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2. Whether Western Used a Permitted Tax Year
An S corporation may use only a permitted year as its
taxable year. Sec. 1378(a). A permitted year is a year ending
December 31, or any other accounting period for which the
corporation establishes a business purpose to the satisfaction of
the Secretary. Sec. 1378(b).
Western stated in its S corporation election that a tax year
ending January 31 was its natural business year as provided in
Rev. Proc. 87-32, secs. 4.01 and 4.02(a). Rev. Proc. 87-32,
supra, provides a procedure under which a corporation electing S
corporation status may have a tax year ending on a date other
than January 31 that coincides with its natural business year.
Generally, a 12-month period is a taxpayer’s natural business
year if at least 25 percent of the gross receipts of the
enterprise are regularly earned in the last two months of the
annual period. Id.
A taxpayer cannot establish a natural business year under
Rev. Proc. 87-32, sec. 4.01(1)(d), if the taxpayer (and any
predecessor organization) has not had gross receipts for a period
of at least 47 months. Petitioners did not offer evidence
showing the amount of Western’s gross receipts from sales and
services for any period. Thus, petitioners have not established
that Western may use a tax year other than a calendar year. We
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Last modified: May 25, 2011