Edward W. and Edith M. Arnold, et al. - Page 8

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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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