| Question 84: I understand that Code Section 402(g) limits elective deferrals based on the taxable year which for most individuals is the calendar year. Can you provide a cite?
Answer: Internal Revenue Code of 1986 ("Code") Section 402(g)(1) provides that the elective deferrals of any individual for any taxable year are included in the individual's income to the extent the deferrals exceed the applicable dollar limit. (The applicable dollar limit for 2009 is $16,500. See Q&A 80.) The regulations are a little clearer about referring to the "individual's taxable year." See Treas. Reg. Section 1.402(g)-1(d) and (e)(2)(i). Code Section 7701(a)(23) provides that "[w]hen used in this title [Title 26: Internal Revenue Code], where not otherwise distinctly expressed or manifestly incompatible with the intent thereof . . ., the term “taxable year” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A" [subtitle A is entitled "Income Taxes" and covers Sections 1-1563]. So that does not help much since it does not clarify why the calendar year applies to most individuals. Code Section 441(a) provides that taxable income is computed on the basis of the taxpayer's taxable year. Code Section 441(b) provides that for purposes of Subtitle A, the term “taxable year” generally means: (1) the taxpayer's annual accounting period, if it is a calendar year or a fiscal year; or (2) the calendar year, if the taxpayer keeps no books, does not have an annual accounting period, or the taxpayer has an annual accounting period, but such period does not qualify as a fiscal year. Under Code Section 441(c), for purposes of Subtitle A, the term “annual accounting period” means the annual period on the basis of which the taxpayer regularly computes his income in keeping his books. Thus, it appears that an individual generally needs to keep "books" or have an "annual accounting period" to choose a non-calendar year taxable year. "Books include the taxpayer's regular books of account and such other records and data as may be necessary to support the entries on the taxpayer's books and on the taxpayer's return, as for example, a reconciliation of any difference between such books and the taxpayer's return. Records that are sufficient to reflect income adequately and clearly on the basis of an annual accounting period will be regarded as the keeping of books. See Code Section 6001 and the regulations thereunder for rules relating to the keeping of books and records." Treas. Reg. Section 1.441-1(b)(7). The IRS Commissioner issues administrative procedures to provide conditions under which a taxpayer may be permitted to adopt, change, or retain an "annual accounting period." Treas. Reg. Section 1.442-1(b)(3). The regulations refer to Rev. Proc. 66-50 for automatic approval procedures for individuals. Rev. Proc. 66-50 was superseded by Rev. Proc. 2003-62 regarding changes in accounting periods for individuals.
Also see IRS Publication Number 538, which addresses Accounting Periods and Methods: http://www.irs.gov/pub/irs-pdf/p538.pdf. "Generally, individuals must adopt the calendar year as their tax year. An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year." P. 4, IRS Pub. No. 538. Thus, apparently most individuals do not keep books and thus do not qualify for off-calendar year taxable years, but I do not have statistics on how many file on an off-calendar year basis. For Code Section 402(g) purposes, plan administrators should be aware that if they are applying the annual applicable limit ($16,500 for 2009) to the individual's taxable year, the taxable year apparently normally is the calendar year, but might be a fiscal year. This Q&A is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel. Nothing in this Q&A is intended to be used, and no information can be used, for the purpose of avoiding penalties under the Internal Revenue Code, or promoting, marketing, or recommending to another party any transaction or matter addressed in this Q&A. | 
