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Instructions for Form 1128 2003 Tax Year

Specific Instructions

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Part I–General Information

All applicants must complete Part I. Attachments to Form 1128 must show the applicant's name, identifying number, and address. Also indicate that the statement is an attachment to Form 1128.

Name

If the application is filed for a husband and wife who file a joint income tax return, the names of both should appear in the heading.

Identifying Number

Individuals enter their social security number (SSN). If the application is for a husband and wife who file a joint return, enter both SSNs. However, if one or both are engaged in a trade or business, enter the employer identification number (EIN) instead of the SSNs. All other applicants enter their EIN.

Except as discussed below (regarding foreign corporations), if the applicant does not have an EIN or SSN, it must apply for one. An EIN may be applied for:

  • Online—Click on the EIN link at www.irs.gov/business/small. The EIN is issued immediately once the application information is validated.
  • By telephone at 1-800-829-4933 from 7:30 am to 5:30 pm in the corporation's local time zone.
  • By mailing or faxing Form SS-4, Application for Employer Identification Number.

A limited liability company must determine which type of federal tax entity it will be (i.e., partnership, corporation, or disregarded entity) before applying for an EIN (see Form 8832, Entity Classification Election, for details).


Note:

The online application process is not yet available for the following types of entities: Entities with addresses in foreign countries or Puerto Rico, REMICs, state and local governments, Federal government/military entities, and Indian Tribal Government/Enterprise entities. Please call the toll-free Business and Specialty Tax Line at 1-800-829-4933 for assistance in applying for an EIN.

An SSN must be applied for on Form SS-5, Application for a Social Security Card. Form SS-5 can be obtained at SSA offices or by calling the SSA at 1-800-772-1213.

If the applicant has not received its EIN or SSN by the time the application is due, write “Applied for” in the space for the EIN/SSN . See Pub. 583, Starting a Business and Keeping Records.


Note:

If the applicant is a foreign corporation that is not otherwise required to have or obtain an EIN, enter “Not applicable” in the space provided for the EIN/SSN.

Address

Include the suite, room, or other unit number after the street address.

If the Post Office does not deliver mail to the street address and the applicant has a P.O. box, show the box number instead.

Person To Contact

The person to contact must be the person authorized to sign the Form 1128, or the applicant's authorized representative. If the person to contact is not the applicant or the filer, attach Form 2848, Power of Attorney and Declaration of Representative.

Line 1.   Check all applicable boxes to indicate the type of entity filing this application. For example, an entity that is a domestic corporation may also be a regulated investment company (RIC). That entity would check both the “Domestic corporation” box and the “Other” box, and write, “RIC under sec. 851” on the dotted line.

Lines 2a and 2b.   If the requested year is a 52-53-week tax year, describe the year (e.g., last Saturday in December or Saturday nearest to December 31). A 52-53-week tax year must end on the date a specified day of the week last occurs in a particular month or on the date that day of the week occurs nearest to the last day of a particular calendar month.

Line 2c.   The required short period return must begin on the day following the close of the old tax year and end on the day before the first day of the new tax year. An applicant's first tax year generally starts when business operations begin.

  A corporation's tax year begins at the earliest date it first:
  • Has shareholders,
  • Has assets, or
  • Begins doing business. The initial year ends on the day before the first day of the new tax year.

Part II—Automatic
Approval Request

Part II is completed by applicants requesting automatic approval of a change in tax year under:

  • Rev. Proc. 2002-37 (corporations),
  • Rev. Proc. 2002-38 (pass-through entities),
  • Rev. Proc. 2003-62 (individuals),
  • Rev. Proc. 76-10, 1976-1 C.B. 548 and Rev. Proc. 85-58 (exempt organizations), and
  • Rev. Proc. 85-15, 1985-1 C.B. 516 (all filers), to correct an improper tax year.


Note:

Applicants requesting an automatic approval, complete Parts I and II only.


Note:

A user fee is not required if requesting an automatic approval under any of the sections of Part II listed below.

Complete Part II if the applicant can use the automatic approval rules under one of the sections listed below and the application is filed on time.

If the applicant is: Complete only
A corporation (other than an S corporation or a PSC) Section A
A partnership, S corporation, or a PSC Section B
An individual Section C
A tax-exempt organization. Section D

If the applicant does not qualify for automatic approval, a ruling must be requested. See Part III for more information.

If the Service Center denies approval because Form 1128 was not filed on time, the applicant may request relief under Regulations section 301.9100-3, discussed earlier under Late Applications on page 2, by completing Part III, as discussed on page 5, and sending Form 1128 to the IRS National Office for consideration.

Section A—Corporations (Other than S Corporations or Personal Service Corporations)

Rev. Proc 2002-37 provides exclusive procedures for certain corporations to obtain automatic approval to change their annual accounting period under section 442 and Regulations section 1.442-1(b). A corporation complying with all the applicable provisions of this revenue procedure will be deemed to have established a business purpose and obtained the approval of the IRS to change its accounting period. See Rev. Proc. 2002-37 for more information.

A corporation is not eligible to make an automatic approval request if it:

  1. Has changed its annual accounting period at any time within the most recent 48-month period ending with the last month of the requested tax year. For exceptions, see section 4.02(1) of Rev. Proc. 2002-37.
  2. Has an interest in a pass-through entity as of the end of the short period. For exceptions, see section 4.02(2) of Rev. Proc. 2002-37.
  3. Is a shareholder of a FSC or IC-DISC, as of the end of the short period. For exceptions, see section 4.02(3) of Rev. Proc. 2002-37.
  4. Is a FSC or an IC-DISC.
  5. Is an S corporation.
  6. Attempts to make an S corporation election for the tax year immediately following the short period, unless the change is to a permitted tax year.
  7. Is a PSC.
  8. Is a CFC or a foreign personal holding company (FPHC). For exceptions, see sections 4.01(4) and 4.02(8) of Rev. Proc. 2002-37.
  9. Is a tax-exempt organization, other than an organization exempt from tax under section 521, 526, 527, or 528.
  10. Has in effect a possessions corporation election under section 936.
  11. Is a cooperative association (within the meaning of section 1381(a)) with a loss in the short period required to effect the change of annual accounting period, unless the patrons of the cooperative association are substantially the same in the year before the change of annual accounting period, in the first effective year required to effect the change, and in the year following the change.
  12. Has a required tax year (e.g., a real estate investment trust), unless the corporation is changing to its required tax year and is not described in 1 through 11 above.

Line 3.   If the answer to question 3 is “Yes,” attach a statement providing the names, addresses, and identifying numbers for each U.S. shareholder of the foreign corporation.

Line 4.   If a corporation's interest in a pass-through entity, CFC, FSC, or IC-DISC (related entity) is disregarded under section 4.02(2) or 4.02(3) of Rev. Proc. 2002-37 because the related entity is required to change its tax year to the corporation's new tax year (or, in the case of a CFC, to a tax year beginning one month earlier than the corporation's new tax year), the related entity must change its tax year concurrently with the corporation's change in tax year, either under Rev. Proc. 2002-37 or 2002-38. This related party change is required notwithstanding the testing date provisions in section 706(b)(4)(A)(ii), section 898(c)(1)(C)(ii), Temporary Regulations section 1.921-1T(b)(6), and the special provision in section 706(b)(4)(B).

Section B—Partnerships, S Corporations, or Personal Service Corporations

A partnership, S corporation, or PSC may be able to adopt, change, or retain its tax year by following Rev. Proc. 2002-38.

Line 5.   A partnership, S corporation, or PSC is not eligible to make an automatic approval request if any of the following apply:
  1. It is under examination, unless it obtains consent of the appropriate director as provided in section 7.03(1) of Rev. Proc. 2002-38.
  2. It is before an appeals office with respect to any income tax issue and its annual accounting period is an issue under consideration by the appeals office.
  3. It 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. On the date the partnership or S corporation would otherwise file its application, the partnership's or S corporation's annual accounting period is an issue under consideration in the examination of a partner's or shareholders'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.
  5. It is requesting a change to, or retention of, a natural business year as described in section 4.01(2) of Rev. Proc. 2002-38 if the entity has changed its annual accounting period at any time in the most recent 48-month period ending with the last month of the requested tax year. For this purpose, the following changes are not considered prior changes in annual accounting period: (a) a change to a required tax year or ownership tax year; (b) a change from a 52-53 week tax year to a non-52-53 week tax year that ends with reference to the same calendar month, and vice versa; or (c) a change in accounting period by a S corporation or PSC, in order to comply with the common tax year requirements of Regulations sections 1.1502-75(d)(3)(v) and 1.1502-76(a)(1).

Line 7.   A partnership, S corporation, electing S corporation, or PSC establishes a "natural business year" under Rev. Proc. 2002-38 by satisfying the following "25-percent gross receipts test:"
  1. Prior three years gross receipts.

    1. 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.
    2. The same computation as in a above is made for the two preceding 12-month periods ending with the last month of the requested annual accounting period.
  2. Natural business year:

    1. Except as provided in b below, if each of the three results described in 1 equals or exceeds 25 percent, then the requested annual accounting period is deemed to be the taxpayer's natural business year.
    2. The taxpayer must determine whether any annual accounting period other than the requested annual accounting period also meets the 25-percent test described in 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 accounting period, then the requested annual accounting period will not qualify as the taxpayer's natural business year.
  3. Special rules:

    1. To apply the 25-percent gross receipts test for any particular year, the taxpayer must compute its gross receipts under the method of accounting used to prepare its federal income tax returns for such tax year.
    2. If the taxpayer has a predecessor organization and is continuing the same business as its predecessor, the taxpayer must use the gross receipts of its predecessor for purposes of computing the 25-percent gross receipts test.
    3. If the taxpayer (including any predecessor organization) does not have a 47-month period of gross receipts (36-month period for the requested tax year plus an additional 11-month period for comparing the requested tax year with other potential tax years), then it cannot establish a natural business year under this revenue procedure.
    4. If the requested tax year is a 52-53-week tax year, the calendar month ending nearest to the last day of the 52-53-week tax year is treated as the last month of the requested tax year for purposes of computing the 25-percent gross receipts test.

Line 8.   For an S corporation, an "ownership tax year" is the tax year (if any) that, as of the first day of the first effective year, constitutes the tax year of one or more shareholders (including any shareholder that concurrently changes to such tax year) holding more than 50 percent of the corporation's issued and outstanding shares of stock. For this purpose, a shareholder that is tax-exempt under section 501(a) is disregarded if such shareholder is not subject to tax on any income attributable to the S corporation. Tax-exempt shareholders are not disregarded, however, if the S corporation is wholly-owned by such tax-exempt entities. A shareholder in an S corporation that wants to concurrently change its tax year must follow the instructions generally applicable to taxpayers changing their tax years contained in Regulations section 1.442-1(b), Rev. Proc. 2002-39, or any other applicable administrative procedure published by the IRS.

Line 9.   The partnership must concurrently change its tax year as a term and condition of a related entity change in tax year.

Section C—Individuals

An individual is eligible for automatic approval if:

  • The individual is changing from a fiscal year to a calendar year and
  • The individual ia not subject to the restrictions of section 4.02 of Rev. Proc. 2003-62 (or its successor).

Section D—Tax-Exempt Organizations

A tax-exempt organization may request a change to its tax year under the simplified method of either Rev. Proc. 85-58 or Rev. Proc. 76-10.

Under Rev. Proc. 85-58, an organization exempt under section 501(a) does not have to file Form 1128 unless:

  1. The organization was required to file an annual information return or Form 990-T, Exempt Organization Business Income Tax Return, at any time during the last 10 calendar years, and
  2. The organization has changed its tax year at any time within the last 10 calendar years ending with the calendar year that includes the beginning of the first effective year resulting from the change of tax year.

An organization described in section 501(c) or (d) is exempt from tax under section 501(a) unless the exemption is denied under section 502 or 503.

Rev. Proc. 85-58 does not apply to:

  • Farmers' cooperatives exempt from Federal income tax under section 521,
  • Organizations described in sections 526, 527, and 528,
  • Organizations described in section 401(a), and
  • Organizations requesting a change in a tax year on a group basis.

A central organization should follow Rev. Proc. 76-10 to apply for a group change in tax year for all its subordinate organizations.

Rev. Proc. 76-10 does not apply to:

  • Farmers' cooperatives exempt from Federal income tax under section 521,
  • Certain organizations that have unrelated business taxable income defined in section 512(a), and
  • Organizations that are private foundations defined in section 509(a).

Part III—Ruling Request

Part III is completed only by applicants requesting to adopt, change, or retain a tax year that cannot use the automatic procedures listed in Part II.

Also, the applicant must complete the specific section(s) in Part III that applies to that particular applicant.

If the applicant is: Complete only
A corporation (other than an S corporation or CFC) Sections A and B, plus any other applicable section in Part III
An S corporation Sections A and C
A Partnership Sections A and D
A Controlled Foreign Corporation Sections A and E

Caution

Do not file a tax return using the requested tax year until this application is approved.

Rev. Proc. 2002-39 provides the general procedures for obtaining approval to adopt, change, or retain a tax year for taxpayers not qualifying under the automatic approval rules or if the application is late.

Section A—General Information

All applicants must complete this section to request a ruling on an adoption, change to, or retention of a tax year.

Line 1.   If the applicant is:
  • Under examination. Attach to the application a statement from the director consenting to the change or retention. The applicant must also attach to the application a statement indicating if a copy of the application has been given to the examination agent as required by section 6.06(1)(b) of Rev. Proc. 2002-39, as well as the name and telephone number of the examination agent.
  • Before an appeals (area) office. Attach to the application a 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 appeals (area) office. The applicant must also attach to the application a statement indicating if a copy of the application has been given to the appeals officer as required by section 6.06(2) of Rev. Proc. 2002-39, as well as the name and telephone number of the appeals officer.
  • Before a Federal court. Attach to the application a 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 Federal court. The applicant must also attach to the application a statement indicating if a copy of the application has been given to the government counsel as required by section 6.06(3) of Rev. Proc. 2002-39, as well as the name and telephone number of the government counsel.

Line 4a.   Attach an explanation of the legal basis supporting the requested tax year. Include all authority (statutes, regulations, etc.) supporting the requested year. The applicant is encouraged to include all relevant facts and circumstances that may establish a business purpose.

Line 4b.   If the applicant requests to establish a natural business year under the annual business cycle test or seasonal business test of sections 5.03(1) and 5.03(2) of Rev. Proc. 2002-39, 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 years.

  If the applicant is requesting to change to a natural business year that satisfies the 25-percent gross receipts test described in section 5.03(3) of Rev. Proc. 2002-39, the applicant must supply the gross receipts for the most recent 47 months for itself (or any predecessor).

Line 14.   Applicants filing to request an automatic approval for a change in tax year under Rev. Procs. 2002-37, 2002-38, 2003-62, 85-58, or 76-10 (Part II) are not required to pay a user fee when Form 1128 is filed on time.

  Applicants filing to request a letter ruling on a change in tax year under Rev. Proc. 2003-1 and Rev. Proc. 2002-39 must pay a $1,000 user fee. A request for an exempt organization letter ruling on a change in tax year under Rev. Proc. 2003-8, 2003-1 I.R.B. 236, requires payment of a $150 user fee.

   A separate $1,200 user fee is also required for applicants filing a letter ruling request for an extension of time to file under Regulations section 301.9100-3 (including requests under Rev. Procs. 2002-37, 2002-38, and 2003-62 (Part II, Sections A, B, and C)).


Note:

The user fees referred to in the above paragraphs are published in Rev. Proc. 2003-1 (exempt organizations, see Rev. Proc. 2003-8), or an annual update. The annual updates are published as revenue procedures in the Internal Revenue Bulletin. The Internal Revenue Bulletins can be accessed on the IRS web site, www.irs.gov.

  Payment of the user fee (check or money order made payable to the United States Treasury) must be attached to Form 1128 at the time the form is filed. See Rev. Proc. 2003-1 for more information.

Section B—Corporations (Other Than S Corporations and Controlled Foreign Corporations)

Corporations must complete this section and any other section in Part III that applies to that particular entity. For example, a PFIC completes Section B and attaches the statement required by Section H. Complete Sections B and F for a tax-exempt organization that is a corporation.

Section C—S Corporations

An S corporation must have a permitted tax year unless it has elected under section 444 to have a tax year other than the required tax year. A “permitted tax year” is:

  1. A tax year that ends on December 31 or
  2. Any other tax year if the corporation can establish a business purpose to the satisfaction of the IRS.

For purposes of 2, any deferral of income to shareholders will not be treated as a business purpose. For more information, see Rev. Proc. 2002-38

If any shareholder is applying for a corresponding change in tax year, that shareholder must file a separate Form 1128 to get advance approval to change its tax year.

Section D—Partnerships

A partnership must obtain advance approval from the IRS to adopt, change, or retain a tax year unless it is not required to file Form 1128, or it meets one of the automatic approval rules discussed in Part II, Section B on page 4. See Exceptions on page 1.

Partners must also get separate advance approval to change their tax years.

Line 23.   Enter the first date a business transaction resulted in a tax consequence, such as receiving income or incurring an expense.

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