[Code of Federal Regulations] [Title 26, Volume 6] [Revised as of April 1, 2002] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.442-3T] [Page 30-31] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) DEFERRED COMPENSATION, ETC.--Table of Contents Sec. 1.442-3T Special limitations on certain adoptions and retentions of a taxable year (temporary). (a) Applicability. This section generally applies to-- (1) Any partnership that wishes to adopt a taxable year other than the calendar year, the taxable year of its principal partners, or the taxable year to which all of its principal partners are concurrently changing, and (2) Any corporation seeking S status that wishes to adopt or retain a taxable year other than the calender year or a taxable year that meets the requirements of section 4.02 or 4.04 of Rev. Proc. 83-25, 1983-1 C.B. 689. (b) General rule. A taxpayer to which this section applies may not adopt or retain a taxable year that results in any deferral of income to its partners or shareholders unless the taxpayer-- (1) Secures the prior approval of the Commissioner by establishing a substantial business purpose under paragraph (c)(2) of this section for the adoption or retention, or (2) Is permitted to adopt or retain the taxable year without securing the prior approval of the Commissioner under paragraph (c)(1) of this section. Thus, a taxpayer to which this section applies may not adopt or retain a taxable year that results in a deferral of income to its partners or shareholders under Rev. Proc. 72-51, 1972-2 C.B. 832, or section 4.03 of Rev. Proc. 83-25, 1983-1 C.B. 689. (c) Substantial business purpose--(1) Prior approval of the Commissioner not needed. Notwithstanding Sec. 1.706-1(b), Sec. 1.442- 1(b)(2), and 26 CFR 18.1378-1(a), a taxpayer to which this section applies may adopt or retain a taxable year that results in a deferral of income to its partners or shareholders without the prior approval of the Commissioner if the taxpayer can establish a substantial business purpose under Sec. 1.442-2T(c). Thus, a taxpayer described in Sec. 1.442-2T(c)(4) must secure the prior approval of the Commissioner to the adoption or retention even if the requirements of Sec. 1.442- 2T(c)(1) are satisfied. A taxpayer shall effect an adoption or retention permitted under this paragraph (c)(1) in the manner prescribed by Sec. 1.442-2T(f)(1), except that the taxpayer's first income tax return shall be treated as the return for the short period involved in a change of annual accounting period. (2) Prior approval of the Commissioner. In any case where the taxpayer was in existence for the three 12-month periods described in Sec. 1.442-2T(c)(2), or where a predecessor organization (within the meaning of Sec. 4.04 of Rev. Proc. 83-25) was actively engaged in a trade or business at all times during the portion of those three 12- month periods prior to the inception of the taxpayer, the Commissioner will consider a request for prior approval of an adoption or retention of a taxable year that results in a deferral of income to its partners or shareholders only if the taxpayer is described in Sec. 1.442-2T(e). In such a case, the application for approval shall be filed in the manner prescribed by Sec. 1.442-2T(f)(2). In any other case, the taxpayer must establish a substantial business purpose in order to obtain the prior approval of the Commissioner, and must file an application for approval in accordance with Sec. 1.706-1(b) or 26 CFR 18.1378-1(a) (whichever is applicable) and Sec. 1.442-1T(b)(1). For this purpose, the following factors generally will not be sufficient to establish a substantial business purpose: (i) The use of a particular year for regulatory or financial accounting purposes; (ii) The hiring patterns of a particular 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 for the admission or retirement of partners or shareholders, promotion of staff, and compensation or retirement arrangements with staff, partners, or shareholders; and (iv) The fact that a particular business involves the use of price lists, model year, or other items that change on an annual basis. (d) Time for filing. (1) Except as otherwise provided in paragraph (d)(2) of this [[Page 31]] section, a taxpayer cannot adopt or retain a taxable year under this section unless the return or form required to effect or request the adoption or retention is filed by its due date (with extensions if the adoption is effected by filing an income tax return for the taxpayer's first taxable year). (2) A taxpayer may adopt or retain a taxable year under this section if the due date (without regard to extensions) for the return or form required to effect or request the adoption or retention is on or after November 6, 1986, and before March 9, 1987, and the return or form is filed before March 9, 1987 (or, in the case of an adoption effected by filing an income tax return for the taxpayer's first taxable year, if an application for extension is filed before March 9, 1987). This paragraph (d)(2) only extends the time for adopting or retaining a taxable year and does not extend the time for making an S election. An S election that is timely filed before March 9, 1987, however, will not be denied or rendered ineffective solely by reason of the need for the taxpayer to submit the information required by paragraph (c) of this section. (3) In the case of an adoption or retention of a taxable year under this section that is effected by filing an income tax return for the taxpayer's first taxable year, any failure to file a return or to pay tax on or before the due date for the return or the date prescribed for payment will be treated as due to reasonable cause and will not give rise to any addition to tax under section 6651 if-- (i) The due date for the return (without regard to extensions) or the date prescribed for payment is on or after November 6, 1986, and before March 9, 1987, and (ii) The return (or application for extension) is filed and the tax is paid before March 9, 1987. (e) Effective date. This section generally applies if the first taxable year of the partnership or the first taxable year for which the election to be an S corporation is effective begins before January 1, 1987, unless the application necessary to effect or request the adoption or retention was timely filed before November 6, 1986. This section shall not apply, however, to an adoption by a partnership of a taxable year that begins before January 1, 1986. [T.D. 8123, 52 FR 3622, Feb. 5, 1987]