| REG-107722-00 |
January 23, 2006 |
Partial Withdrawal of Previous Proposed Rules,
Notice of Proposed Rulemaking, and
Notice of Public Hearing Corporate Estimated Tax
Internal Revenue Service (IRS), Treasury.
Partial withdrawal of previous proposed rules, notice of proposed rulemaking,
and notice of public hearing.
This document withdraws proposed regulations relating to corporate estimated
taxes. This document also contains new proposed regulations that provide
guidance to corporations with respect to estimated tax requirements. These
proposed regulations generally affect corporate taxpayers who are required
to make estimated tax payments. These proposed amendments reflect changes
to the law since 1984. This document also provides notice of a public hearing
on these proposed regulations.
Written or electronic comments must be received by February 22, 2006.
Outlines of topics to be discussed at the public hearing scheduled for March
15, 2006, must be received by February 22, 2006.
Send submissions to: CC:PA:LPD:PR (REG-107722-00), room 5203, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions
may be hand-delivered Monday through Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG-107722-00), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically,
via the IRS Internet site at www.irs.gov/regs or via
the Federal eRulemaking Portal at www.regulations.gov (IRS-REG-107722-00).
The public hearing will be held in the Auditorium, Internal Revenue Service
Building, 1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations, Joseph P. Dewald, (202) 622-4910;
concerning the submissions of comments, the hearing, and/or to be placed on
the building access list to attend the hearing, Robin Jones at (202) 622-7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
This document withdraws §§1.6152-1(a)(1), 1.6654-2(d)(1)(i),
1.6655-1, 1.6655-2, 1.6655-3, 1.6655-4, 1.6655-5, 1.6655-6, and 301.6655-1
in the notice of proposed rulemaking (LR-228-82, 1984-1 C.B. 760) relating
to corporate estimated taxes under section 6655 that was published in the Federal Register (49 FR 11186) on March 26, 1984 (referred
to as the 1984 proposed regulations). This document also contains new proposed
amendments to the Income Tax Regulations (26 CFR Part 1) and the Procedure
and Administration Regulations (26 CFR Part 301) relating to corporate estimated
taxes under section 6425 and section 6655 of the Internal Revenue Code. The
IRS is withdrawing the 1984 proposed regulations because significant changes
to the law since 1984 have caused them to become outdated.
These proposed regulations reflect changes to the law made by the Deficit
Reduction Act of 1984, Public Law 98-369 (98 Stat. 494), the Superfund Amendments
and Reauthorization Act of 1986, Public Law 99-499 (100 Stat. 1613), the Tax
Reform Act of 1986, Public Law 99-514 (100 Stat. 2085), the Omnibus Budget
Reconciliation Act of 1987, Public Law 100-203 (101 Stat. 1330), the Revenue
Act of 1987, Public Law 100-203 (101 Stat. 1330-382), the Omnibus Trade and
Competitiveness Act of 1988, Public Law 100-418 (102 Stat. 1107), the Technical
and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342),
the Omnibus Budget Reconciliation Act of 1989, Public Law 101-239 (103 Stat.
2106), the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508 (104
Stat. 1388), the Tax Extension Act of 1991, Public Law 102-227 (105 Stat.
1686), the Act of Feb. 7, 1992, Public Law 102-244 (106 Stat. 3), the Unemployment
Compensation Amendments of 1992, Public Law 102-318 (106 Stat. 290), the Omnibus
Budget Reconciliation Act of 1993, Public Law 103-66 (107 Stat. 312), the
Uruguay Round Agreements Act of 1994, Public Law 103-465 (108 Stat. 4809),
the Small Business Job Protection Act of 1996, Public Law 104-188 (110 Stat.
1755), the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788),
the Ticket to Work and Work Incentives Improvement Act of 1999, Public Law
106-170 (113 Stat. 1860), the Community Renewal Tax Relief Act of 2000, Public
Law 106-554 (114 Stat. 2763), the Economic Growth and Tax Relief Reconciliation
Act of 2001, Public Law 107-16 (115 Stat. 38), the Jobs and Growth Tax Relief
Reconciliation Act of 2003, Public Law 108-27 (117 Stat. 752), and the American
Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418).
The existing regulations under section 6655 do not reflect significant
changes to the tax law since 1984, most notably the enactment of the economic
performance rules under section 461(h). Since the enactment of section 461(h),
the determination of when economic performance must occur for taxpayers to
take a deduction into account for purposes of computing a quarterly estimated
tax payment has been unclear, particularly for taxpayers that compute their
quarterly estimated tax payments using an annualization method.
In addition, the IRS and Treasury Department have become aware of techniques
employed by taxpayers, particularly those taxpayers computing their estimated
tax payments using an annualization method, that reduce, if not eliminate,
estimated tax payments for one or more installments for a taxable year. The
proposed regulations provide rules that the IRS and Treasury Department believe
result in a more accurate reflection of annualized income than methods that
taxpayers may currently be employing. For example, the proposed regulations
make it clear that taxpayers may not, for any purpose, determine taxable income
for an annualization period or an adjusted seasonal installment period as
though the period is a short taxable year. The proposed regulations provide
specific rules for determining taxable income for any annualization period,
including how section 461(h) is to be applied in computing taxable income
for any annualization period. For example, with respect to an item of income
or gain, the proposed regulations provide that the item must be taken into
account in computing annualized taxable income for a particular annualization
period if the item is includible in computing taxable income in accordance
with section 451 on or before the last day of the annualization period. With
respect to an item of deduction, the proposed regulations generally provide
that an accrual method taxpayer may take into account a deduction in computing
annualized taxable income for a particular annualization period only to the
extent the item is incurred under §1.461-1(a)(2) on or before the last
day of the annualization period. For purposes of determining whether a deduction
may be taken into account by an accrual method taxpayer in determining annualized
taxable income for a particular annualization period, the provisions of section
170(a)(2) and §1.170A-11(b) (charitable contributions by accrual method
corporations), §1.461-4(d)(6)(ii) (provision of services or property
to a taxpayer), §1.461-5 (recurring item exception), and any other provision
that has a similar effect are not taken into account in determining whether
the item of deduction has been incurred under §1.461-1(a)(2) and is deductible
in computing annualized taxable income for an annualization period.
Revenue Ruling 76-450, 1976-2 C.B. 444, provides that state property
tax and franchise tax are deductible from the income for an annualization
period on the date the taxpayer accrues the taxes under the taxpayer’s
method of accounting. Revenue Ruling 76-450 was issued prior to the enactment
of section 461(h) and does not take into account the application of the economic
performance requirements of section 461(h) for purposes of computing an estimated
tax payment using the annualized income installment method. The proposed
regulations address the application of section 461(h) for purposes of the
annualized income installment method and provide that a taxpayer using an
accrual method of accounting cannot take a deduction into account unless the
deduction has been incurred under §1.461-1(a)(2) and is otherwise deductible
in computing taxable income for the applicable annualization period. As a
result of the rules provided in the proposed regulations regarding the application
of section 461(h) to the annualized income installment method, Rev. Rul. 76-450
is no longer applicable and will be obsoleted when these regulations are effective.
For purposes of section 404 and the regulations, regardless of the overall
method of accounting employed by the taxpayer, the applicable 2-, 3-, 4-,
5-, 6-, 7-, 8-, 9-, 10- or 11-month annualization period shall not be treated
as a short taxable year and the rules of section 404 and the regulations shall
be applied on the basis of the taxpayer’s taxable year for which estimated
tax is being determined. Thus, the determination of whether a payment to
an employee is deferred compensation under §1.404(b)-1T shall be made
by reference to whether the payment is received by the employee more than
a brief period of time after the last day of the taxable year for which estimated
tax is being determined, and not the last day of the annualization period.
With respect to contributions to qualified plans governed by section 404
and the regulations, in determining whether an item is paid or incurred by
the end of an annualization period, economic performance is satisfied only
to the extent such item is paid by the last day of the annualization period
(without regard to section 404(a)(6)) and does not, in combination with other
such items paid during the annualization period, exceed the applicable deduction
limit of section 404(a) for the taxable year. For purposes of sections 419
and 419A and the regulations, regardless of the overall method of accounting
employed by the taxpayer, the applicable 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-, 10-,
or 11-month annualization period shall not be treated as a short taxable year
and the rules of sections 419 and 419A and the regulations shall be applied
on the basis of the taxpayer’s taxable year for which estimated tax
is being determined. With respect to contributions to a welfare benefit fund
governed by sections 419 and 419A and the regulations, in determining whether
an item is paid or incurred by the end of an annualization period, economic
performance is satisfied only to the extent such item is paid by the last
day of the applicable annualization period and does not, in combination with
other such items paid during the annualization period, exceed the applicable
deduction limit of section 419 for the taxable year.
The proposed regulations provide guidance for annual expenses paid or
incurred at the end of the taxable year, or after the end of the taxable year
that are deemed paid or incurred during the taxable year. Section 1.6655-2(f)(2)(i)
of the proposed regulations provides that if an accrual method taxpayer has
a history of incurring a specific item of expense (or paying a specific item
of expense, in the case of a cash method taxpayer) that, while attributable
to income earned throughout the current taxable year, is not incurred (or
paid, in the case of a cash method taxpayer) until the end of the taxable
year or after the end of the current taxable year and is deemed incurred (or
paid, in the case of a cash method taxpayer) during the current taxable year
(taking into account, as applicable, section 170(a)(2) and §1.170A-11(b),
section 404(a)(6), §1.461-4(d)(6)(ii), §1.461-5, and any other provision
that has a similar effect), then the taxpayer may take into account a proportionate
part of the specific item of expense for each annualization period. In such
case the taxpayer may take into account a proportionate part of the specific
item of expense for each annualization period only if the portion of the annual
expense taken into account is determined with reasonable accuracy and the
expense is properly deducted by the taxpayer for the current taxable year
under the taxpayer’s method of accounting. For purposes of §1.6655-2(f)(2)(i),
a taxpayer has a history of incurring or paying a specific item of expense
at the end of the taxable year, or after the end of the taxable year that
is deemed incurred or paid during the taxable year, if, in each of the two
taxable years immediately preceding the current taxable year (or the immediately
preceding taxable year if the taxpayer was not in existence for the two preceding
taxable years), the taxpayer incurred or paid the specific item of expense
at the end of each taxable year, or after the end of each taxable year that
was deemed incurred or paid during such taxable year. For purposes of §1.6655-2(f)(2)(i),
the term “the end of the taxable year” means the period between
and including the 15th and last day of the last
month of the taxable year.
The proposed regulations also provide guidance regarding the treatment
of specific items for purposes of computing annualized taxable income for
an annualization period. For example, net operating loss carryovers must
be taken into account in computing an annualized income installment after
placing the taxable income for the annualization period on an annualized basis,
and section 481(a) adjustments must be recognized ratably over the applicable
adjustment period.
Revenue Ruling 67-93, 1967-1 C.B. 366, provides that a taxpayer should
deduct a net operating loss (NOL) carryover from the income for an annualization
period before annualizing the income for that period. As previously stated,
the IRS and Treasury Department believe that it is not appropriate for taxpayers
to determine taxable income for an annualization period or an adjusted seasonal
installment period as though the period is a short taxable year. As a result,
the IRS and Treasury Department now believe that it is a more appropriate
reflection of annualized taxable income if a NOL carryover is deducted after
annualizing the taxable income for an applicable annualization period or adjusted
seasonal installment period. Accordingly, the proposed regulations provide
that a taxpayer must annualize taxable income before taking into account a
NOL carryover and reduce the annualized amount by the NOL carryover. As a
result, Rev. Rul. 67-93 will be obsoleted when these regulations are effective.
In addition, the proposed regulations provide guidance on the amount
of depreciation and amortization (depreciation) expense that a taxpayer may
take into account for an annualization period. The proposed regulations generally
provide that a proportionate amount of a taxpayer’s estimated annual
depreciation expense shall be taken into account when determining any annualized
income installment for the taxable year. In determining the estimated annual
depreciation expense, a taxpayer may take into account purchases, sales or
other dispositions, changes in use, depreciation permitted by sections 168(k)
and 1400L, and other similar events that, based on all of the relevant information
available as of the last day of the annualization period (such as capital
spending budgets, financial statement data and projections, or similar reports
that provide evidence of the taxpayer’s capital spending plans for the
current taxable year), the taxpayer reasonably expects to occur during the
taxable year. As an alternative to estimating annual depreciation expense
based on events that are reasonably expected to occur, the proposed regulations
provide that, in general, a taxpayer may claim for an annualization period
at least a proportionate amount of 50 percent of the taxpayer’s estimated
depreciation expense for the current taxable year attributable to assets that
the taxpayer had in service on the last day of the preceding taxable year,
that remain in service on the first day of the current taxable year, and that
are subject to the half-year convention. The proposed regulations also provide
that an annualization period cannot be treated as a short taxable year, including
for purposes of determining the depreciation allowance for such annualization
period.
The proposed regulations also provide guidance regarding short taxable
years, including the due dates for required installments for a short taxable
year (including a taxpayer’s initial taxable year), the computation
of such installments, and the applicable percentage of the annual tax due
with each installment.
These regulations are proposed to apply to taxable years beginning after
the date that is 30 days after the date the final regulations are published
in the Federal Register. Until the final
regulations become effective, taxpayers may rely on these proposed rules for
taxable years beginning on or after the date this notice of proposed rulemaking
is published in the Federal Register, provided,
however, that the taxpayer applies all of these proposed rules in determining
its required installments.
It has been determined that this notice of proposed rulemaking is not
a significant regulatory action as defined in Executive Order 12866. Therefore,
a regulatory assessment is not required. Except with respect to §1.6655-5,
which deals with the rules applicable to a short taxable year, it has been
determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because these provisions
do not impose a collection of information on small businesses, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. With respect to §1.6655-5,
it is hereby certified that this provision of the regulations will not have
a significant economic impact on a substantial number of small entities.
This certification is based on the fact that not many small businesses are
going to be subject to the short taxable year rules because: (1) existing
small businesses generally are not targets of mergers and acquisitions, which
result in a short taxable year; (2) start-up small businesses with a short
taxable year of less than four months do not have to pay estimated taxes;
and (3) start-up small businesses with a short taxable year of four months
or more are not likely to have taxable income that would be subject to the
corporate estimated tax rules. Therefore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small businesses.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a signed
original and eight (8) copies) that are submitted timely to the IRS. The
IRS and Treasury Department request comments on the clarity of the proposed
rules and how they can be made easier to understand. In particular, the IRS
and Treasury Department request comments on whether the 52-53 week taxable
year rules under §1.6655-2(e) should be simplified. The IRS and Treasury
Department also request comments on whether the final regulations should include
an additional exception, similar to the exception provided in §1.6655-2(f)(2)(i),
that would permit a taxpayer to take into account for an annualization period
a proportionate amount of a specific item of expense that is attributable
to income earned throughout the current taxable year and is paid or incurred
during the taxable year but after the applicable annualization period. If
such an exception is appropriate, the IRS and Treasury Department request
comments on what specific types of expenses would meet the requirements of
the rule, and whether the exception should provide for any additional limitations,
such as a requirement that a minimum percentage of the annual amount of the
expense be paid or incurred on a particular day during the taxable year.
All comments will be available for public inspection and copying.
A public hearing has been scheduled for March 15, 2006, beginning at
10:00 a.m. in the Auditorium of the Internal Revenue Service Building, 1111
Constitution Avenue, NW, Washington, DC. Due to building security procedures,
visitors must enter at the Constitution Avenue entrance. In addition, all
visitors must present photo identification to enter the building. Because
of access restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For information
about having your name placed on the building access list to attend the hearing,
see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit electronic or written comments and
an outline of the topics to be discussed and time to be devoted to each topic
(a signed original and eight (8) copies) by February 22, 2006. A period of
10 minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the deadline
for receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Partial Withdrawal of a Previous Notice of Proposed
Rulemaking
Accordingly, under the authority of 26 U.S.C. 7805, §§1.6152-1(a)(1),
1.6654-2(d)(1)(i), 1.6655-1, 1.6655-2, 1.6655-3, 1.6655-4, 1.6655-5, 1.6655-6,
and 301.6655-1 in the notice of proposed rulemaking published in the Federal Register on March 26, 1984, (LR-228-82) (49
FR 11186) are withdrawn.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as follows:
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6655-5 also issued under 26 U.S.C. 6655(i)(2). * * *
Par. 2. In §1.56-0, the heading for paragraph (e)(5) is added
to read as follows:
§1.56-0 Table of contents to §1.56-1, adjustment
for book income of corporations.
* * * * *
(e) * * *
(5) Effective date.
Par. 3. In §1.56-1, paragraph (e)(4) is revised and paragraph
(e)(5) is added to read as follows:
§1.56-1 Adjustment for the book income of corporations.
* * * * *
(e) * * *
(4) Estimating the book income adjustment for purposes of
the estimated tax liability. See §1.6655-7, as issued by
T.D. 8307, 1990-2 C.B. 9 (55 FR 33671), for special rules for estimating the
corporate alternative minimum tax book income adjustment under the annualization
exception.
(5) Effective date. Paragraph (e)(4) of this section
is applicable for taxable years beginning after the date that is 30 days after
the date the final regulations are published in the Federal
Register.
Par. 4. In §1.6425-2, paragraph (a) is revised and paragraph (c)
is added to read as follows:
§1.6425-2 Computation of adjustment of overpayment of
estimated tax.
(a) Income tax liability defined. For purposes
of §§1.6425-1 through 1.6425-3 and 1.6655-7, relating to excessive
adjustment, the term income tax liability means the excess
of—
(1) The sum of—
(i) The tax imposed by section 11 or 1201(a), or subchapter L of chapter
1 of the Internal Revenue Code, whichever is applicable; plus
(ii) The tax imposed by section 55; over
(2) The credits against tax provided by part IV of subchapter A of chapter
1 of the Internal Revenue Code.
* * * * *
(c) Effective date. Paragraph (a) of this section
is applicable to applications for adjustments of overpayments of estimated
income tax that are filed in taxable years beginning after the date that is
30 days after the date the final regulations are published in the Federal Register.
Par. 5. Section 1.6425-3 is amended by:
1. Revising paragraphs (f)(1) and (f)(2).
2. Adding paragraph (f)(3).
The revisions and addition read as follows:
§1.6425-3 Allowance of adjustments.
* * * * *
(f) Effect of adjustment. (1) For purposes of
all sections of the Internal Revenue Code except section 6655, relating to
additions to tax for failure to pay estimated income tax, any adjustment under
section 6425 is to be treated as a reduction of prior estimated tax payments
as of the date the credit is allowed or the refund is paid. For the purpose
of sections 6655(a) through (g), (i), and (j), credit or refund of an adjustment
is to be treated as if not made in determining whether there has been any
underpayment of estimated income tax and, if there is an underpayment, the
period during which the underpayment existed. However, an excessive adjustment
under section 6425 shall be taken into account in applying the addition to
tax under section 6655(h).
(2) For the effect of an excessive adjustment under section 6425, see
§1.6655-7.
(3) This paragraph (f) is applicable to applications for adjustments
of overpayments of estimated income tax that are filed in taxable years beginning
after the date that is 30 days after the date the final regulations are published
in the Federal Register.
Par. 6. Section 1.6655-0 is added to read as follows:
§1.6655-0 Table of contents.
This section lists the table of contents for §§1.6655-1 through
1.6655-7.
§1.6655-1 Addition to the tax in the case of a corporation.
(a) In general.
(b) Amount of underpayment.
(c) Period of the underpayment.
(d) Amount of required installment.
(e) Large corporation required to pay 100 percent of current year tax.
(1) In general.
(2) May use last year’s tax for 1st installment.
(f) Required installment due dates.
(1) Number of required installments.
(2) Time for payment of installments.
(i) Calendar year.
(ii) Fiscal year.
(iii) Short taxable year.
(iv) Partial month.
(g) Definitions.
(h) Special rules for consolidated returns.
(i) Overpayments applied to subsequent taxable year’s estimated
tax.
(1) In general.
(2) Subsequent examinations.
(j) Examples.
(k) Effective date.
§1.6655-2 Annualized income installment method.
(a) In general.
(b) Determination of annualized income installment—In general.
(c) Special rules.
(1) Applicable percentage.
(2) Partial month.
(d) Election of different annualization periods.
(e) 52-53 week taxable year.
(f) Determination of taxable income for an annualization period.
(1) In general.
(2) Exceptions.
(i) Annual expenses paid or incurred at or after the end of the taxable
year.
(ii) Net operating loss carryover.
(iii) Credit carryover.
(iv) Section 481(a) adjustment.
(v) Depreciation and amortization.
(A) General rule.
(B) Short taxable years.
(vi) Member of partnership.
(3) Examples.
(g) Items that substantially affect taxable income but cannot be determined
accurately by the installment due date.
(1) In general.
(2) Example.
(h) Events arising after installment due date that were not reasonably
foreseeable.
(1) In general.
(2) Example.
(i) Effective date.
§1.6655-3 Adjusted seasonal installment method.
(a) In general.
(b) Limitation on application of section.
(c) Determination of amount.
(d) Special rules.
(1) Base period percentage.
(2) Filing month.
(3) Application of the rules related to the annualized income installment
method to the adjusted seasonal installment method.
(e) Example.
(f) Effective date.
§1.6655-4 Large corporations.
(a) Large corporation defined.
(b) Testing period.
(c) Computation of taxable income during testing period.
(1) Short taxable year.
(2) Computation of taxable income in taxable year when there occurs
a transaction to which section 381 applies.
(d) Members of controlled group.
(1) In general.
(2) Aggregation.
(3) Allocation rule.
(4) Controlled group members.
(e) Effect on a corporation’s taxable income of items that may
be carried back or carried over from any other taxable year.
(f) Consolidated returns. [Reserved]
(g) Example.
(h) Effective date.
§1.6655-5 Short taxable year.
(a) In general.
(b) Exception to payment of estimated tax.
(c) Installment due dates.
(1) In general.
(i) Taxable year of four months but less than twelve months.
(ii) Exception.
(2) Early termination of taxable year.
(i) In general.
(ii) Exception.
(d) Amount due for required installment.
(1) In general.
(2) Tax shown on the return for the preceding taxable year.
(3) Applicable percentage.
(e) Examples.
(f) 52 or 53 week taxable year.
(g) Use of annualized income or seasonal installment method.
(1) In general.
(2) Computation of annualized income installment.
(3) Annualization period for final required installment.
(4) Examples.
(h) Preceding taxable year a short taxable year.
(i) Effective date.
§1.6655-6 Methods of accounting.
(a) In general.
(b) Exceptions.
(1) Automatic accounting method changes.
(2) Non-automatic accounting method changes.
(c) Examples.
(d) Effective date.
§1.6655-7 Addition to tax on account of excessive adjustment
under section 6425.
Par. 7. Sections 1.6655-1, 1.6655-2, and 1.6655-3 are revised to read
as follows:
§1.6655-1 Addition to the tax in the case of a corporation.
(a) In general. Section 6655 imposes an addition
to the tax under chapter 1 of the Internal Revenue Code in the case of any
underpayment of estimated tax by a corporation. An addition to tax due to
the underpayment of estimated taxes is determined by applying the underpayment
rate established under section 6621 to the amount of the underpayment, for
the period of the underpayment. This addition to the tax is in addition to
any applicable criminal penalties and is imposed whether or not there was
reasonable cause for the underpayment.
(b) Amount of underpayment. The amount of the
underpayment for any required installment is the excess of—
(1) The required installment; over
(2) The amount, if any, of the installment paid on or before the last
date prescribed for such payment.
(c) Period of the underpayment. The period of
the underpayment of any required installment runs from the date the installment
was required to be paid to the 15th day of the
3rd month following the close of the taxable year,
or to the date such underpayment is paid, whichever is earlier. For purposes
of determining the period of the underpayment—
(1) The date prescribed for payment of any installment of estimated
tax shall be determined without regard to any extension of time; and
(2) A payment of estimated tax will be credited against unpaid required
installments in the order in which such installments are required to be paid.
(d) Amount of required installment. Except as
otherwise provided in this section and §§1.6655-2 through 1.6655-7,
the amount of any required installment is 25 percent of the lesser of—
(1) 100 percent of the tax shown on the return for the taxable year
(or, if no return is filed, 100 percent of the tax for such year); or
(2) 100 percent of the tax shown on the return of the corporation for
the preceding taxable year.
(3) Paragraph (d)(2) of this section shall not apply if the preceding
taxable year was not a taxable year of 12 months or the corporation did not
file a return for such preceding taxable year showing a liability for tax.
(e) Large corporation required to pay 100 percent of current
year tax—(1) In general. Except as
provided in paragraph (e)(2) of this section, paragraph (d)(2) of this section
shall not apply in the case of a large corporation (as defined in §1.6655-4).
(2) May use last year’s tax for first installment.
Paragraph (e)(1) of this section shall not apply for purposes of determining
the amount of the 1st required installment for
any taxable year. Any reduction in such 1st installment
by reason of the preceding sentence shall be recaptured by increasing the
amount of the next required installment determined under paragraph (d)(1)
of this section by the amount of such reduction and, if the next required
installment is reduced by use of the annualized income installment method
under §1.6655-2 or the adjusted seasonal installment method under §1.6655-3,
by increasing subsequent required installments determined under paragraph
(d)(1) of this section to the extent that the reduction has not previously
been recaptured.
(f) Required installment due dates—(1) Number
of required installments. Unless otherwise provided, corporations
must make 4 required installments for each taxable year.
(2) Time for payment of installments—(i) Calendar
year. In the case of a calendar year taxpayer, the due dates of
the required installments are as follows:
(ii) Fiscal year. In the case of a taxpayer other
than a calendar year taxpayer, the due dates of the required installments
are as follows:
(iii) Short taxable year. See §1.6655-5 for
rules regarding required installments for corporations with a short taxable
year.
(iv) Partial month. Except as otherwise provided,
for purposes of determining the due date of any required installment a partial
month shall be treated as a full month.
(g) Definitions. (1) The term tax as
used in this section and §§1.6655-2 through 1.6655-7 means the excess
of—
(i) The sum of—
(A) The tax imposed by section 11, section 1201(a), or subchapter L
of chapter 1 of the Internal Revenue Code, whichever is applicable;
(B) The tax imposed by section 55; plus
(C) The tax imposed by section 887; over
(D) The credits against tax provided by part IV of subchapter A of chapter
1 of the Internal Revenue Code.
(ii) In the case of a foreign corporation subject to taxation under
section 11, section 1201(a), or subchapter L of chapter 1 of the Internal
Revenue Code, the tax imposed by section 881 shall be treated as a tax imposed
by section 11.
(iii) In the case of a partnership that is treated, pursuant to regulations
issued under section 1446(f)(2), as a corporation for purposes of this section,
the tax imposed by section 1446 shall be treated as a tax imposed by section
11.
(2) For the purposes of paragraph (d)(2) of this section, the term return
for the preceding taxable year means the Federal income tax return
for such taxable year that is required by section 6012(a)(2). However, if
an amended Federal income tax return has been filed before the due date for
an installment, then the term return for the preceding taxable year means
the Federal income tax return as amended. Paragraph (d)(2) of this section
will apply without regard to whether the taxpayer’s Federal income tax
return for the preceding taxable year is filed in a timely manner.
(3) If the tax rates for the current taxable year for which estimated
tax is being determined differ from the rates applicable to the preceding
taxable year, the tax determined for the preceding taxable year shall be recomputed
using the rates applicable to the current taxable year.
(h) Special rules for consolidated returns. For
special rules relating to the determination of the amount of the underpayment
in the case of a corporation whose income is included in a consolidated return,
see §1.1502-5(b).
(i) Overpayments applied to subsequent taxable year’s
estimated tax—(1) In general. If a
taxpayer elects under the provisions of sections 6402(b) and 6513(d) and the
regulations to apply an overpayment in year one against the estimated tax
liability for year two, the overpayment will be applied to the required installment
payments for year two in the order due and to the extent necessary to satisfy
such installments, similar to the manner in which an actual overpayment of
one installment is carried forward to the next installment. No interest is
accrued or paid on an overpayment if the election to apply the overpayment
against estimated tax is made.
(2) Subsequent examinations. If a deficiency is
determined in an examination of a return for a taxable year that originally
reflected an overpayment that was applied against estimated tax for the succeeding
taxable year, interest on the deficiency will not begin to accrue on an amount
applied until that amount is used to satisfy a required estimated tax payment
in such taxable year. Regardless of whether the taxpayer anticipated the
application of such overpayment from the prior taxable year in calculating
and paying its required estimated tax installment liabilities for the current
taxable year, the subsequently determined underpayment and interest computation
thereon will not change the taxpayer’s original election to apply the
overpayment against the estimated tax liability of the succeeding taxable
year. Any changes to the usage of the original overpayment from the prior
taxable year are hypothetical only and solely for the purpose of computing
deficiency interest. Overpayment interest will not be impacted. For further
guidance, see Rev. Rul. 99-40, 1999-2 C.B. 441, (see §601.601(d)(2)(ii)(b)
of this chapter).
(j) Examples. The method prescribed in paragraphs
(d) through (g) of this section may be illustrated by the following examples:
Example 1. X, a calendar year corporation, estimates
its tax liability for its taxable year ending December 31, 2006, will be $85,000.
X is not a large corporation as defined in section 6655(g)(2) and §1.6655-4.
X reported a liability of $74,900 on its return for the taxable year ended
December 31, 2005, with no credits against tax. X paid four installments
of estimated tax, each in the amount of $18,725 (25 percent of $74,900), on
April 17, 2006, June 15, 2006, September 15, 2006, and December 15, 2006,
respectively. X reported a tax liability of $88,900 on its return due March
15, 2007. X had a $5,000 credit against tax for tax year 2006 as provided
by part IV of subchapter A of chapter 1 of the Internal Revenue Code. X did
not underpay its estimated tax for tax year 2006 for any of the four installments,
determined as follows:
Example 2. (i) Facts. Y,
a calendar year corporation, estimates its tax liability for its taxable year
ending December 31, 2006, will be $70,000. Y is not a large corporation as
defined in section 6655(g)(2) and §1.6655-4. Y reported a Federal income
tax liability of $90,000 for its taxable year ending December 31, 2005. Y
paid no installment of estimated tax on or before April 17, 2006, June 15,
2006, or September 15, 2006, but made a payment of $63,000 on December 15,
2006. On March 15, 2007, Y filed its income tax return showing a tax of $70,000.
Y had no credits against tax for tax year 2006. Of the $63,000 paid by Y
on December 15, 2006, $17,500 is applied to each of the first three installments
due on April 15, June 15, and September 15, 2006, and the remaining $10,500
is applied to the fourth installment. Y has an underpayment of estimated
tax for each of the first three installments of $17,500 and for the fourth
installment of $7,000. The addition to tax under section 6655(a) is computed
as follows:
(ii) Addition to tax. Assuming that neither the
annualized income installment method nor the adjusted seasonal installment
method described in §§1.6655-2 and 1.6655-3 would result in a lower
payment for any installment period, and the addition to tax is computed under
section 6621(a)(2) at the rate of 8 percent per annum for the applicable periods
of underpayment, the addition to tax is determined as follows:
(k) Effective date. This section applies to taxable
years beginning after the date that is 30 days after the date the final regulations
are published in the Federal Register.
§1.6655-2 Annualized income installment method.
(a) In general. In the case of any required installment,
if the corporation establishes that the annualized income installment determined
under this section, or the adjusted seasonal installment determined under
§1.6655-3, is less than the amount determined under §1.6655-1—
(1) The amount of such required installment shall be the annualized
income installment (or, if less, the adjusted seasonal installment); and
(2) Any reduction in a required installment resulting from the application
of this section will be recaptured by increasing the amount of the next required
installment determined under §1.6655-1 by the amount of such reduction
(and, if the next required installment is similarly reduced, by increasing
subsequent required installments to the extent that the reduction has not
previously been recaptured).
(b) Determination of annualized income installment—In
general. In the case of any required installment, the annualized
income installment is the excess (if any) of—
(1) The product of the applicable percentage and the tax for the taxable
year computed by annualizing the taxable income and alternative minimum taxable
income—
(i) For the first 3 months of the taxable year, in the case of the first
required installment;
(ii) For the first 3 months of the taxable year, in the case of the
second required installment;
(iii) For the first 6 months of the taxable year in the case of the
third required installment; and
(iv) For the first 9 months of the taxable year, in the case of the
fourth required installment; over
(2) The aggregate amount of any prior required installments for the
taxable year.
(c) Special rules—(1) Applicable
percentage. Except as otherwise provided in §1.6655-5(d)
with respect to short taxable years—
(2) Partial month. Except as otherwise provided,
for purposes of paragraph (b) of this section a partial month shall be treated
as a month.
(d) Election of different annualization periods.
(1) If the taxpayer timely files Form 8842, “Election To
Use Different Annualization Periods for Corporate Estimated Tax,”
in accordance with section 6655(e)(2)(C)(iii), and elects Option 1—
(i) Paragraph (b)(1)(i) of this section will be applied by using the
language “2 months” instead of “3 months”;
(ii) Paragraph (b)(1)(ii) of this section will be applied by using the
language “4 months” instead of “3 months”;
(iii) Paragraph (b)(1)(iii) of this section will be applied by using
the language “7 months” instead of “6 months”; and
(iv) Paragraph (b)(1)(iv) of this section will be applied by using the
language “10 months” instead of “9 months”.
(2) If the taxpayer timely files Form 8842, in accordance with section
6655(e)(2)(C)(iii), and elects Option 2—
(i) Paragraph (b)(1)(ii) of this section will be applied by using the
language “5 months” instead of “3 months”;
(ii) Paragraph (b)(1)(iii) of this section will be applied by using
the language “8 months” instead of “6 months”; and
(iii) Paragraph (b)(1)(iv) of this section will be applied by using
the language “11 months” instead of “9 months”.
(e) 52-53 week taxable year. (1) Generally, in
the case of a taxpayer whose taxable year constitutes 52 or 53 weeks in accordance
with section 441(f), the rules prescribed by §1.441-2 shall be applicable
in determining—
(i) Whether a taxable year is a taxable year of 12 months; and
(ii) When the 2-, 3- ,4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-month period
(whichever is applicable) commences and ends for purposes of paragraphs (b)(1),
(d)(1) and (d)(2) of this section.
(2) If a taxpayer employs four 13-week periods or thirteen 4-week accounting
periods and the end of any accounting period employed by the taxpayer does
not correspond to the end of the 2-, 3- ,4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-month
period (whichever is applicable), then, provided the taxpayer has at least
one full 4-week or 13-week accounting period, as appropriate, within the applicable
period, annualized taxable income for the applicable period shall be—
(i) [(x/(y*13))*z], in the case of a taxpayer using four 13-week periods,
if—
(A) x = Taxable income for the number of full 13-week periods in the
applicable period;
(B) y = The number of full 13-week periods in the applicable period;
and
(C) z = The number of weeks in the taxable year; or
(ii) [(x/(y*4))*z], in the case of a taxpayer using thirteen 4-week
periods, if—
(A) x = Taxable income for the full 4-week periods in the applicable
period;
(B) y = The number of full 4-week periods in the applicable period;
and
(C) z = The number of weeks in the taxable year.
(3) If a taxpayer employs four 13-week periods and the taxpayer does
not have at least one 13-week period within the applicable 2-, 3- ,4-, 5-,
6-, 7-, 8-, 9-, 10-, or 11-month period, the taxpayer shall be permitted to
determine annualized taxable income for the applicable period based upon—
(i) The taxable income for the number of weeks in the applicable period;
or
(ii) The taxable income for the full 13-week periods that end before
the due date of the required installment.
(4) The following examples illustrate the rules of this paragraph (e):
Example 1. Taxpayer A, an accrual method taxpayer,
uses a 52/53 week year-end ending on the last Friday in December and uses
four thirteen-week periods. For its year beginning December 30, 2006, A uses
the annualized income installment method under section 6655(e)(2)(A)(i) to
calculate all of its required installments. For purposes of computing its
first and second required installments, the first 3 months of A’s taxable
year under paragraph (b)(1)(i) of this section will end on March 30th,
the thirteenth Friday of A’s taxable year. For purposes of its third
required installment, the first 6 months of A’s taxable year will end
on June 29th, the twenty-sixth Friday of A’s
taxable year. For purposes of its fourth required installment, the first
9 months of A’s taxable year will end on September 28th,
the thirty-ninth Friday of A’s taxable year.
Example 2. Same facts as Example 1 except
that A uses thirteen four-week periods and there are 52 weeks during A’s
taxable year beginning December 30, 2006, and ending December 28, 2007. For
purposes of computing A’s first and second required installments, A’s
annualized taxable income for the first three months will be the taxable income
for the first three four-week periods of A’s taxable year (December
30, 2006, through March 23, 2007) divided by 12 (number of full four-week
periods in the first three months (3) multiplied by 4) and multiplied by 52
(the number of weeks in the taxable year). For purposes of computing A’s
third required installment, A’s annualized taxable income for the first
six months will be the taxable income for the first six four-week periods
of A’s taxable year (December 30, 2006, through June 15, 2007) divided
by 24 and multiplied by 52. For purposes of computing A’s fourth required
installment, A’s annualized taxable income for the first nine months
will be the taxable income for the first nine four-week periods of A’s
taxable year (December 30, 2006, through September 7, 2007) divided by 36
and multiplied by 52.
(5) The application of the annualized income installment method is
illustrated by the following example:
Example. (i) X, a calendar year corporation, had
a taxable year of less than twelve months for tax year 2005 and no credits
against tax for tax year 2006. X made an estimated tax payment of $15,000
on the installment dates of April 17, 2006, June 15, 2006, September 15, 2006,
and December 15, 2006, respectively. Assume that, under paragraph (d)(1)
of this section, X elected Option 1 by timely filing Form 8842, in accordance
with section 6655(e)(2)(C)(iii), and determined that its taxable income for
the first 2, 4, 7 and 10 months was $25,000, $64,000, $125,000, and $175,000
respectively. The income for each period is annualized as follows:
(ii)(A) To determine whether the installment payment made on April 17,
2006, equals or exceeds the amount that would have been required to have been
paid if the estimated tax were equal to 100 percent of the tax computed on
the annualized income for the 2-month period, the following computation is
necessary:
(B) Because the total amount of estimated tax that was timely paid on
or before the first installment date ($15,000) exceeds the amount required
to be paid on or before this date if the estimated tax were 100 percent of
the tax determined by placing on an annualized basis the taxable income for
the first 2-month period, the exception described in paragraphs (a) and (b)
of this section applies, and no addition to tax will be imposed for the installment
due on April 15, 2006.
(iii)(A) To determine whether the installment payments made on or before
June 15, 2006, equal or exceed the amount that would have been required to
have been paid if the estimated tax were equal to 100 percent of the tax computed
on the annualized income for the 4-month period, the following computation
is necessary:
(B) Because the total amount of estimated tax actually paid on or before
the second installment date ($19,562 ($15,000 second required installment
payment plus $4,562 overpayment of first required installment)) exceeds the
amount required to be paid on or before this date if the estimated tax were
100 percent of the tax determined by placing on an annualized basis the taxable
income for the first 4-month period, the exception described in paragraphs
(a) and (b) of this section applies, and no addition to tax will be imposed
for the installment due on June 15, 2006.
(iv)(A) To determine whether the installment payments made on or before
September 15, 2006, equal or exceed the amount that would have been required
to have been paid if the estimated tax were equal to 100 percent of the tax
computed on the annualized income for the 7-month period, the following computation
is necessary:
(B) Because the total amount of estimated tax actually paid on or before
the third installment date ($15,935 ($15,000 third required installment payment
plus $935 overpayment of second required installment)) does not equal or exceed
the amount required to be paid on or before this date if the estimated tax
were 100 percent of the tax determined by placing on an annualized basis the
taxable income for the first 7-month period, the exception described in paragraphs
(a) and (b) of this section does not apply, and an addition to tax will be
imposed with respect to the underpayment of the September 15, 2006, installment
unless another exception applies to this installment payment.
(v)(A) To determine whether the installment payments made on or before
December 15, 2006, equal or exceed the amount that would have been required
to have been paid if the estimated tax were equal to 100 percent of the tax
computed on the annualized income for the 10-month period, the following computation
is necessary:
(B) Because the total amount of estimated tax payments made on or before
the fourth installment date that is available to be applied to the estimated
tax due for the fourth installment ($9,884 ($15,000 fourth required installment
payment less $5,116 underpayment for the third installment of estimated tax
($21,051 third installment of estimated tax due less $15,935 payments available
to be applied to the third installment of estimated tax))) does not equal
or exceed the amount required to be paid on or before this date if the estimated
tax were 100 percent of the tax determined by placing on an annualized basis
the taxable income for the first 10-month period, the exception described
in paragraphs (a) and (b) of this section does not apply, and an addition
to tax will be imposed with respect to the underpayment of the December 15,
2006, installment unless another exception applies to this installment payment.
(vi) Assuming that no other exceptions apply and the addition to tax
is computed under section 6621(a)(2) at the rate of 8 percent per annum for
the applicable periods of underpayment, the amount of the addition to tax
is as follows:
(f) Determination of taxable income for an annualization period—(1) In
general. In determining the applicability of the exception described
in paragraphs (a) and (b) of this section (relating to the annualization of
income) and the exception described in §1.6655-3 (relating to annualization
of income for corporations with seasonal income), and for purposes of computing
a taxpayer’s taxable income (and applicable tax), an item must be taken
into account in computing a taxpayer’s taxable income for the taxable
year for which the estimated tax is being determined, and must be properly
taken into account in determining a taxpayer’s taxable income (and applicable
tax) for the applicable annualization period by the last day of the such period.
Generally, except as provided in paragraph (f)(2) of this section, for an
item to be taken into account during an annualization period, the following
must occur on or before the last day of the applicable annualization period
(determined based on the accounting period employed by the taxpayer):
(i) With respect to an item of gross income, such income is includible
in computing taxable income in accordance with section 451 or the appropriate
provision of the Internal Revenue Code (for example, section 453 for installment
sales or section 460 for long-term contracts).
(ii) With respect to an item of loss, the loss must be permitted to
be taken into account under the appropriate provision of the Internal Revenue
Code.
(iii) With respect to an item of deduction, for taxpayers using the
cash receipts and disbursements method of accounting, the deduction must be
paid under §1.461-1(a)(1) and otherwise deductible in computing taxable
income for the annualization period or, for taxpayers using an accrual method
of accounting, the deduction must be incurred under §1.461-1(a)(2) and
otherwise deductible in computing taxable income for the annualization period.
In the case of an accrual method taxpayer, the provisions of section 170(a)(2)
and §1.170A-11(b) (charitable contributions by accrual method corporations),
§1.461-4(d)(6)(ii) (provision of services or property to a taxpayer),
§1.461-5 (recurring item exception), and any other provision that has
a similar effect can not be used in determining whether the item of deduction
has been incurred under §1.461-1(a)(2) and is otherwise deductible for
purposes of computing taxable income for an annualization period. For purposes
of section 404 and the regulations, regardless of the overall method of accounting
employed by the taxpayer, the applicable 2-, 3-, |
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