Returns for a period of less than 12 months

# (a) Returns for short period

A return for a period of less than 12 months (referred to in this section as “short period”) shall be made under any of the following circumstances: (1) Change of annual accounting period When the taxpayer, with the approval of the Secretary, changes his annual accounting period. In such a case, the return shall be made for the short period beginning on the day after the close of the former taxable year and ending at the close of the day before the day designated as the first day of the new taxable year. (2) Taxpayer not in existence for entire taxable year When the taxpayer is in existence during only part of what would otherwise be his taxable year.

# (b) Computation of tax on change of annual accounting period

(1) General rule If a return is made under paragraph (1) of subsection (a), the taxable income for the short period shall be placed on an annual basis by multiplying the modified taxable income for such short period by 12, dividing the result by the number of months in the short period. The tax 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) Exception (A) Computation based on 12-month period If the taxpayer applies for the benefits of this paragraph and establishes the amount of this taxable income for the 12-month period described in subparagraph (B), computed as if that period were a taxable year and under the law applicable to that year, then the tax for the short period, computed under paragraph (1), shall be reduced to the greater of the following: (i) an amount which bears the same ratio to the tax computed on the taxable income for the 12-month period as the modified taxable income computed on the basis of the short period bears to the modified taxable income for the 12-month period; or (ii) the tax computed on the modified taxable income for the short period. The taxpayer (other than a taxpayer to whom subparagraph (B)(ii) applies) shall compute the tax and file his return without the application of this paragraph.

(B) 12-month period The 12-month period referred to in subparagraph (A) shall be— (i) the period of 12 months beginning on the first day of the short period, or (ii) the period of 12 months ending at the close of the last day of the short period, if at the end of the 12 months referred to in clause (i) the taxpayer is not in existence or (if a corporation) has theretofore disposed of substantially all of its assets.

(C) Application for benefits Application for the benefits of this paragraph shall be made in such manner and at such time as the regulations prescribed under subparagraph (D) may require; except that the time so prescribed shall not be later than the time (including extensions) for filing the return for the first taxable year which ends on or after the day which is 12 months after the first day of the short period. Such application, in case the return was filed without regard to this paragraph, shall be considered a claim for credit or refund with respect to the amount by which the tax is reduced under this paragraph.

(D) Regulations The Secretary shall prescribe such regulations as he deems necessary for the application of this paragraph.

(3) Modified taxable income defined For purposes of this subsection the term “modified taxable income” means, with respect to any period, the gross income for such period minus the deductions allowed by this chapter for such period (but, in the case of a short period, only the adjusted amount of the deductions for personal exemptions).

# (c) Adjustment in deduction for personal exemption

In the case of a taxpayer other than a corporation, if a return is made for a short period by reason of subsection (a)(1) and if the tax is not computed under subsection (b)(2), then the exemptions allowed as a deduction under section 151 (and any deduction in lieu thereof) shall be reduced to amounts which bear the same ratio to the full exemptions as the number of months in the short period bears to 12.

# (d) Adjustment in computing minimum tax and tax preferences

If a return is made for a short period by reason of subsection (a)— (1) the alternative minimum taxable income for the short period shall be placed on an annual basis by multiplying such amount by 12 and dividing the result by the number of months in the short period, and (2) the amount computed under paragraph (1) of section 55(a) shall bear the same relation to the tax computed on the annual basis as the number of months in the short period bears to 12.

# (e) Cross references

For inapplicability of subsection (b) in computing— (1) Accumulated earnings tax, see section 536. (2) Personal holding company tax, see section 546. (3) The taxable income of a regulated investment company, see section 852(b)(2)(E). (4) The taxable income of a real estate investment trust, see section 857(b)(2)(C). For returns for a period of less than 12 months in the case of a debtor’s election to terminate a taxable year, see section 1398(d)(2)(E).