENT
TAX
Application of partial undesignated pay-
ments to assessed tax, penalty, and
interest (RP 26) 15,746
Levy restrictions during installment
agreements (REG–104762–00) 18,825
Proposed Regulations:
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (REG–104762–00) 18,825
June 3, 2002xii2002–22 I.R.B.