1. (a) General Rule.

   1. (1) If a return is made for a short period, the net income for the short period shall be placed on an annual basis by multiplying such income by 12 and dividing the result by the number of months in the short period. Unless Section 24636 (b) and subsection (b) of this regulation apply, the tax for the short period shall be the same part of the tax computed on the annual basis as the number of months in the short period is of 12 months.
   2. (2) If a return is made for a short period of more than 6 days, but less than 359 days, resulting from a change from or to a 52-53 week income year, the net income for the short period shall be annualized and the tax computed on a daily basis, as provided in Section 24631 (f) (2) (B) (iii) and subsection (3) (E) of Reg. 24631 (b).
   3. (3) In the case of the offset provided for in Article 3 of Chapter 2, the Franchise Tax Board shall compute the amount of tax on the income placed on an annual basis, and shall allow the offset provided for from such tax. The tax due under Section 24636, which shall not be subject to offset, shall be such part of the tax, less the offset allowed, computed on such annual basis as the number of months in the short period of 12 months.

   4. (4) The provisions of subsection (a) (3) may be illustrated by the following example:

      EXAMPLE.

      The X Financial Corporation makes a return for the one-month period ending September 30, 1969, because of a change in annual accounting period permitted under Section 24633. Income and expenses for the short period are as follows:

      Gross operating income

      $133,900

      Business expenses

      130,000

      Net income from operations

      $3,900

      Net income for short period before annualizing

      $3,900

      Net income annualized ($3,900 x 12)

      $46,800

      Tax on annual basis: $46,800 at 11 percent

      $5,148

      Financial corporation offset (Section 23184)

      348

      Net tax

      $4,800

      Tax for one-month period ($4,800 x ¹/₁₂ )

      $400

2. (b) Exception: Computation based on 12-month period.

   1. (1) A taxpayer whose tax would otherwise be computed under Section 24636 (a) (or Section 24631 (f) (2) (B) (iii) on the case of certain changes from or to a 52-53-week income year) for the short period resulting from a change of annual accounting period may apply to the Franchise Tax Board to have its tax computed under the provisions of Section 24636(b) and this subsection. If such application is made, as provided in paragraph (4) of the subsection, and if the taxpayer establishes the amount of its net income for the 12-month period described in paragraph (2) of this subsection, then the tax for the short period shall be the greater of the following--

      1. (A) An amount which bears the same ratio to the tax computed on the net income which the taxpayer has established for the 12-month period as the net income computed on the basis of the short period bears to the net income for such 12-month period; or

      2. (B) The tax computed on the net income for the short period without placing the net income on an annual basis.

         However, if the tax computed under Section 24636(b) and this subsection is not less than the tax for the short period computed under Section 24636(a) (or Section 24631(f)(2)(B)(iii) in the case of certain changes from or to a 52-53 week income year), then Section 24636(b) and this subsection do not supply.

   2. (2) The term “12-month period” referred to in paragraph (1) of this subsection means the 12-month period beginning on the first day of the short period, However, if the taxpayer is not in existence at the end of such 12-month period, or if the taxpayer is a corporation which has disposed of substantially all of its assets before the end of such 12-month period, the term “12-month period” means the 12-month period ending at the close of the last day of the short period. For the purposes of the preceding sentence, a corporation which has ceased business and distributed so much of the assets used in its business that it cannot resume its customary operations with the remaining assets, will be considered to have disposed of substantially all of its assets, In the case of a change from a 52-53-week income year, the term “12-month period” means the period were an actual annual accounting period of 52 or 53 weeks (depending on the taxpayer's 52-52-week income year) beginning on the first day of the short period.

      1. (B) In the case of a taxpayer permitted or required to use inventories, the cost of goods sold during a part of the 12-month period included in an income year shall be considered, unless a more exact determination is available, as such part of the cost of goods sold during the entire income year as the gross receipts from sales for the entire income year as the gross receipts from sales for such part of the 12-month period as of the gross receipts from sales for the entire income year. For example, the 12-month period of a corporation engaged in the sale of merchandise, which has a short period from January 1, 1968, to September 30, 1968, is the calendar year 1968. The cost of goods sold during the three-month period, October 1, 1968, to December 31, 1968, is the calendar year 1968. The three-month period, October 1, 1968, to December 1, 1968, is part of the taxpayer's income year ending September 30, 1969. The cost of goods sold during the three-month period, October 1, 1968, to December 31, 1968, is such part of the cost of goods sold during the entire fiscal year ending September 30, 1969, as the gross receipts from sales for such three-month period are of the gross receipts from sales for the entire fiscal year.
      2. (C) The Franchise Tax Board may, in granting permission to a taxpayer to change its annual accounting period, require, as a condition to permitting the change, that the taxpayer must take a closing inventory upon the last day of the 12-month period if it wishes to obtain the benefits of Section 24636(b). Such closing inventory will be used only for the purposes of Section 24636(b), and the taxpayer will not be required to use such inventory in computing the net income year in which such inventory is taken.

      (3)(A) The net income for the 12-month period is computed under the some provisions of law as are applicable to the short period and is computed as if the 12-month period were an actual annual accounting period of the taxpayer. All items which fall in such 12--month period must be included even it they are extraordinary in amount or of an unusual nature. If the taxpayer is a member of a partnership, its net income for the 12-month period shall include its distributive share of partnership income for any taxable year of the partnership ending within or with such 12-month period, but no amount shall be included with respect to a taxable year of the partnership ending before or after such 12-month period. If any other item partially applicable to such 12-month period can be determined only at the end of an income year which includes only part of the 12-month period, the taxpayer, subject to review by the Franchise Tax Board, shall apportion such item to the 12-month period in such manner as will most clearly reflect income for the 12-month period.

   3. (4) (A) A taxpayer who wishes to compute its tax for a short period resulting from a change of annual accounting period under Section 24636(b) must make an application therefor. Except as provided in (B) of this paragraph, the taxpayer shall first file its return for the short period and compute its tax under Section 24636(a). The application for the benefits of Section 24636(b) shall subsequently be made in the form of a claim for credit or refund. The claim shall set forth the computation of the net income and the tax thereon for the 12-month period and must be filed not later than the time (including extensions) prescribed for filing the return for the taxpayer's first income year which ends on or after the day which is 12 months after the beginning of the short period. For example, assume that a taxpayer changes its annual accounting period from the calendar year to a fiscal year ending September 30, and files a return for the short period from January 1, 1968, to September 30, 1968. Its application for the benefits of Section 24636(b) must be filed not later than the time prescribed for filing its return for its first income year which ends on or after the last day of December 1968, the twelfth month after the beginning of he short period. Thus, the taxpayer must file its application not later than the time prescribed for filing the return for its fiscal year ending September 30, 1969. If it obtains an extension of time for filing the return for such fiscal year, it may file its application during the period of such extension. If the Franchise Tax Board determines that the taxpayer has established the amount of its net income for the 12-month period, any excess of the tax paid for the short period over the tax computed under Section 24636(b) will be credited or refunded to the taxpayer in the same manner as in the case of an overpayment.

      1. (B) If at the time the return for the short period is filed, the taxpayer is able to determine that the 12-month period ending with the close of the short period (see Section 24636(b) and subsection (b)(2) of this regulation) will be used in the computations under Section 24636(b), then the tax on the return for the short period may be determined under the provision of Section 24636(b). In such case, a return covering the 12-month period shall be attached to the return for the short period as a part thereof, and the return and attachment will then be considered as an application for the benefits of Section 24636(b).

History

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).

[FN*]

Compare Section 26 CFR 1.443-1(b).