Page 354

TITLE 26-INTERNAL REVENUE CODE 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 tax- able year. (b) Computation of tax on change of annual account. ing 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 such income by 12 and 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 his taxable Income for the 12-month period described in subparagraph (B), com- puted 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 taxable Income computed on the basis of the short period bears to the taxable income for the 12-month period; or (ii) the tax computed on the taxable income for the short period without plac- ing the taxable Income on an annual basis. The taxpayer (other than a taxpayer to whom subparagraph (B)(il) 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 sub- paragraph (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 re- ferred 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 para- graph 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 exten- sions) for filing the return for the first tax- able year which ends on or after the day which is 12 mouths 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 regula- tions as he deems necessary for the applica- tion of this paragraph. (c) Adjustment in deduction for personal exemption In the case of a taxpayer other than a corpo- ration, 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 ex- emptions 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 exclusion for computing minimum tax for tax preferences If a return is made for a short period by reason of subsection (a), then the $10,000 amount specified in section 56 (relating to mini- mum tax for tax preferences), modified as pro- vided by section 58, shall be reduced to the amount which bears the same ratio to such specified amount as the number of days in the short period bears to 365. (e) Cross references For inapplicability of subsection () In computing- (1) Accumulated earnings tax, see section 536. (2) Personal holding company tax, see section 546. (3) Undistributed foreign personal holding company income, see section 557. (4) The taxable income of a regulated investment com- pany, see section 852(b)(2)(E). (5) The taxable income of a real estate Investment trust, see section 857(b)(2)(C). (Aug. 16, 1954, ch. 736, 68A Stat. 149; Sept. 14, 1960, Pub. L. 86-779, § 10(0), 74 Stat. 1009; Dec. 30, 1969, Pub. L. 91-172, title III, § 301(b)(6), 83 Stat. 585; Oct. 4, 1976, Pub.,L. 94-455, title III, § 301(e), title XII, § 1204(c)(2), title XVI, § 1607(b)(1)(C), title XIX, § 1906(b)(13)(A), 90 Stat. 1553, 1697, 1757, 1834.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. !a)(3). Pub. L. 94-455, § 1204(c)(2), struck out subsec. (a3) which made termination of taxpayer's taxable year under section 6851 as one of the circum- stances under which a tax return for a period of less than 12 months shall be made. Subsec. (b)(2)(D). Pub. L. 94-455, § 1906(b)(13)(A), struck out' or his delegate" following "Secretary". Subsec. d). Pub. L. 94-455, §301(e), substituted "10,000" for "$30,000". Subsec. (e,,(5). Pub. L. 94-455, § 1607(b)(1)(C), substi- tuted "section 857(b)(2)(C)" for "section 857(b)(2)(D)". 1969-Subsec. (d). Pub. L. 91-172 added subsec. (d). Former subsec. (d) redesignated (e). Subsec. (e). Pub. L. 91-172 redesignated former subsec. (d) as (e). 1960-Subsec. (d)(5). Pub. L. 86-779 added par. (5). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1204(c)(2) of Pub. L. 94-455 effective with respect to action taken under section 6851, 6861 or 6862 of the Internal Rev- § 443 Page 354