CHANGING FISCAL YEAR-END BEFORE ELECTING S STATUS.

Facts: Norco, a C corporation, has used a tax year ending September 30 since it incorporated in 1990. The shareholders want the corporation to elect S status and change to a calendar year. They ask their tax adviser if the corporation can elect S status effective Jan. 1, 2001, and file a short-period C return for Oct. 1-Dec. 31, 2000. Issue: Can Norco change to a December 31 tax year without IRS approval?

Analysis

An S year must be effective on the day following the last day of the C corporation's tax year. Thus, an S election would normally be effective on Oct. 1, 2000, if it is filed any time from Oct. 1, 1999 (i.e., the beginning of the C corporation's tax year) through Dec. 15, 2000 (i.e., the 15th day of the third month of the new tax year). Under the general rule, the final C return will be for the 12-month period ending Sept. 30, 2000. The S corporation's first tax return will cover Oct. 1-Dec. 31, 2000. The second S return will be for the 2001 calendar year.

The tax adviser should consider whether Norco could change the end of its C tax year beginning Oct. 1, 2000. Before changing its tax year, a corporation generally must obtain the Service's approval, by showing a business purpose for the change. However, Rev. Proc. 2000-11 allows a C corporation to change its tax year without obtaining prior approval if it meets all of the following requirements:

1. Has not changed its tax year at any time within the last six calendar years, ending with the calendar year that includes the beginning of the short period required to effect the change. (Presumably, a corporation that has been in existence less than six years qualifies if it has not previously changed its tax year.) Certain exceptions apply to this requirement.

2. Is not a member of certain partnerships or a beneficiary of certain trusts or estates as of the end of the short period.

3. Is not a shareholder of a foreign sales corporation (FSC) or an interest-charge domestic international sales corporation (IC-DISC).

4. Is not an FSC or an IC-DISC.

5. Is not an S corporation.

6. Does not attempt to make an S election for the tax year immediately following the short period, unless the change is to a permitted S year. For this purpose, a permitted S year includes a calendar year, a natural business year, an ownership tax year or a tax year permitted under Sec. 444.

7. Is not a personal service corporation, as defined under Sec. 441(i).

8. Is not a controlled foreign corporation (CFC) or a foreign personal holding company (FPHC).

9. Is not a shareholder of certain CFCs or FPHCs.

10. Is not a certain tax-exempt organization.

11. Is not a direct or indirect shareholder of certain passive foreign investment companies (PFICs).

12. Is not a certain PFIC.

13. Does not have in effect a Puerto Rico and possession tax credit election under Sec. 936.

14. Is not a certain cooperative association. Because it meets all of the requirements of Rev. Proc. 2000-11, Norco can change its tax year beginning Oct. 1, 2000, to a December 31 tax year. The change requires Norco to file Form 1128, Application to Adopt, Change, or Retain a Tax Year, with the District Director and a short-period C return for Oct. 1-Dec. 31, 2000. In computing the tax due with this short-period return, Norco has to annualize its taxable income. The S corporation's first tax return will be for the 2001 calendar year.

Form 1128 must be filed by the due date of the short-period return (March 15, 2001) if Norco does not file an extension request. If a six-month extension is requested, Form 1128 must be filed by Sept. 15, 2001 (the extended due date for the short-period return).

Forms, Elections and Implementation

To change to an automatically approved tax year under Rev. Proc. 2000-11, the C corporation must meet the 14 requirements discussed previously It also must file Form 1128 on or before the time (including extensions) for filing the return for the resulting short period. The form must be signed by a corporate officer and submitted to "Director, Internal Revenue Service Center, Attention: ENTITY CONTROL," where the corporate Federal income tax return is filed. The company should type or print the statement "FILED UNDER REV. PROC. 2000-11" across the top of page i of the form. No user fee is required when submitting Form 1128 under Rev. Proc. 2000-11.

Albert B. Ellentuck, Esq. Of Counsel King and Nordlinger, L.L.P. Arlington,VA