rp-03-34.pdf

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Part III

Administrative, Procedural and Miscellaneous

26 CFR 601.204: Changes in accounting periods and methods of
accounting.
(Also Part I, '' 442; 1.442-1)

Rev. Proc. 2003-34

SECTION 1. PURPOSE
.01 This revenue procedure modifies one of the terms and
conditions under which the Internal Revenue Service grants
approval of requests for changes in annual accounting periods
filed under Rev. Proc. 2002-37, 2002-22 I.R.B. 1030, and Rev.
Proc. 2002-39, 2002-22 I.R.B. 1046. Specifically, this revenue
procedure modifies the term and condition pursuant to which
taxpayers generally are prohibited from carrying back net
operating losses (NOLs) and capital losses (CLs) generated in the
short period necessary to effect the change. See section 6.08 of
Rev. Proc. 2002-37, and section 5.04(6) of Rev. Proc. 2002-39.
.02 The Modified Carryback Term and Condition of section
4.01 of this revenue procedure generally applies, in the case of

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taxpayers within the scope of Rev. Proc. 2002-37, to taxable
years ending on or after April 8, 2003, and, in the case of
certain taxpayers within the scope of Rev. Proc. 2002-39, to
applications filed on or after that date. In addition, section 5
of this revenue procedure allows certain qualifying taxpayers
that previously changed their annual accounting period (either
automatically or with prior approval) to elect to apply either
(1) the Modified Carryback Term and Condition, under which the
loss is carried back to the applicable number of years prescribed
by § 172 or 1212 of the Internal Revenue Code as it would have
applied to the short period; or (2) in the case of taxpayers with
certain NOLs arising in short periods ending during 2001 or 2002,
an Alternative Carryback Term and Condition under which the NOL
is carried back to each of the 2 taxable years preceding the
short period.
SECTION 2. BACKGROUND
.01 Section 442 and § 1.442-1(a) of the Income Tax
Regulations generally provide that a taxpayer that wants to
change its annual accounting period and use a new taxable year
must obtain the approval of the Commissioner.
.02 Section 1.442-1(b)(2) provides, in relevant part, that
a change in annual accounting period will be approved only where

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the taxpayer agrees to the Commissioner’s prescribed terms,
conditions, and adjustments for effecting the change.
.03 Section 1.442-1(b)(3) provides that such terms,
conditions, and adjustments may include adjustments necessary to
neutralize the tax effects of a substantial distortion of income
that would otherwise result from the requested annual accounting
period, including, for example, the creation of a short period in
which there is a substantial NOL, CL, or credit (including a
general business credit).
.04 Section 172(b)(1)(A)(i) generally provides that an NOL
for any taxable year must be carried back to each of the 2
taxable years preceding the taxable year of such NOL, unless the
taxpayer elects to forgo the carryback period by attaching a
statement to the taxpayer’s timely filed original federal income
tax return for the loss year. See § 172(b)(3). Section
172(b)(1)(H) provides that NOLs arising in a taxable year ending
during 2001 and 2002 must be carried back to each of the 5
taxable years preceding the taxable year of such NOL, unless the
taxpayer elects to forgo the carryback period entirely under §
172(b)(3), or elects under § 172(j) to forgo the 5-year carryback
period in favor of a 2-year carryback period. In addition, § 172
provides special rules (including different carryback periods)

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for certain net operating losses, such as specified liability
losses, casualty losses, and net operating losses incurred by
real estate investment trusts and farming businesses.
.05 Section 1212 generally provides that if a corporation
has a net CL for any taxable year, the net CL generally must be
carried back to each of the 3 taxable years preceding the taxable
year of the CL.
.06 Rev. Proc. 2002-37 provides the exclusive procedures
for certain corporations to obtain automatic approval of the
Commissioner to change their annual accounting periods. Rev.
Proc. 2002-37 modifies, amplifies, and supersedes Rev. Proc.
2000-11, 2000-1 C.B. 309.
.07 Rev. Proc. 2002-39 provides the general procedures for
establishing a business purpose and obtaining the approval of the
Commissioner to adopt, change, or retain an annual accounting
period in cases where the taxpayer does not meet the requirements
for using an automatic approval revenue procedure.
.08 Section 6.08 of Rev. Proc. 2002-37 provides, as a term
and condition for automatic approval, that a corporation
generally is prohibited from carrying back an NOL or CL generated
in the short period (the “Original Carryback Term and
Condition”). The Original Carryback Term and Condition, however,

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is not imposed if the NOL or CL either (1) is $50,000 or less; or
(2) results from a short period of 9 months or longer and is less
than the NOL or CL for the 12-month period beginning with the
first day of the short period. Section 5.04(6) of Rev. Proc.
2002-39 also imposes the Original Carryback Term and Condition
for prior approval of a change in annual accounting period.
Moreover, the Service has imposed a similar term and condition in
consent letters issued prior to Rev. Proc. 2002-39. The purpose
of the Original Carryback Term and Condition is to prevent
artificial distortions of income from NOLs and CLs that are
generated in the short period.
.09 The Service has determined that the purpose of the
Original Carryback Term and Condition would not be frustrated if
the exception to that term were expanded to include short periods
of less than 9 months, provided that the NOL or CL generated in
such short period were less than the NOL or CL for the 12-month
period beginning with the first day of the short period.
.10 In an effort to provide relief to taxpayers who may
have been economically disadvantaged by the events of September
11, 2001, the Service is also permitting certain taxpayers who
received approval to change an annual accounting period for which
the short period began on or after February 1, 2000, and whose

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short period loss would have qualified for the expanded
exception, to carry back an NOL or CL generated in the short
period.
SECTION 3. SCOPE
.01 In General. This revenue procedure generally applies
to any taxpayer that requests to change the taxpayer’s annual
accounting period under Rev. Proc. 2002-37 or Rev. Proc. 2002-39.
.02 Prior Accounting Period Changes. This revenue procedure
also applies to any taxpayer if:
(1) prior to April 8, 2003, the taxpayer either filed an
application for automatic approval to change the taxpayer’s
annual accounting period under Rev. Proc. 2002-37 (or any
predecessor), or received prior approval to change its annual
accounting period by a letter issued by the national office
(whether or not issued under Rev. Proc. 2002-39);
(2) the administrative procedure, letter ruling, or consent
letter under which the taxpayer made the change, as a term and
condition of the change, prohibited the taxpayer from carrying
back an NOL or CL generated in the short period because the short
period was less than 9 months;

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(3) the NOL or CL generated in the short period is less than
the NOL or CL for the full 12-month period beginning with the
first day of the short period; and
(4) the short period necessary to effect the change began on
or after February 1, 2000.
SECTION 4. MODIFIED CARRYBACK TERM AND CONDITION
.01 Section 6.08 of Rev. Proc. 2002-37 and section 5.04(6)
of Rev. Proc. 2002-39 are modified to read as follows:
“If the taxpayer generates a net operating loss (NOL) or
capital loss (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 taxable year after the short period. However, except as
otherwise provided in the Code or regulations, the short period
NOL or CL must be carried back or carried over in accordance with
§ 172 or 1212, respectively, if it is either: (a) $50,000 or
less; or (b) less than the NOL or CL, respectively, generated for
the full 12-month period beginning with the first day of the
short period. The taxpayer must wait until this 12-month period
has expired to determine whether the taxpayer qualifies for the
exception in (b) above.”

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.02 A taxpayer that is eligible to carry back an NOL and
wishes to forego the carryback of such NOL must do so by making a
timely election to waive the entire carryback period under §
172(b)(3), or have in place an election under § 1502-
21(b)(3)(ii)(B).
SECTION 5. OPTIONAL TERMS AND CONDITIONS FOR TAXPAYERS WITH PRIOR
ACCOUNTING PERIOD CHANGES
.01 In General. Pursuant to the Commissioner’s authority
under § 442 to prescribe terms and conditions necessary to effect
a change in annual accounting period, this section provides that
a taxpayer described in section 3.02 of this revenue procedure
may elect to apply to all NOLs and CLs attributable to the short
period, in lieu of the Original Carryback Term and Condition,
either: (a) the Modified Carryback Term and Condition of section
4.01 of this revenue procedure (see section 5.02 of this revenue
procedure); or (b) if the short period ends during 2001 or 2002,
the Alternative Carryback Term and Condition (see section 5.03 of
this revenue procedure). Unless such a taxpayer satisfies the
applicable requirements of section 6 of this revenue procedure
for timely electing one of the optional carryback terms and
conditions described in this section 5, the Original Carryback
Term and Condition will continue to apply. A taxpayer with both

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an NOL and a CL for the short period must apply the same term and
condition (Original, Modified, or Alternative) to both the NOL
and CL.
.02 Modified Carryback Term and Condition. A taxpayer
described in section 3.02 of this revenue procedure may elect to
apply the Modified Carryback Term and Condition of section 4.01
of this revenue procedure by following the procedures set forth
in section 6 of this revenue procedure. Thus, if a taxpayer
elects to apply the Modified Carryback Term and Condition, NOLs
and CLs generated in the short period must be carried back in
accordance with § 172 or 1212, whichever applies, except as
otherwise provided in the Code or regulations. For example, an
NOL generated in a short period ending in 2001 generally must be
carried back 5 taxable years under § 172(b)(1)(H), and an NOL
generated in a short period ending in 2000 generally must be
carried back 2 taxable years under § 172(b)(1)(A)(i) (unless one
of the special carryback periods or limitations of § 172
applies).
.03 Alternative Carryback Term and Condition.
(1) In general. If a taxpayer described in section
3.02 of this revenue procedure has a short period that ends in
2001 or 2002, the taxpayer may elect to apply the Alternative

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Carryback Term and Condition of this section 5.03, in lieu of
either the Original Carryback Term and Condition or the Modified
Term and Condition, by following the procedures set forth in
section 6 of this revenue procedure.
(2) Alternative Carryback Term and Condition. If the
taxpayer generates an NOL or CL in the short period required to
effect a change in annual accounting period, and the short period
ends in 2001 or 2002, 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 taxable
year after the short period. However, if the short period NOL or
CL is either: (a) $50,000 or less; or (b) less than the NOL or
CL, respectively, generated for the full 12-month period
beginning with the first day of the short period, such short
period NOL must be carried back to each of the 2 taxable years
preceding the short period (and any remaining NOL must be carried
over in accordance with the provisions of § 172) and any short
period CL must be carried back or carried over in accordance with
§ 1212. The taxpayer must wait until the 12-month period has
expired to determine whether the taxpayer qualifies for the
exception in (b) above.

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(3) Other limitations. The Alternative Carryback Term and
Condition is not available to a taxpayer whose NOL for the short
period is subject to the provisions of:
(a) § 172(b)(1)(B) (regarding NOLs of real estate
investment trusts);
(b) § 172(b)(1)(C) (regarding specified liability
losses);
(c) § 172(b)(1)(E) (regarding certain excess interest
losses);
(d) § 172(b)(1)(F) (regarding a certain 3-year
carryback in certain cases); or
(e) § 172(b)(1)(G) (regarding farming losses).
.04 Special Elections for Consolidated Groups. This
paragraph 5.04 applies to a taxpayer that is a consolidated group
that:
(1) is described in section 3.02 of this revenue
procedure;
(2) includes a member that was a member of another group
immediately before it became a member of the consolidated group
(acquired member); and
(3) elects either the Modified Carryback Term and
Condition of section 4.01 of this revenue procedure, or the

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Alternative Carryback Term and Condition of section 5.03 of this
revenue procedure.
A consolidated group to which this paragraph applies may make an
irrevocable election to relinquish, with respect to all
consolidated net operating losses for the short period
attributable to the acquired member, the portion of the carryback
period for such loss for which the acquired member was a member
of another group to the extent such portion of the carryback
period includes one or more taxable years that are prior to the
taxable year that is 2 taxable years preceding the taxable year
of the loss. Additionally, if an acquired member became a member
of the consolidated group to which this paragraph applies after
June 25, 1999, the consolidated group may make an irrevocable
election to relinquish, with respect to all consolidated net
operating losses for the short period attributable to the
acquired member, the entire portion of the carryback period for
which the acquired member was a member of another group. The
elections described in the prior 2 sentences may be made only if
any other corporation joining the consolidated group that was
affiliated with the acquired member immediately before it joined
the consolidated group is also included in the election. The

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elections are made by following the procedures set forth in
section 6 of this revenue procedure.
SECTION 6. PROCEDURES FOR ELECTING OPTIONAL TERMS AND CONDITIONS
OF SECTION 5.
.01 Time and Manner for Making Elections
(1) In general. The election to apply either the
Modified Carryback Term and Condition of section 4.01 of this
revenue procedure, or the Alternative Carryback Term and
Condition of section 5.03 of this revenue procedure, must be made
on a statement filed with the appropriate Internal Revenue
Service Center in accordance with the procedures described in
this section 6.01. A taxpayer wishing to make one of the Special
Elections for Consolidated Groups under section 5.04 of this
revenue procedure must make such election with the election to
apply either the Modified Carryback Term and Condition of section
4.01 of this revenue procedure or the Alternative Carryback Term
and Condition of section 5.03.
(2) Time for making election. An election to apply
either the Modified Carryback Term and Condition or the
Alternative Carryback Term and Condition in lieu of the Original
Carryback Term and Condition must be made no later than September
30, 2003. The Special Elections for Consolidated Groups of

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section 5.04 of this revenue procedure must be made concurrently
with the election to apply either the Modified Carryback Term and
Condition or the Alternative Carryback Term and Condition.
(3) Manner of making elections.
(a) What to file. A taxpayer may elect to apply
either the Modified Carryback Term and Condition or the
Alternative Carryback Term and Condition, and may make one of the
Special Elections for Consolidated Groups, by filing with the
appropriate Internal Revenue Service Center on or before
September 30, 2003, whichever of the following statements
applies. The statements must be signed and dated by the
taxpayer, the taxpayer’s authorized representative, or other
person authorized to bind the taxpayer with respect to federal
income tax matters.
(i) Election to apply Modified Carryback Term and
Condition of section 4.01:
“ELECTION UNDER REVENUE PROCEDURE 2003-34. By this
statement, [insert taxpayer name and EIN or SSN] elects to apply
the Modified Carryback Term and Condition of section 4.01 of Rev.
Proc. 2003-34 to any net operating loss and capital loss arising
in a short taxable year ending [insert date short taxable year
ended]. Under the Modified Carryback Term and Condition, net
operating losses and capital losses arising in the short taxable
year must be carried back and carried over in accordance with the
applicable provisions of sections 172 and 1212 of the Code.”; or

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(ii) Election to apply Alternative Carryback Term and
Condition of section 5.03:
“ELECTION UNDER REVENUE PROCEDURE 2003-34. By this
statement, [insert taxpayer name and EIN or SSN] elects to apply
the Alternative Carryback Term and Condition of section 5.03 of
Rev. Proc. 2003-34 to any net operating loss and capital loss
arising in a short taxable year ending [insert date short taxable
year ended]. Under the Alternative Carryback Term and Condition,
any net operating loss arising in this short taxable year must be
carried back to each of the 2 taxable years preceding the short
taxable year (and any remaining net operating loss must be
carried over in accordance with the provisions of section 172 of
the Code) and any capital loss arising in this short taxable year
must be carried back or carried over in accordance with section
1212.”

(iii) Special elections for consolidated groups. A
consolidated group that wishes to make one of the elections
under section 5.04 of this revenue procedure (acquiring group)
must attach one of the following statements to the election to
apply the Modified Carryback Term and Condition or the
Alternative Carryback Term and Condition:
“SPECIAL ELECTION TO WAIVE PRE-ACQUISITION EXTENDED
CARRYBACK PERIOD. This is an election under section 5.04 of Rev.
Proc. 2003-34 to waive the pre[insert the first day of the first
taxable year for which the acquired member (or members) was a
member of the taxpayer’s consolidated group (acquiring group)]
extended carryback period for the consolidated NOLs attributable
to [insert name and employer identification number of acquired
member (or members)] for the [short period].”; or

“SPECIAL ELECTION TO WAIVE ENTIRE PRE-ACQUISITION CARRYBACK
PERIOD. This is an election under section 5.04 of Rev. Proc.
2003-34 to waive the pre[insert the first day of the first
taxable year for which the acquired member (or members) was a
member of the taxpayer’s consolidated group (acquiring group)]

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carryback period for the consolidated NOLs attributable to
[insert name and employer identification number of acquired
member (or members)] for the [short period].”

(b) Where to file. A taxpayer electing to apply
either the Modified Carryback Term and Condition or the
Alternative Carryback Term and Condition must file the
appropriate statement(s) with the Director, Internal Revenue
Service Center, Attention: ENTITY CONTROL, where the taxpayer
files its federal income tax return. No copies of any statements
are required to be sent to the National Office.
(c) Statements not claims for refunds. The statements
described in section 6.01(3)(a) do not constitute claims for
refund or applications for tentative refunds. A taxpayer
electing to apply either the Modified Carryback Term and
Condition or the Alternative Carryback Term and Condition by
filing a statement in compliance with the procedures of this
section 6.01 must additionally file a claim for refund or
application for tentative refund within the periods prescribed by
statute to carry back any short period NOL or CL. The taxpayer
must attach a copy of the statement filed under these procedures
to any claim for refund or application for tentative refund filed
as a result of the making of an election under this revenue
procedure.

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.02 Election Constitutes Taxpayer’s Agreement. An election
made in accordance with this section constitutes an agreement
between the taxpayer and the Service to modify the terms and
conditions for the Commissioner’s approval of the taxpayer’s
change in annual accounting period. An election to apply either
the Modified Carryback Term and Condition or the Alternative
Carryback Term and Condition does not revoke a valid election
described in § 172(b)(3), Reg. § 1.1502-21(b)(3)(ii)(B) or Reg.
§ 1.1502-21T.
SECTION 7. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-37 and Rev. Proc. 2002-39 are modified.
SECTION 8. EFFECTIVE DATES AND TRANSITION RULE
.01 Applications Filed Under Rev. Proc. 2002-37. For a
taxpayer within the scope of Rev. Proc. 2002-37:
(1) In general. This revenue procedure is effective for all
changes in annual accounting periods for which the first
effective year (as defined in section 5.07 of Rev. Proc. 2002-37)
ends on or after April 8, 2003; and
(2) Transition rule. If the first effective year (as
defined in section 5.07 of Rev. Proc. 2002-37) ends before April
8, 2003, and the time for filing Form 1128 with respect to that
first effective year expires on or after April 8, 2003,(whether

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or not a Form 1128 was filed before that date with the Service
Center), a taxpayer may elect to use one of the optional
carryback terms and conditions of section 5 of this revenue
procedure by following the procedures of section 6 of this
revenue procedure.
.02 Applications Filed Under Rev. Proc. 2002-39. For a
taxpayer within the scope of Rev. Proc. 2002-39:
(1) In general. This revenue procedure is effective for
applications filed on or after April 8, 2003; and
(2) Transition rule. If a taxpayer filed an application to
change the taxpayer’s annual accounting period before April 8,
2003, and the application is pending with the national office on
April 8, 2003, the taxpayer may request that the application be
processed in accordance with this revenue procedure. However,
the national office will process applications filed before April
8, 2003, in accordance with prior authority unless, prior to the
later of June 9, 2003, or the issuance of the letter ruling
granting or denying consent to the adoption, change, or
retention, the taxpayer notifies the national office that the
taxpayer desires that the taxpayer’s application be processed in
accordance with this revenue procedure.
.03 Taxpayers With Prior Accounting Period Changes. For a

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taxpayer described in section 3.02 of this revenue procedure,
this revenue procedure is effective for changes in the taxpayer’s
annual accounting period if the short period necessary to effect
the change began on or after February 1, 2000.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Roy A.
Hirschhorn and Michael Schmit of the Office of Associate Chief
Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure, contact Mr. Hirschhorn or Mr.
Schmit on (202) 622-4960 (not a toll-free call).