26 U.S.C. § 443 — Returns for a period of less than 12 months

(a) Returns for short period (1) Change of annual accounting period: if you change your tax year with the Secretary's approval, you file a "short period" return covering from the day after your old year ended to the day before your new year starts. (2) Taxpayer not in existence for entire taxable year: if you (or your business) existed for only part of what would have been your tax year, you also file a short-period return. (b) Computation of tax on change of annual accounting period (1) General rule: If you filed a short return because you changed your accounting year under (a)(1), figure your tax this way. Take your "modified taxable income" for the short period. Multiply it by 12. Divide by the number of months in the short period. That gives an annualized income figure. Compute the tax on that annualized amount. Your actual tax is the same fraction of that tax as the number of months in your short period is of 12. (2) Exception (A) Computation based on 12-month period: You can ask for a lower tax if you show your taxable income for a full 12-month period described in (B), calculated as if it were a real tax year under that year's law. If you qualify, your short-period tax (as figured under paragraph (1)) is reduced to whichever is greater: (i) the same share of the 12-month period's tax as your short-period modified income is of the 12-month period's modified income; or (ii) the tax computed directly on your short-period modified income. Everyone else (except in the case covered by (B)(ii)) must compute tax without this exception. (B) 12-month period: The 12-month period used above is either: (i) the 12 months starting on the first day of the short period, or (ii) the 12 months ending on the last day of the short period -- used instead if, at the end of the period in (i), the taxpayer no longer exists or (for a corporation) has since sold off nearly all its assets. (C) Application for benefits: You must apply for this exception in the manner and by the time the regulations set -- no later than the deadline (including extensions) for filing the return for the first tax year ending at least 12 months after the short period began. If you already filed your return without claiming this, your application counts as a claim for a credit or refund of the extra tax. (D) Regulations: The Secretary must write regulations needed to carry out this exception. (3) "Modified taxable income" defined: For this subsection, it means gross income for the period minus the deductions this chapter allows for that period -- except that for a short period, only the adjusted personal-exemption deduction (see (c)) is used. (c) Adjustment in deduction for personal exemption If you're not a corporation and you file a short-period return because you changed your accounting year, and you didn't use the 12-month exception in (b)(2), your personal exemptions under section 151 are cut down. They're reduced to the same fraction of the full exemption as the number of months in your short period is of 12. (d) Adjustment in computing minimum tax and tax preferences If you file a short-period return under (a): (1) Your alternative minimum taxable income for the short period is annualized the same way -- multiply by 12, divide by the number of months in the short period. (2) The amount figured under section 55(a)(1) bears the same relationship to the tax on the annualized amount as your short period's months bear to 12. (e) Cross references Subsection (b) does not apply when figuring: (1) the accumulated earnings tax -- see section 536. (2) the personal holding company tax -- see section 546. (3) a regulated investment company's taxable income -- see section 852(b)(2)(E). (4) a real estate investment trust's taxable income -- see section 857(b)(2)(C). For short-period returns tied to a debtor's election to end a tax year, see section 1398(d)(2)(E).