S Corp Fiscal Year

[Guest John Nelson]

Does anyone know whether the IRS might approve a corporation's retaining its non-calendar year fiscal year under the following circumstances: C Corp has 5/31 fiscal year end. C Corp is majority owned by ESOP. ESOP plan year is also 5/31. C Corp intends to elect to be treated as an S Corp.

Assume that the only business purpose for retaining the fiscal year is to coincide with the ESOP's fiscal year.

Thanks.

[stephen]

An S-Corporation 100% owned by an ESOP can maintain a fiscal year plan year without penalty.

[Lori Friedman]

Explanation provided BNA's "S Corporations: Formation and Termination" portfolio:

As provided by the 1996 SBA, the S corporation eligibility rules now allow Employee Stock Ownership Plans (ESOPs) to hold S corporation stock. As a result, several fiscal year C corporations with existing ESOPs can now elect S corporation status. Normally, the ESOP will have the same fiscal year as the sponsoring C corporation. Therefore, if an ESOP owns more than 50% of a C corporation's outstanding stock and the C corporation wishes to elect S corporation status, it is permitted to retain the former C corporation's fiscal year as an S corporation under the ownership tax year rules.

The instructions to Form 8716 make no mention of this exception. Can we assume that the S corporation is required to file the form?

[stephen]

I am not certain of the form but there is an exception for a 100% S-Corp owned by an ESOP to maintain a fiscal year. I had many clients affected by the recent change where S-corps that were under 100% had to switch to calendar year while the 100% clients were able to maintain their fiscal year-

Pehaps Becky Miller, RLL or Kirk will provide more information.

[Guest John Nelson]

The ESOP does not own 100% of the corporation. Therefore, in order for the corporation to retain the fiscal year, the corporation will have to apply to the IRS. I'm wondering whether any one has experience or can comment on whether the IRS will likely approve such an application.

Thanks.

[BeckyMiller]

I think the BNA citation refers to the old provisions for retaining a fiscal year. The more than 50 percent shareholder rule no longer applies where the shareholder is exempt from tax on the pass-through earnings. See Rev. Proc. 2002-38. Only a 100 percent ESOP owned S Corporation is allowed to use the ESOP year.

Now, as to probability of success, my experience is quite dreary. Our success has been limited to the allowable deferral periods - 9/30, 10/31 or 11/30 year ends....

[Guest John Nelson]

Thanks Becky. The company in question has a 5/31 fiscal year end, so I think they're probably doomed to have to change fiscal years as part of the S conversion.