IRS Revenue Procedure Limits Most S Corporations to Calendar Year

On May 10, 2002, the IRS issued Revenue Procedure 2002-38, in which it clarified that under Section 1378 of the Internal Revenue Code, an S corporation's taxable year must normally be its calendar year. There are exceptions for fiscal years other than calendar years if approved by the IRS, one of which appeared to provide an automatic approval for plans adopting the fiscal year of the sole owner (such as an ESOP). Many S corporation ESOPs retained the fiscal years they used when they were in C corporations, relying on this automatic approval process. The new revenue ruling, however, requires that these companies now switch to a calendar year. Only plans that had specifically requested IRS approval for non-calendar years would be grandfathered. It is not clear if the IRS will allow companies who will have to pay double taxes in a year due to the change in their fiscal years to spread the payments over a longer period of time.