Adoption of a Fiscal Year Basis of Accounting Not Prohibited Under the Law

December 12, 1994 BIR RULING NO. 174-94 37 000-00 174-94 Diaz, Murillo & Dalupan 3F Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village, Makati Metro Manila Attention: Mr . Arturo N . Dalupan Managing Partner Gentlemen : This refers to your letter dated April 8, 1994 stating that Diaz, Murillo & Dalupan (DMD) (formerly L:C Diaz & Company, which was dissolved on February 28, 1993) is a duly registered professional partnership with the Securities and Exchange Commission in February 1993; that it has adopted the fiscal year basis of accounting for its income, which does not coincide with the calendar year basis of reporting income for its partners' income tax returns; that as such, you have decided to prepare a tentative cut-off for the distribution of profit for the ten (10) month period starting March 1, 1993 to December 31, 1993, in order to determine the tentative distribution of profit to the partners in reporting their taxable income for calendar year 1993; that thereafter, it will prepare regular financial statements for the fiscal year March 1, 1993 to February 28, 1994, and shall file an information return on or before June 15, 1994 and every year thereafter. LLpr Based on the foregoing representations, you ask confirmation on the aforesaid arrangement. In reply, please be informed that since DMD is a newly registered professional partnership with the SEC in February 1993, adoption of a fiscal year basis of accounting, if it deems best suited for its purpose and clearly reflects its income, is not prohibited under the law. Section 37 of the Tax Code, as amended, provides "Sec. 37. General Rule. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 20, or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year." However, since the fiscal year basis of accounting (March-February) does not coincide with the calendar year basis of reporting of its partners' income tax returns (January-December), then the partnership shall report all the income received for the taxable year, that is, the ten (10)-month (March-December) tentative income distribution ending December 31 of every year and the two (2)-month (January-February) income from the prior fiscal year. prll Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue