[Federal Register: August 7, 2007 (Volume 72, Number 151)]
[Rules and Regulations]
[Page 44337-44366]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au07-7]
[[Page 44337]]
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Part IV
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1, 301 and 602
Corporate Estimated Tax; Final Rule
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
[TD 9347]
RIN 1545-AY22
Corporate Estimated Tax
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that provide guidance
to corporations with respect to estimated tax requirements. These final
regulations generally affect corporate taxpayers who are required to
make estimated tax payments. These final regulations reflect changes to
the law since 1984. This document also removes the section 6154
regulations.
DATES: Effective date: These regulations are effective on August 7,
2007.
Applicability date: These regulations apply to tax years beginning
after September 6, 2007.
FOR FURTHER INFORMATION CONTACT: Timothy Sheppard, at (202) 622-4910
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1), the Procedure and Administration Regulations (26 CFR part
301), and the OMB Control Numbers under the Paperwork Reduction Act
Regulations (26 CFR part 602) relating to corporate estimated taxes
under section 6425 and section 6655 of the Internal Revenue Code
(Code). This document also removes Sec. Sec. 1.6154-1, 1.6154-2,
1.6154-3, 1.6154-4, 1.6154-5, and 301.6154-1. The IRS is removing the
section 6154 regulations because Congress repealed section 6154 in
1987.
These 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).
These regulations do not reflect changes made by the Tax Increase
Prevention and Reconciliation Act of 2005, Public Law 109-222 (120
Stat. 345) (TIPRA), as amended by the U.S. Troop Readiness, Veterans'
Care, Katrina Recovery, and Iraq Accountability Act of 2007, Public Law
110-28 (121 Stat. 112), because TIPRA made temporary, targeted changes
to the time and amount of any required installment otherwise due in
September 2010 and September 2011. TIPRA also changed the amount of
required installments in 2006, 2012, and 2013 for corporations with
assets of not less than $1 billion. Although these changes are not
reflected in these regulations, these and any further changes made in
the Code supersede the rules in these regulations.
A notice of proposed rulemaking under section 6655 (REG-107722-00)
was published in the Federal Register (70 FR 73393) on December 12,
2005. The proposed regulations provide guidance on how to determine the
amount of a corporation's estimated tax due with each quarterly
installment. No requests for a public hearing were received, so the
public hearing on the proposed regulations, scheduled for March 15,
2006, was cancelled. The IRS received written and electronic comments
responding to the notice of proposed rulemaking. After consideration of
all comments, the proposed regulations are adopted as revised by this
Treasury decision.
Explanation of Provisions and Summary of Comments
Section 6655 generally requires corporations to make quarterly
estimated tax payments or be assessed an addition to tax for any
underpayment. As a general rule, payments are due on the fifteenth day
of the fourth, sixth, ninth, and twelfth months. Each quarterly payment
must be at least twenty-five percent of the required annual payment in
order to avoid an underpayment penalty. Generally, the required annual
payment equals one hundred percent of the tax shown on the return for
the current year tax, or for certain small taxpayers, the lesser of one
hundred percent of the tax shown on the return for the current year tax
or one hundred percent of the tax shown on the return for the preceding
taxable year. Alternatively, corporations may elect to use an
annualized income installment or an adjusted seasonal installment if
less than the amount computed under the general rules.
1. Comments Concerning Sec. 1.6655-1 (Addition to Tax in the Case of a
Corporation) of the Proposed Regulations
A. Recapture of a Tax Credit Not Included in the Definition of ``Tax''
One commentator requested that the final regulations clarify that
the recapture of a tax credit under Chapter 1 is not a section 11 tax
and not included within the definition of tax for purposes of section
6655 unless there is authority that provides that the recaptured credit
is treated as a tax imposed by section 11.
Revenue Ruling 78-257 (1978-1 CB 440) provides that the term tax,
as defined in section 6655, includes the amount of tax resulting from
the recomputation of a prior year's investment credit at the applicable
rate for the current year. However, Berkshire Hathaway, Inc. v. United
States, 802 F.2d 429 (Fed. Cir. 1986), held that, for purposes of the
definition of tax under section 6655, the recapture tax under former
section 47 was not a tax imposed by section 11. The Court concluded
that because the taxpayer paid no tax imposed by section 11 in the
preceding taxable year, that taxpayer was not subject to an addition to
tax for failing to pay estimated tax in the current year under the
former provision in section 6655(d)(2) that allowed a taxpayer to pay
estimated tax in the current year based on the law applicable to (other
than the rates), and the known facts of,
[[Page 44339]]
the prior year's return. Based on the holding in Berkshire Hathaway,
Sec. 1.6655-1(g)(1)(iii) of the final regulations provides that,
unless otherwise provided in the Internal Revenue Code, for purposes of
the definition of tax as used in section 6655, a recapture of tax, such
as a recapture provided by section 50(a)(1)(A) and any other similar
provision, is not considered to be a tax imposed by section 11.
Therefore, Rev. Rul. 78-257 is removed. See Sec. 601.601(d)(2)(ii)(b).
B. Tax Rate Changes for Preceding Year Safe Harbor
Section 6655(d)(1)(B)(ii) allows taxpayers to determine their
required annual payment based on 100 percent of the tax shown on the
preceding year's return. Commentators suggested that the rule provided
in Sec. 1.6655-1(g)(3) of the proposed regulations, which requires
taxpayers to recompute the tax determined for the preceding taxable
year based on the current year tax rates if the tax rates for the
current year and the preceding year differ, is not authorized by
section 6655. The commentators suggested that, prior to the effective
date of its amendment in 1987, section 6655 allowed estimated tax
payments to be based on the facts shown on the return for the preceding
taxable year and the law applicable to that year but using the tax
rates for the current taxable year. The commentators requested that the
final regulations not adopt the rule provided in Sec. 1.6655-1(g)(3)
of the proposed regulations.
Section 6655 no longer provides specific statutory authority to
recompute tax determined for the preceding taxable year using the rates
applicable to the current taxable year. Therefore, the final
regulations do not adopt the rule provided in Sec. 1.6655-1(g)(3) of
the proposed regulations.
C. Return for the Preceding Taxable Year
One commentator requested that the final regulations clarify that
the regulations adopt the holding in Mendes v. Commissioner, 121 T.C.
308 (2003). In Mendes, the Tax Court held that a tax return that is
filed after the IRS issues a notice of deficiency is not a return for
purposes of section 6654(d)(1)(B)(i). Id. at 324-325. Mendes cited
Evans Cooperage Co., Inc. v. United States, 712 F.2d 199 (5th Cir.
1983), for the proposition that the purpose of the preceding year safe
harbor is ``to provide a predictable escape from any possible penalty
liability [and this purpose] would be defeated if penalties for
underpayment of estimated taxes during the year were based, not on the
easily determinable amount reflected on the preceding year's return,
but instead upon the ultimate tax liability, possibly determined by
adverse tax audit, a year or so after the tax year for * * * which the
estimated tax installments were paid.'' Mendes, 121 T.C. at 326
(quoting Evans Cooperage, 712 F.2d at 204). Evans Cooperage held that
the statutory reference to ``tax shown on the return of the corporation
for the preceding taxable year'' refers to the timely filed return for
the preceding year, not to any later-filed amended return. Evans
Cooperage, 712 F.2d at 204.
Section 1.6655-1(g)(2) of the proposed regulations provides that
the reference in section 6655(d)(1)(B)(ii) to ``return of the
corporation of the preceding taxable year'' includes the Federal income
tax return as amended, only if an amended Federal income tax return has
been filed before the due date for an installment. As long as a
taxpayer has remaining estimated tax installment payments to make
during the tax year and is basing the payments on the preceding year
return, the remaining payments should be made based on the most recent
information the IRS has on the preceding year return. This includes the
information on an amended return for the preceding year filed before an
installment due date. Section 1.6655-1(g)(2) of the final regulations
retains this rule but clarifies that the term ``return for the
preceding taxable year'' includes the Federal income tax return as
amended only if filed before the applicable installment due date if an
amended Federal income tax return is filed for the preceding taxable
year. If an amended Federal income tax return is filed on or after an
installment due date, then the term ``return for the preceding taxable
year'' does not include that amended Federal income tax return with
respect to the installments due prior to the time the amended Federal
income tax return is filed. This rule applies regardless of whether the
IRS issues a notice of deficiency prior to the filing of the amended
Federal income tax return.
2. Comments Concerning Sec. 1.6655-2 (Annualized Income Installment
Method) of the Proposed Regulations
As a general comment to the proposed regulations, one commentator
noted that the estimated tax payment rules should strive to provide the
most accurate picture of annualized taxable income based on facts known
as of the end of an annualization period. The IRS and Treasury
Department agree with this comment and recognize that treating an
annualization period as a short taxable year does not necessarily
result in an accurate estimate of annualized taxable income. The final
regulations make it clear that taxpayers may not determine taxable
income for an annualization period or an adjusted seasonal installment
period as though the period is a short taxable year.
Consistent with the general rejection of a short taxable year
approach, the final regulations recognize that certain types of items
that are generally incurred once (or otherwise infrequently) during the
taxable year or that are subject to special exceptions, should not be
annualized because doing so would create a distortion in the estimate
of annualized taxable income. This approach also recognizes that
although distortions may occur in the annualization process due to
general fluctuations in the timing of items of income and deductions
incurred throughout the year, taxpayers should generally be permitted
to rely on such annualized estimates to the extent the estimate is
based upon information available to the taxpayer as of the end of the
annualization period.
A commentator expressed concern that the rules provided in the
proposed regulations were too mechanical and created traps for the
unwary. In response to this comment, the final regulations provide
rules which are intended to produce a reasonably accurate estimate of
annualized taxable income for estimated tax purposes without imposing
an undue compliance burden on taxpayers. Specifically, the final
regulations address this general concern by allowing taxpayers to make
a reasonably accurate allocation of certain items of income or expense.
However, a taxpayer's annualized taxable income for estimated tax
purposes is primarily based on items of income and expense recognized
during the annualization period. Therefore, the annualization method is
as inherently complex as computing taxable income.
A. Reasonably Accurate Allocation
Commentators noted that many of the rules provided in the proposed
regulations with respect to economic performance and recurring expenses
would create significant administrative burdens, result in similarly
situated taxpayers being treated differently, and did not further the
underlying goal of providing an accurate picture of annualized taxable
income.
The final regulations do not retain the recurring expense rules
provided in the proposed regulations. The final regulations provide
special rules for specific items of deduction that are routinely
incurred on an annual basis or for which a special exception to the
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general accounting rules exists. Given the nature of these items,
applying the general annualization rules to these items could result in
a significant distortion in the estimate of annualized taxable income.
These items include real property tax deductions; employee and
independent contractor bonus compensation deductions (including the
employer's share of employment taxes related to such compensation);
deductions under sections 404 (deferred compensation) and 419 (welfare
benefit funds); items allowed as a deduction for the taxable year by
reason of section 170(a)(2) and Sec. 1.170A-11(b) (certain charitable
contributions by accrual method corporations), Sec. 1.461-5 (recurring
item exception) or Sec. 1.263(a)-4(f) (12-month rule); and items of
deduction designated by the Secretary by publication in the Internal
Revenue Bulletin (IRB) (see Sec. 601.601(d)(2)(ii)(b)).
The final regulations require that these specified items of
deduction be allocated in a reasonably accurate manner. The item of
deduction that must be allocated in a reasonably accurate manner
includes the total amount of the item of deduction recognized by the
taxpayer during the taxable year regardless of whether the item is
deemed to be paid or incurred during the taxable year as a result of
events that occurred during the taxable year, after the taxable year,
or both. While a reasonably accurate allocation may permit certain
items to be recognized in an annualization period prior to being paid
or incurred, an amount may only be taken into account to the extent the
item of deduction is properly recognized by the taxpayer during the
taxable year. Therefore, taxpayers will be subject to a section 6655
addition to tax for an underpayment of estimated tax if an underpayment
results from a deduction the taxpayer expected to be incurred but was
not ultimately recognized as a deduction by the taxpayer in the
computation of taxable income for that year.
The final regulations provide that an allocation will be considered
to be made in a reasonably accurate manner if the item is allocated
ratably throughout the tax year. In addition, an allocation will be
considered to be made in a reasonably accurate manner to the extent it
provides a reasonable estimate of taxable income for the taxable year
based upon the facts known as of the end of the annualization period.
The final regulations provide a list of some relevant factors to be
taken into consideration in determining whether an allocation provides
a reasonable estimate of taxable income based upon facts known as of
the end of the annualization period. The IRS and Treasury Department
recognize that various allocations may be considered to be done in a
reasonably accurate manner and intend for taxpayers to have flexibility
in determining which allocation to use, particularly when use of a
specific allocation reduces administrative burdens on the taxpayer. In
general, allocations that are made with the intent to distort will not
be considered to have been made in a reasonably accurate manner.
Many of the items of deduction which are required to be allocated
in a reasonably accurate manner include items that may not have
otherwise been allowed to be taken into account by taxpayers (for
example, year-end bonus liabilities, items paid after year end) under
the general annualization rules to the extent they were deemed to be
incurred in the last quarter of the year. In this regard, the final
regulations provide a measure of relief to taxpayers with respect to
such items. The final regulations provide that the Secretary may
designate in future IRB guidance additional items of deduction that are
required to be allocated in a reasonably accurate manner. Taxpayers are
encouraged to bring items to the attention of the IRS and Treasury
Department that they believe should be allocated in a reasonably
accurate manner rather than applying the general annualization rules.
Commentators requested that taxpayers be permitted to take the
exceptions provided in section 170(a)(2) and Sec. 1.170A-11(b)
(certain charitable contributions by accrual method corporations),
Sec. 1.461-5 (recurring item exception) or Sec. 1.263(a)-4(f) (12-
month rule) into account for purposes of determining items of expense
incurred during an annualization period. As noted above, these
exceptions frequently apply either to expenses paid annually or to
expenses paid after the end of the taxable year. The specific rules and
underlying intent of these exceptions do not easily translate to the
concept of an annualization period. The final regulations provide that
items of expense that utilize these exceptions will be considered to be
properly taken into account if they are allocated among annualization
periods in a reasonably accurate manner. Therefore, the final
regulations permit taxpayers for estimated tax payment purposes to
allocate throughout the tax year items of deduction recognized in the
taxable year as a result of these exceptions to the extent the
allocation is made in a reasonably accurate manner. The final
regulations adopt this approach in order to reduce the complexity and
burden associated with the computation of estimate taxes by allowing
taxpayers to allocate these specific items of expense in a reasonably
accurate manner while also preventing unintended distortions under the
annualization method.
B. Net Operating Loss Deductions
Several commentators addressed provisions in the proposed
regulations requiring a net operating loss (NOL) deduction to be taken
into account in computing an annualized installment after annualizing
the taxable income for the annualization period. One commentator argued
that economic performance with respect to an NOL carryover has already
occurred and therefore, the NOL deduction should be taken into account
in computing an annualized installment before annualizing the taxable
income for the annualization period. Another commentator suggested that
special rules be provided for extraordinary items such as NOL
deductions noting the unique nature of such items. Comments were also
received suggesting that NOL deductions should be treated the same as
any other deduction.
NOL deductions are different from other items of deduction
occurring throughout the year in that there is no anticipation that
similar deductions will recur throughout the year or in future years.
In this regard, NOL deductions are more like extraordinary items.
Treating NOL deductions in the same manner as other recurring
deductions would be inconsistent with attempting to provide a
reasonably accurate picture of annualized taxable income and could
result in a distorted estimate of annualized taxable income similar to
the distortions created by the various techniques the regulations are
intended to prevent. The final regulations treat a NOL deduction as an
extraordinary item that is treated as occurring on the first day of the
taxable year and is taken into account after annualization. As a result
of the final regulations, Rev. Rul. 67-93 (1967-1 CB 366) is removed.
See Sec. 601.601(d)(2)(ii)(b).
C. Credit Carryovers
One commentator suggested that a credit carryover should be taken
into account in computing an annualized installment before annualizing
the taxable income for the annualization period because economic
performance has occurred for the credit carryover. In general,
taxpayers annualize components of a credit for the current taxable year
to determine the amount of a credit because the credit is based on
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components for the current year. However, credit carryovers are
generally based on the components for the entire year in which the
credit arose. Therefore, the credit carryover already is computed based
on annualized components for the year in which the credit arose.
Because a credit carryover is based on annualized components, the final
regulations provide that a credit carryover must be taken into account
after determining the annualized tax and before taking into account the
applicable percentage for the annualization period.
D. Credits Incurred in an Annualization Period and Recaptured Credits
One commentator suggested that the final regulations provide that
credits incurred in an annualization period are not annualized. The
commentator suggested that annualization should be based on the
underlying basis for the credit. The commentator also suggested that if
a credit is based on an item that is annualized in computing the
required installment for the annualization period, the amounts should
be annualized in determining the amount of the credit. Finally, the
commentator suggested that similar rules should apply to the recapture
of credits that are included within the definition of tax.
Section 1.6655-2(f)(3)(iii) of the final regulations provides that
the items upon which the credit is computed are annualized pursuant to
the provisions of Sec. 1.6655-2(f)(1) and the amount of the credit is
computed based on the annualized items. The amount of the credit is
then deducted from the annualized tax. For example, for an
annualization period consisting of three months in a full 12-month
taxable year, the items upon which the credit is based that are taken
into account for the three-month period are multiplied by four, the
credit is determined, and the credit reduces the annualized tax.
Reducing the annualized tax by a credit before taking into account the
applicable percentage is consistent with the statutory definition of
tax provided in section 6655(g)(1) and the annualized income
installment method provided in section 6655(e). In order to clarify
this rule, Sec. 1.6655-2(b)(1) of the final regulations provides that
tax means tax after taking into account credits and before applying the
applicable percentage. These rules generally do not apply to a credit
recapture because, as discussed in heading 1A of the preamble, a credit
recapture, such as a recapture provided by section 50(a)(1)(A), is not
taken into account when determining the tax for an annualized income
installment for purposes of section 6655.
E. Depreciation and Amortization Expense
One commentator requested clarification on the alternative method
in Sec. 1.6655-2(f)(2)(v)(A) of the proposed regulations. The proposed
regulations provide that a taxpayer may claim for an annualization
period at least a proportionate amount of 50 percent of the taxpayer's
estimated depreciation and amortization (depreciation) expense for the
current taxable year attributable to assets that a 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. Several commentators suggested
that the regulations were not clear on how a taxpayer determines how
much more than 50 percent may be used and requested that the final
regulations provide criteria for making this determination.
Another commentator suggested that the general rule in Sec.
1.6655-2(f)(2)(v)(A) of the proposed regulations for taking into
account depreciation was impractical for many taxpayers because of the
administrative burdens associated with the computation of actual and
expected depreciation expense. The commentator also suggested that the
rule does not provide an alternative calculation methodology for assets
subject to a convention other than the half-year convention or for
intangible assets. The commentator requested that the final regulations
provide alternative computation methodologies for all depreciable and
amortizable assets and allow taxpayers to take into account section 179
deductions. The commentator also requested that the final regulations
eliminate the alternative rule in Sec. 1.6655-2(f)(2)(v)(A) of the
proposed regulations that allows taxpayers to take into account a
proportionate amount of 50 percent of taxpayers' current year estimated
depreciation expense. The commentator requested that instead the final
regulations provide a safe harbor that allows taxpayers to claim a
proportionate amount of 90 percent of the prior year depreciation
expense for all assets placed in service in an earlier year.
By including the alternative rule in Sec. 1.6655-2(f)(2)(v)(A) of
the proposed regulations, the IRS and Treasury Department intended to
illustrate the minimum amount of depreciation a taxpayer is entitled to
take for a taxable year. In response to the comments referenced above,
the final regulations do not include the alternative method in Sec.
1.6655-2(f)(2)(v)(A) of the proposed regulations. The final regulations
provide a general rule that permits taxpayers to estimate their annual
depreciation expense and include a proportionate amount of such expense
for annualization purposes. The final regulations also provide that, in
determining the estimated annual depreciation expense, a taxpayer may
take into account purchases, sales or other dispositions, changes in
use, additional first-year depreciation deductions, and other similar
events and provisions that, based on all 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), are reasonably expected
to occur or apply during the taxable year. The IRS and Treasury
Department believe that prescribing special rules for depreciation is
appropriate because unlike many other deductions, depreciation
generally accrues ratably throughout the taxable year. Therefore, in
contrast to the general annualization rules, the final regulations
require depreciation expense to be taken into account ratably
throughout the taxable year.
As an alternative to the general rule for depreciation expense, the
final regulations provide two safe harbors. The first safe harbor
requires taxpayers to take into account for an annualization period a
proportionate amount of depreciation expense allowed for the taxable
year from: (1) Assets that were in service on the last day of the prior
taxable year, are in service on the first day of the current taxable
year, and have not been disposed of during the annualization period;
(2) assets that were placed in service during the annualization period
and have not been disposed of during that period; and (3) assets that
were in service on the last day of the prior taxable year and that are
disposed of during the annualization period. For purposes of additional
first-year depreciation deductions, the final regulations provide that
only a proportionate amount of the current year's additional first-year
depreciation deduction to be taken into account in determining a
taxpayer's taxable income for the taxable year is taken into account in
computing taxable income for an annualization period. In addition, the
final regulations provide that amounts that the taxpayer deducts under
section 179 or any similar provision, are treated
[[Page 44342]]
the same as additional first-year depreciation.
The second safe harbor included in the final regulations provides
that a taxpayer may take into account a proportionate amount of 90
percent of its preceding year's depreciation that is taken on its
Federal income tax return for the preceding taxable year. However, if
the taxpayer's preceding taxable year is less than 12 months (a short
taxable year), the amount of depreciation expense taken into account
for the preceding taxable year must be put on an annualized basis. In
addition, a taxpayer must use whatever depreciation safe harbor method
it selects under Sec. 1.6655-2(f)(3)(iv)(B) of the final regulations
for all depreciation deductions within the annualization period for the
annualized income installment but may use a different depreciation
method provided in Sec. 1.6655-2(f)(3)(iv) for each annualized income
installment during the taxable year.
F. Events Arising After the Installment Due Date
One commentator requested that the final regulations include
examples of events that would arise after the installment due date that
would be considered reasonably unforeseeable to illustrate the rule
provided in Sec. 1.6655-2(h) of the proposed regulations. In
considering the request for more specific guidance as to what
constitutes an unforeseeable event, the IRS and Treasury Department
determined that providing relief for certain unforeseeable events would
more appropriately be addressed through contemporaneous guidance.
Furthermore, the unforeseeable event exception provided in the proposed
regulations was inherently subjective and retaining such a rule would
be difficult to administer. In addition, certain provisions in the
final regulations allow events that occur after the end of an
annualization period to be taken into account but only to the extent
the anticipated events actually occur. Therefore, the final regulations
do not retain the unforeseeable event exception as provided in Sec.
1.6655-2(h) of the proposed regulations.
The final regulations do permit taxpayers in specific circumstances
to take into account transactions that are properly reflected in the
taxpayer's return for a particular year to be taken into account for
annualization purposes regardless of when the underlying event giving
rise to the item occurs. For example, the final regulations permit
taxpayers to defer income related to a transaction to which sections
1031 or 1033 may apply even if the replacement of property required
under sections 1031 or 1033 has not occurred as of the end of an
annualization period to the extent the taxpayer has a reasonable belief
that qualifying replacement property will be acquired.
G. Items That Substantially Affect Taxable Income But Cannot Be
Determined Accurately by the Installment Due Date
Section 1.6655-2(g) of the proposed regulations provides that in
determining the applicability of the annualized income installment
method or the adjusted seasonal installment method, reasonable
estimates may be made from existing data for items that substantially
affect income if the amount of such items cannot be determined with
reasonable accuracy by the installment due date. Examples of these
items are the inflation index for taxpayers using the dollar-value LIFO
(last-in, first-out) inventory method, intercompany adjustments for
taxpayers that file consolidated returns, and the liquidation of a LIFO
layer at the installment date that the taxpayer reasonably believes
will be replaced at the end of the year.
The IRS and Treasury Department believe that the language in Sec.
1.6655-2(g) of the proposed regulations could be misinterpreted and
broadly applied to items to which the rule was not intended. The final
regulations provide that Sec. 1.6655-2(g) applies only to the items
specifically listed. These items include the inflation index for
taxpayers using the dollar-value LIFO inventory method, adjustments
required under section 263A, intercompany adjustments for taxpayers
that file consolidated returns, the liquidation of a LIFO layer at the
installment date that the taxpayer reasonably believes will be replaced
at the end of the year, section 199 computations, deferred gain under
sections 1031 and 1033 that the taxpayer reasonably believes will be
replaced with qualifying property, and to any other item specifically
designated in guidance published in the Internal Revenue Bulletin.
H. Taking Into Account a Section 199 Deduction
Commentators requested clarification on how taxpayers using the
annualized income installment method (or the adjusted seasonal
installment method) should take into account a section 199 deduction.
One commentator suggested that because the section 199 deduction is
calculated based on income and expense items incurred during the
taxable year and has some characteristics of a credit, the final
regulations should treat a section 199 deduction as a credit.
Commentators also suggested that the final regulations require
taxpayers to annualize income and compute the section 199 deduction
based on the annualized amount. Another commentator requested that the
final regulations treat a section 199 deduction as an item that
substantially affects taxable income but cannot be accurately
determined by the installment due date. The commentator requested that
the final regulations allow taxpayers to make a reasonable estimate of
the section 199 deduction for purposes of determining the proportionate
amount that should be taken into account in determining annualized
taxable income.
Although the section 199 deduction is calculated based on income
and expense items incurred during the taxable year, the section 199
deduction is a deduction and not a credit. Therefore, a section 199
deduction must be taken into account to reduce taxable income, not to
reduce tax. Under the final regulations, a section 199 deduction is
computed prior to annualizing the taxable income for the annualization
period. However, in recognition that qualification for the section 199
deduction is restricted by various annual limitations that may not be
known as of the end any specific annualization period, the final
regulations provide that a section 199 deduction should be treated as
an item that substantially affects taxable income but cannot be
accurately determined by the installment due date. Therefore, the final
regulations permit taxpayers to make a reasonable estimate of the
section 199 deduction for purposes of determining the amount to be
taken into account in determining annualized taxable income.
I. Section 263A Expenses
One commentator suggested that the proposed regulations do not
provide rules on how taxpayers should account for section 263A
adjustments to compute annualized taxable income. The commentator
requested that the final regulations not require taxpayers to compute
an actual section 263A adjustment for an installment period because
this computation would create a significant administrative burden for
taxpayers. The commentator also requested that the final regulations
provide simplifying rules that allow taxpayers to compute the section
263A adjustment for an installment period by multiplying the prior
year's absorption ratio by the inventory on hand at the end of the
annualization period or by
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estimating the annual adjustment and prorating it to each annualization
period.
Section 263A expenses are added to the items covered by the rules
provided in Sec. 1.6655-2(g) of the final regulations for items that
substantially affect taxable income but cannot be accurately determined
by the installment due date. Therefore, taxpayers may use reasonable
estimates from existing data with respect to the amount of adjustments
required under section 263A if that amount cannot be determined with
reasonable accuracy by the installment due date.
J. LIFO
One commentator noted that although the proposed regulations
provide simplifying rules to determine the internal inflation index for
taxpayers using internal dollar-value LIFO inventory methods, the
proposed regulations do not provide rules for taxpayers to determine an
external inflation index under the inventory price index computation
(IPIC) LIFO method. The commentator requested that the final
regulations include a rule that allows taxpayers to determine an
estimated external inflation index by multiplying the prior year
inventory mix by the applicable inflation index for the annualization
period. The commentator also requested that the final regulations
include a rule that allows a taxpayer that elected to use final indices
to use preliminary indices if the final indices for the appropriate
month have not been published. The dollar-value LIFO inventory method
includes the use of external indexes, such as the IPIC LIFO method, as
well as internal indexes. Therefore, the IRS and Treasury Department do
not believe that a separate rule is necessary for the use of external
inflation indexes.
K. Advance Payment
One commentator noted that the proposed regulations do not address
how a taxpayer who defers revenue either under Sec. 1.451-5(c) or Rev.
Proc. 2004-34 (2004-1 CB 991) should account for an advance payment to
determine annualized taxable income. Section 1.451-5(c) and Rev. Proc.
2004-34 generally allow a taxpayer to defer recognition of a qualifying
advance payment for a limited time but only to the extent that
financial statements also defer recognition of the income. The
commentator requested that the final regulations include a rule that
allows a taxpayer using the deferral method under Sec. 1.451-5(c) or
Rev. Proc. 2004-34 to not recognize an advance payment as income in the
annualization period until the advance payment is recognized in the
taxpayer's applicable financial statements for the annualization
period. The commentator also requested that the final regulations allow
a taxpayer using a deferral method to recognize any portion of an
advance payment on the last day of the taxable year in which the
advance payment is required to be recognized under Sec. 1.451-5(c) or
Rev. Proc. 2004-34, if that portion of the advance payment is not
recognized in the taxpayer's financial statements for any of the
annualization periods arising within the limited time provided in Sec.
1.451-5(c) or Rev. Proc. 2004-34. See Sec. 601.601(d)(2)(ii)(b).
The IRS and Treasury Department agree with the commentator that the
final regulations should specifically address advance payments and that
the rule should be consistent with Sec. 1.451-5 and Rev. Proc. 2004-
34. Pursuant to Sec. 1.6655-2(f)(3)(i)(A) of the final regulations, if
the taxpayer uses the method of accounting provided in Sec. 1.451-
5(b)(1)(ii) for an advance payment, the advance payment is includible
in computing taxable income under that method of accounting except
that, if Sec. 1.451-5(c) applies, any amount not included in computing
taxable income by the end of the second taxable year following the year
in which a substantial advance payment is received, and not previously
included in accordance with the taxpayer's accrual method of
accounting, is includible in computing taxable income on the last day
of such second taxable year. In addition, Sec. 1.6655-2(f)(3)(i)(B) of
the final regulations provides that if the taxpayer uses the deferral
method provided in section 5.02 of Rev. Proc. 2004-34 for an advance
payment, the advance payment is includible in computing taxable income
under that method of accounting for annualization purposes. But any
amount not included in computing taxable income by the end of the
taxable year succeeding the taxable year of receipt is includible in
computing taxable income on the last day of such succeeding taxable
year. The final regulations provide an example involving an advance
payment.
L. Extraordinary Items
One commentator suggested that the final regulations provide
special treatment for extraordinary items for purposes of computing
annualized taxable income and suggested that the regulations consider
the extraordinary items listed in Sec. 1.1502-76(b)(2)(ii)(C). The
commentator requested that the final regulations not require taxpayers
to take into account extraordinary items under the general rules of
Sec. 1.6655-2(f) of the proposed regulations because doing so would
result in a distortion of annualized taxable income. The commentator
requested that extraordinary items be taken into account after
annualizing taxable income. The commentator requested that the final
regulations provide that taxpayers begin to account for extraordinary
items in the annualization period in which the extraordinary event
occurs or, alternatively, in the annualization period in which it
becomes reasonably foreseeable that the extraordinary event will occur.
The commentator also requested that the final regulations provide an
exclusive list of extraordinary items by referring to the list of
extraordinary items in Sec. 1.1502-76(b)(2)(ii)(C) with certain
modifications.
The IRS and Treasury Department agree with the commentator that the
annualization of extraordinary items could result in a distortion of
annualized taxable income. The final regulations include a list of
extraordinary items similar to the items in Sec. 1.1502-
76(b)(2)(ii)(C). Included in the list of extraordinary items in the
final regulations are NOL deductions and section 481(a) adjustments. In
addition, the final regulations also provide a de minimis rule wherein
only extraordinary items in excess of $1,000,0000 will be required to
be accounted for after annualizing taxable income. However, this de
minimis rule does not apply to NOL deductions and section 481(a)
adjustments.
M. Section 481(a) Adjustments
The rule in Sec. 1.6655-2(f)(2)(iv) of the proposed regulations
provides that a taxpayer takes into account a section 481(a) adjustment
related to an automatic accounting method change during an
annualization period only if a copy of the Form 3115, ``Application for
Change in Accounting Method'', has been mailed to the IRS National
Office on or before the last day of the annualization period. One
commentator suggested that the rule provided by Sec. 1.6655-
2(f)(2)(iv) of the proposed regulations creates administrative burdens
for taxpayers, is inconsistent with the depreciation and amortization
rules provided in Sec. 1.6655-2(f)(2)(v) of the proposed regulations,
and could result in the filing of incomplete Forms 3115. The
commentator suggested that the rule in Sec. 1.6655-2(f)(2)(iv)(B)(1)
of the proposed regulations causes an administrative burden by
requiring taxpayers to recompute taxable income using a different
method of accounting than would be used to calculate taxpayers' tax
provision for financial
[[Page 44344]]
accounting purposes, which generally allows taxpayers to take into
account section 481(a) adjustments for an automatic accounting method
change if they anticipate that the change will be timely filed. The
commentator also suggested that if the final regulations adopt the rule
in Sec. 1.6655-2(f)(2)(v) of the proposed regulations that allows
taxpayers to anticipate capital expenditures to estimate depreciation
expense for an annualization period, the final regulations should
provide a similar rule for automatic accounting method changes by
allowing taxpayers to take into account section 481(a) adjustments
resulting from anticipated filings for automatic accounting method
changes.
The final regulations provide that, in general, any section 481(a)
adjustment that results from a change in accounting method that is
approved by the Commissioner and properly reflected in the taxpayer's
return for the tax year is taken into account as an extraordinary item
deemed to occur on the first day of the tax year for annualization
purposes. The final regulations provide that a section 481(a)
adjustment may be taken into account in this manner notwithstanding (i)
the annualization period in which the Form 3115 is filed (including
requests filed after year-end), (ii) whether the requested change in
accounting method is considered an automatic or non-automatic
accounting method change request, (iii) whether the section 481(a)
adjustment is positive or negative, and (iv) the date on which the
taxpayer receives the approval of the Commissioner. In allowing for a
section 481(a) adjustment to be taken into account in this manner,
taxpayers should be aware that they will be subject to a section 6655
addition to tax for an underpayment of estimated tax in an installment
period caused from taking into account a section 481(a) adjustment the
taxpayer expected to be incurred but for which the taxpayer does not
receive the consent of the Commissioner to change its method of
accounting for that particular tax year. The final regulations also
provide an exception to the general rule. Under the exception a
taxpayer may choose to treat the filing of a Form 3115 as the date on
which the extraordinary item is deemed to occur rather than the first
day of the tax year but only with respect to the section 481(a)
adjustment (or a portion thereof) that is recognized in the year of
change. Use of this exception will impact the period in which the
taxpayer will be required to take into account the new method of
accounting as provided in Sec. 1.6655-6.
N. Simplify the 52/53 Week Taxable Year Rules
One commentator suggested that the 52/53 week taxable year rules
provided by Sec. 1.6655-2(e) of the proposed regulations are too
complex and administratively burdensome. The commentator suggested that
the final regulations not include the 52/53 week taxable year rules in
Sec. 1.6655-2(e) of the proposed regulations and rely on the general
concept of annualization. The commentator suggested that taxpayers with
52/53 week taxable years under section 441(f) know how to annualize
their applicable annualization period without the rules provided by
Sec. 1.6655-2(e) of the proposed regulations.
The purpose of the annualized income installment method is to give
taxpayers a method of determining annualized income based on the actual
facts that occur in the annualization period. Therefore, with limited
exceptions, the IRS and Treasury Department drafted the proposed
regulations and these final regulations to provide rules that only
allow taxpayers to take into account items of income and expense that
arise in the applicable annualization period. The IRS and Treasury
Department recognize that the 52/53 week taxable year rules provided by
Sec. 1.6655-2(e) of the proposed regulations are complex. Although the
final regulations retain the 52/53 week taxable year rules provided by
Sec. 1.6655-2(e) of the proposed regulations, the final regulations
also provide a safe harbor that allows a taxpayer with a 52/53 week
taxable year to determine its annualization period on the month that
ends closest to the end of its applicable thirteen-week period or four-
week period that ends within the applicable annualization period.
However, an eligible taxpayer may only use this safe harbor if it is
used for determining annualization periods for all required
installments for the taxable year.
O. Controlled Foreign Corporations, Partnerships, and Other Pass-
Through Entities
One commentator suggested that the final regulations provide rules
on how taxpayers should take into account distributions from a section
936 corporation or a controlled foreign corporation to determine
annualized taxable income for an installment period. The commentator
also suggested that the final regulations provide rules on how
taxpayers should take into account a distributive share of income from
passthrough entities other than partnerships, such as trusts, S
corporations, and real estate investment trusts (REITs), to determine
annualized taxable income for an installment period. The commentator
requested that the final regulations expand the scope of Sec. 1.6655-
2(f)(2)(vi) of the proposed regulations to incorporate the statutory
provisions for section 936(h), section 951(a), and closely held REITs,
and also provide rules to take into account the distributive share of
income received from other types of passthrough entities.
Section 1.6655-2(f)(3)(v) of the final regulations expands the rule
in Sec. 1.6655-2(f)(2)(vi) of the proposed regulations to provide for
the statutory rules in section 6655(e)(4) and section 6655(e)(5) for
taking into account subpart F income, income under section 936(h), and
dividends received by closely held REITs when computing any annualized
income installment. In addition, Sec. 1.6655-2(f)(3)(v)(D) adds a rule
that requires items from passthrough entities other than partnerships
and closely held REITs to be taken into account in computing any
annualized income installment in a manner similar to the manner under
which partnership items are taken into account under Sec. 1.6655-
2(f)(3)(v)(A) of the final regulations.
3. Comments Concerning Sec. 1.6655-3 (Adjusted Seasonal Installment
Method) of the Proposed Regulations
A. Adjusted Seasonal Installment Method and Alternative Minimum Tax
One commentator suggested that the determination of whether a
corporation qualifies for the adjusted seasonal installment method
under section 6655(e)(3), and the amount of the required installment
under this method, is based only on the corporation's taxable income
and tax on that taxable income. The commentator requested that the
final regulations clarify that a corporation using the adjusted
seasonal installment method is only required to make estimated tax
payments with respect to taxable income and tax on that taxable income,
and not on the alternative minimum tax (AMT) or any other tax. Any
required installment must include AMT because AMT is included in the
definition of tax in section 6655(g)(1) and Sec. 1.6655-1(g)(1) of the
final regulations. Including AMT in the determination of tax is
consistent with the general annualization method and adjusted seasonal
installment method and recognizes the overall separate and parallel
nature of the AMT. Therefore, Sec. 1.6655-3(d)(4) of the final
regulations provides that the amount of an installment determined using
the adjusted seasonal installment method
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must properly take into account the amount of any AMT under section 55
that would apply for the period of the computation. For this purpose,
the amount of any AMT that would apply is determined by applying to
alternative minimum taxable income, tentative minimum tax, and AMT, the
rules provided in Sec. 1.6655-3(c) of the final regulations for
determining the amount of an installment using the adjusted seasonal
installment method.
B. Adjusted Seasonal Installment Method Base Period Percentage
Section 6655(e)(3)(D)(i) provides that the base period percentage
for any period of months is the average percent that the taxable income
for the corresponding months in each of the 3 preceding taxable years
bears to the taxable income for the 3 preceding taxable years. One
commentator requested that the final regulations clarify whether the
base period percentage provided in Sec. 1.6655-3(d)(1) of the proposed
regulations can be negative.
The rule provided in section 6655(e)(3)(D)(i) requires that the
base period percentage be computed based on taxable income. The rule
does not provide that taxpayers take into account a loss. Therefore, a
taxpayer can never have a negative base period percentage. The lowest
number the base period percentage can equal is zero. Section 1.6655-
3(d)(1) of the final regulations provides that the base period
percentage is computed based on taxable income, which the IRS and
Treasury Department believe provides a clear rule that an overall loss
for the applicable period of months used to calculate the base period
percentage cannot be used to compute the base period percentage. If a
taxpayer has an overall loss for an applicable period of months used in
the computation of the base period percentage, the taxpayer must use
zero in place of the loss.
4. Comments Concerning Sec. 1.6655-4 (Large Corporations) of the
Proposed Regulations
A. Section 381 Transactions to Determine Large Corporation Status
One commentator requested that the final regulations modify the
rules in Sec. 1.6655-4(c)(2) of the proposed regulations to clarify
that, when computing taxable income for a year in which there is a
section 381 transaction to determine if a corporation is a large
corporation, the adjustment for the section 381 transaction relates
only to the portion of taxable income applicable to the transferred
assets.
Generally, for a transaction to qualify under section 381, an
acquiring corporation must acquire a majority of the assets of the
acquired corporation. Section 1.6655-4(c)(2) of the proposed
regulations provides that when determining if a corporation is a large
corporation for a taxable year in which a section 381 transaction
occurs, an acquiring corporation must include in its income the
distributor or transferor corporation's income for the taxable year up
to and including the date of distribution or transfer. This rule
requires the acquiring corporation to include 100 percent of the
distributor or transferor corporation's taxable income (or loss) in the
acquiring corporation's income even if the acquiring corporation
acquires less than 100 percent of the assets of the distributor or
transferor corporation as long as section 381 applies to the
transaction. The final regulations do not include a rule providing that
the adjustment for a section 381 transaction relates only to the
portion of taxable income applicable to the transferred assets when
computing taxable income for a year in which there is a section 381
transaction to determine if a corporation is a large corporation. The
IRS and Treasury Department believe that such a rule would be
unnecessarily complex considering that the rule in the proposed
regulations is both taxpayer favorable (if there are losses of the
distributor or transferor corporation) and taxpayer unfavorable (if
there is taxable income of the distributor or transferor corporation)
and considering that in these transactions, the acquiring corporation
generally acquires a majority of the distributor or transferor
corporation's assets. However, Sec. 1.6655-4(c)(2)(i)(B) of the final
regulations amends Sec. 1.6655-4(c)(2)(i)(B) of the proposed
regulations to clarify that an acquiring corporation takes into account
the distributor or transferor corporation's taxable income or loss for
purposes of determining whether a corporation is a large corporation
for a taxable year in which a section 381 transaction occurs.
B. Aggregation
One commentator suggested that the rule provided by Sec. 1.6655-
4(d)(2) of the proposed regulations, which does not allow taxpayers to
take into account a taxable loss of a member of a controlled group of
corporations for a taxable year during the testing period, results in a
distorted view of the taxable income of the controlled group of
corporations. The commentator requested that the final regulations
modify the rule in Sec. 1.6655-4(d)(2) of the proposed regulations to
allow taxpayers to take into account losses of a member of a controlled
group of corporations when determining whether a corporation is
considered a large taxpayer because this is consistent with the
principles for the computation of consolidated taxable income.
Section 6655(g)(2)(B)(ii) requires that the $1,000,000 exemption be
divided among members of a controlled group under rules similar to the
rules of section 1561. The purpose of the statute is to limit members
of a controlled group, as an aggregate, to $1,000,000 of exemption from
large corporation treatment. The aggregation rule in Sec. 1.6655-
4(d)(2) is intended to allow a controlled group to quickly determine
whether the controlled group must allocate the $1,000,000 limitation
among the members of the group. It is not intended to treat the
controlled group as a single taxpayer, in which all members of the
group will be treated as a large corporation, if the taxable income of
the controlled group, as an aggregate, is over $1,000,000. Thus, for
example, if member A of a controlled group had taxable income of
$900,000 and member B of the group had taxable income greater than
$1,000,000, the controlled group could choose to allocate $900,000 to
member A so that member A will not be treated as a large corporation,
but member B would be treated as a large corporation no matter how much
of the $1,000,000 limitation is allocated to member B. This is
consistent with the rules under section 1561.
5. Comments Concerning Sec. 1.6655-5 (Short Taxable Years) of the
Proposed Regulations
A. Taxpayer's Initial Taxable Year
One commentator noted that a taxpayer is not required to choose its
taxable year until it files a tax return on its chosen basis in
accordance with Sec. 1.441-1(c)(1). The commentator requested that the
final regulations modify the rule in Sec. 1.6655-5(c)(1)(ii) of the
proposed regulations to provide that a taxpayer will not be penalized
if, in its initial taxable year, it makes estimated tax payments based
on a presumption that the taxpayer will have a taxable year that is a
calendar year even if the taxpayer subsequently chooses a fiscal year.
Because a taxpayer has until the date it files its initial tax
return to choose its taxable year, the final regulations modify the
rule in Sec. 1.6655-5(c)(1)(ii) of the proposed regulations to allow a
taxpayer with an initial short taxable year to make estimated tax
payments as
[[Page 44346]]
though it chose to be a calendar year taxpayer until the taxpayer files
its return for its initial short taxable year. Pursuant to this
modified rule, a taxpayer with an initial short taxable year may make
estimated tax payments as though it were a calendar year taxpayer until
it files its tax return for its initial taxable year.
B. Taxpayer's Final Taxable Year
One commentator suggested that Sec. Sec. 1.6655-5(d)(1), 1.6655-
5(d)(2), and 1.6655-5(d)(3) of the proposed regulations provide rules
that may require taxpayers with short taxable years to make installment
payments based on an applicable percentage that is more than the
standard 25 percent per installment period. The commentator suggested
that these rules may result in a section 6655 addition to tax being
imposed on a taxpayer who makes annualization payments based on 25
percent of its annualized tax and later in the year discovers that, due
to an unforeseen termination of its tax year, it should have made its
annualization payments based on a higher applicable percentage because
it will have fewer than four installment payments. The commentator also
suggested that the rule in Sec. 1.6655-2(h) of the proposed
regulations, which addresses events arising after an installment due
date that were not reasonably foreseeable, does not appear to protect a
taxpayer that makes an installment payment based on 25 percent of its
annualized tax and later discovers that it should have based its
installment payment on a higher applicable percentage because it had an
unforeseen termination of its tax year resulting in a short taxable
year. The commentator requested that the final regulations revise the
rules in Sec. Sec. 1.6655-5(d)(1), 1.6655-5(d)(2), and 1.6655-5(d)(3)
of the proposed regulations so that payments made for an installment
period in a short taxable year do not exceed 25 percent. As an
alternative, the commentator requested that the final regulations
revise the rules in Sec. 1.6655-2(h) of the proposed regulations to
allow a taxpayer with an unexpected termination of its tax year to make
a payment with its final required installment equal to the remaining
portion of 100 percent of its required annual payment to avoid a
penalty on its earlier required installments.
A taxpayer should not be penalized for making payments based on the
applicable percentage of 25 percent for each installment period when it
does not know that it will have an early termination year that will
result in it making less than four installment payments. Therefore,
Sec. 1.6655-5(d)(4) of the final regulations provides a rule
addressing the applicable percentage for an installment period in which
the taxpayer does not reasonably expect that the taxable year will be
an early termination year. In the case of any required installment
determined under section 6655(e) in which the taxpayer does not know
that the taxable year will be an early termination year, the applicable
percentage under section 6655(e)(2)(B)(ii) and Sec. 1.6655-5(d)(3)(i)
of the final regulations is the applicable percentage for each
installment period with the remaining balance of the estimated tax
payment for the year due with the final installment.
C. Internal Revenue Manual Provisions and Annualizing Taxable Income in
an Initial or Final Taxable Year
One commentator noted that Internal Revenue Manual Part
20.1.3.6.3(2) provides that a corporation filing a short period return
that is either an initial or final return is not required to annualize
its taxable income to compute the penalty. The commentator requested
that the final regulations clarify this rule.
The rule in IRM 20.1.3.6.3(2) provides that if a taxpayer has a
short taxable year that is either an initial or final year, the
taxpayer should not annualize its taxable income based on a full 12
month period. Instead, the taxpayer should annualize its taxable income
based on the number of months in the short taxable year. This rule was
intended to be provided in Sec. 1.6655-5(g)(2) of the proposed
regulations. However, the computational rule in Sec. 1.6655-5(g)(2) of
the proposed regulations is incorrect and does not result in the
computation of the correct amount for every installment payment during
a short taxable year. The final regulations revise the rule in Sec.
1.6655-5(g)(2) of the proposed regulations to provide that a taxpayer
computes its annualized income installment by determining the tax on
the basis of the annualized income for the annualization period,
dividing the resulting tax by 12, multiplying that result by the number
of months in the short taxable year, and finally multiplying that
result by the applicable percentage for the annualized income
installment. The final regulations also revise an example to reflect
the new computational rule.
D. Preceding Taxable Year Rule for Large Corporations When the
Preceding Taxable Year Is a Short Year
One commentator suggested that the rule provided in Sec. 1.6655-
5(h) of the proposed regulations, which requires taxpayers to compute
the preceding year tax on an annual basis if the preceding taxable year
was a short taxable year when using section 6655(d)(2) to determine
their first installment, is not authorized by section 6655. Consistent
with Sec. 1.6655-1(g)(3), the final regulations do not adopt the rule
provided in Sec. 1.6655-5(h) of the proposed regulations.
6. Change in Method of Accounting
The rule in Sec. 1.6655-6(b) of the proposed regulations provides
that if a taxpayer is making a change in method of accounting for the
current taxable year that is permitted to be made with the automatic
consent of the Commissioner, the new method is used in determining any
required installment if, and only if, a copy of the Form 3115 has been
mailed to the IRS National Office on or before the last day of the
annualization period. One commentator suggested that the rule provided
by Sec. 1.6655-6(b) of the proposed regulations creates administrative
burdens for taxpayers, is inconsistent with the depreciation and
amortization rules provided in Sec. 1.6655-2(f)(2)(v) of the proposed
regulations, and could result in the filing of incomplete Forms 3115.
The commentator suggested that the rule in Sec. 1.6655-6(b) of the
proposed regulations causes an administrative burden by requiring
taxpayers to recompute taxable income using a different method of
accounting than would be used to calculate taxpayers' tax provision for
financial accounting purposes, which generally allows taxpayers to take
into account an automatic accounting method change if they anticipate
that the change will be timely filed.
Consistent with the rules for section 481(a) adjustments as
discussed in heading (2)(M) above, the final regulations require a
taxpayer to take into account any change in method of accounting for
which the taxpayer has received the consent of the Commissioner in the
same manner the taxpayer chooses to treat the section 481(a) adjustment
resulting from such a change (for example, as of the first day of the
taxable year or as of the date the Form 3115 was filed). For a change
in accounting method that does not result in a section 481(a)
adjustment, the final regulations provide that in the year of change
the taxpayer will have the choice for annualization purposes to either
use the new method as of the first day of the taxable year or as of the
date the Form 3115 was filed.
[[Page 44347]]
Effect on Other Documents
The following publications are obsolete for tax years beginning
after September 6, 2007:
Revenue Ruling 67-93 (1967-1 CB 366).
Revenue Ruling 76-450 (1976-2 CB 444).
Revenue Ruling 78-257 (1978-1 CB 440).
Revenue Ruling 67-93 (1967-1 CB 366) provides that the entire
amount of a net operating loss carryover should be deducted from income
prior to annualization under the annualized income installment method.
The rational underlying the conclusion in Rev. Rul. 67-93 was based on
the position that each annualization period should be treated as a
short taxable year. The final regulations specifically provide that an
annualization period is not treated as a short taxable year. Therefore,
Rev. Rul. 67-93 will be removed when the final regulations are
effective.
Revenue Ruling 76-450 (1976-2 CB 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 final regulations provide
specific rules related to address the application of section 461(h) and
real property taxes for purposes of the annualized income installment
method. As a result of the rules provided in the final regulations,
Rev. Rul. 76-450 is no longer applicable and will be removed when the
final regulations are effective. See Sec. 601.601(d)(2)(ii)(b).
Revenue Ruling 78-257 (1978-1 CB 440) provides that the term tax,
as defined in section 6655, includes the amount of tax resulting from
the recomputation of a prior year's investment credit at the applicable
rate for the current year. In Rev. Rul. 78-257, a corporation incurred
a net operating loss in 1975 but showed an amount of tax from the
recomputation of the prior year's investment credit. For 1976 the
corporation had a liability for income tax but made no deposits of
estimated tax, relying on the former provision in section 6655 that
allowed a taxpayer to base its estimated tax payments on an amount
equal to the tax computed at the rates applicable to the taxable year
but otherwise on the basis of the facts shown on the return of the
corporation for, and the law applicable to, the preceding taxable year.
The revenue ruling concludes that the corporation was subject to an
addition to tax for the underpayment of estimated tax because it failed
to pay on or before the prescribed installment due dates an amount
equal to the tax resulting from the recomputation of the prior year's
investment credit. However, as discussed in heading (1)(A) of the
preamble, based on the holding in Berkshire Hathaway, Inc. v. United
States, 802 F.2d 429 (Fed. Cir. 1986), Sec. 1.6655-1(g)(1)(iii) of the
final regulations provides that, unless otherwise provided, for
purposes of the definition of tax as used in section 6655, a recapture
of tax, such as a recapture provided by section 50(a)(1)(A) and any
other similar provision, is not considered to be a tax imposed by
section 11. Therefore, Rev. Rul. 78-257 is no longer applicable and
will be removed when the final regulations are effective. See Sec.
601.601(d)(2)(ii)(b).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. Except with respect
to Sec. 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
Sec. 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, the notice of proposed rulemaking preceding this
regulation was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small businesses.
Drafting Information
The principal authors of these regulations are Joseph P. Dewald,
formerly of the Office of Associate Chief Counsel (Procedure and
Administration), and Timothy S. Sheppard, Office of Associate Chief
Counsel (Procedure and Administration).
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:
PART 1--INCOME TAXES
0
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). * * *
0
Par. 2. In Sec. 1.56-0, the heading for paragraph (e)(5) is added to
read as follows:
Sec. 1.56-0 Table of contents to Sec. 1.56-1, adjustment for book
income of corporations.
* * * * *
(e) * * *
(5) Effective/applicability date.
0
Par. 3. Section 1.56-1(e)(4) is revised and paragraph (e)(5) is added
to read as follows:
Sec. 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 Sec. 1.6655-7, as contained in 26 CFR
part 1 revised as of April 1, 2007, for special rules for estimating
the corporate alternative
[[Page 44348]]
minimum tax book income adjustment under the annualization exception.
(5) Effective/applicability date. Paragraph (e)(4) of this section
is applicable for taxable years beginning after September 6, 2007.
Sec. Sec. 1.6154-1, 1.6154-2, 1.6154-3, 1.6154-4, and 1.6154-
5 [Removed].
0
Par. 4. Sections 1.6154-1, 1.6154-2, 1.6154-3, 1.6154-4, and 1.6154-5
are removed.
0
Par. 5. Section 1.6425-2(a) is revised and paragraph (c) is added to
read as follows:
Sec. 1.6425-2 Computation of adjustment of overpayment of estimated
tax.
(a) Income tax liability defined. For purposes of Sec. 1.6425-1,
this section, Sec. Sec. 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/applicability 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 September 6,
2007.
0
Par. 6. Section 1.6425-3 is amended by revising paragraph (f) to read
as follows:
Sec. 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 is 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 Sec. 1.6655-7.
(3) Effective/applicability date: This paragraph (f) is applicable
to applications for adjustments of overpayments of estimated income tax
that are filed in taxable years beginning after September 6, 2007.
0
Par. 7. Section 1.6655-0 is added to read as follows:
Sec. 1.6655-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.6655-1
through 1.6655-7.
Sec. 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.
(1) In general.
(2) Exception.
(e) Large corporation required to pay 100 percent of current
year tax.
(1) In general.
(2) May use last year's tax for first 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/applicability date.
Sec. 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.
(3) Annualization period not a short taxable year.
(d) Election of different annualization periods.
(e) 52-53 week taxable year.
(f) Determination of taxable income for an annualization period.
(1) In general.
(i) Items of income.
(ii) Items of deduction.
(iii) Losses.
(2) Certain deductions required to be allocated in a reasonably
accurate manner.
(i) In general.
(ii) Application of the reasonably accurate manner requirement
to certain charitable contributions, recurring items, and 12-month
rule items.
(iii) Reasonably accurate manner defined.
(iv) Special rule for certain real property tax liabilities.
(v) Examples.
(3) Special rules.
(i) Advance payments.
(A) Advance payments under Sec. 1.451-5(b)(1)(ii).
(B) Advance payments under Rev. Proc. 2004-34.
(ii) Extraordinary items.
(A) In general.
(B) De minimis extraordinary items.
(C) Special rules for net operating loss deductions and section
481(a) adjustments.
(iii) Credits.
(A) Current year credits.
(B) Credit carryovers.
(iv) Depreciation and amortization.
(A) Estimated annual depreciation and amortization.
(B) Safe harbors.
(1) Proportionate depreciation allowance.
(2) 90 percent of preceding year's depreciation.
(3) Safe harbor operational rules.
(C) Short taxable years.
(v) Distributive share of items
(A) Member of partnership.
(B) Treatment of subpart F income and income under section
936(h).
(1) General rule.
(2) Prior year safe harbor.
(i) General rule.
(ii) Special rule for noncontrolling shareholder.
(C) Dividends from closely held real estate investment trust.
(1) General rule.
(2) Closely held real estate investment trust.
(D) Other passthrough entities.
(vi) Alternative minimum taxable income exemption amount.
(vii) Examples.
(g) Items that substantially affect taxable income but cannot be
determined accurately by the installment due date.
(1) In general.
(2) Example.
(h) Effective/applicability date.
Sec. 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.
(4) Alternative minimum tax.
(e) Example.
(f) Effective/applicability date.
Sec. 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.
[[Page 44349]]
(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/applicability date.
Sec. 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 at least four months but less than twelve
months.
(ii) Exceptions.
(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.
(4) Applicable percentage for installment period in which
taxpayer does not reasonably expect that the taxable year will be an
early termination year.
(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) Effective/applicability date.
Sec. 1.6655-6 Methods of accounting.
(a) In general.
(b) Accounting method changes.
(c) Examples.
(d) Effective/applicability date.
Sec. 1.6655-7 Addition to tax on account of excessive adjustment
under section 6425.
0
Par. 8. Sections 1.6655-1 and 1.6655-2 are revised to read as follows:
Sec. 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 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--(1) In general. Except as
otherwise provided in this section and Sec. Sec. 1.6655-2 through
1.6655-7, the amount of any required installment is 25 percent of the
lesser of--
(i) 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
(ii) 100 percent of the tax shown on the return for the preceding
taxable year.
(2) Exception. This paragraph (d)(1)(ii) does not apply if the
preceding taxable year was not a taxable year of 12 months or the
corporation did not file a return for the 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)(1)(ii) of this section does not apply in the
case of a large corporation (as defined in Sec. 1.6655-4).
(2) May use last year's tax for first installment. Paragraph (e)(1)
of this section does 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 is recaptured
by increasing the amount of the next required installment determined
under paragraph (d)(1)(i) 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 Sec. 1.6655-2 or the
adjusted seasonal installment method under Sec. 1.6655-3, by
increasing subsequent required installments determined under paragraph
(d)(1)(i) 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. Unless
otherwise provided, in the case of a calendar year taxpayer, the due
dates of the required installments are as follows:
1st April 15
2nd June 15
3rd September 15
4th December 15
(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:
1st 15th day of 4th month of the taxable year
2nd 15th day of 6th month of the taxable year
3rd 15th day of 9th month of the taxable year
4th 15th day of 12th month of the taxable year
(iii) Short taxable year. See Sec. 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
is treated as a full month.
(g) Definitions. (1) The term tax as used in this section and
Sec. Sec. 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
(ii) The credits against tax provided by part IV of subchapter A of
chapter 1 of the Internal Revenue Code.
(2)(i) 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 is treated as a
tax imposed by section 11.
(ii) 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 is treated as
a tax imposed by section 11.
(iii) Unless otherwise provided in the Internal Revenue Code or
Treasury regulations, for purposes of the definition of ``tax'' as used
in this section, a recapture of tax, such as a recapture provided by
section 50(a)(1)(A), and any other similar provision, is not considered
to be a tax imposed by section 11.
(iv) For the purposes of paragraph (d) of this section, the return
for the preceding taxable year is the Federal income tax return for
such taxable year
[[Page 44350]]
that is required by section 6012(a)(2). However, if an amended Federal
income tax return has been filed before the due date of an installment,
then the return for the preceding taxable year is the Federal income
tax return as amended. If an amended Federal income tax return has been
filed on or after the due date for an installment, then the return for
the preceding taxable year does not include for such installment period
the Federal income tax return as amended subsequent to the due date for
such installment. Paragraph (d) 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.
(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 Sec. 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 CB 441), (see Sec.
601.601(d)(2)(ii)(b) of this chapter).
(j) Examples. The method prescribed in paragraphs (d) through (g)
of this section is illustrated by the following examples:
Example 1. (i) X, a calendar year corporation, estimates its tax
liability for its taxable year ending December 31, 2009, will be
$85,000. X is not a large corporation as defined in section
6655(g)(2) and Sec. 1.6655-4. X reported a liability of $74,900 on
its return for the taxable year ended December 31, 2008, 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 15, 2009,
June 15, 2009, September 15, 2009, and December 15, 2009,
respectively. X reported a tax liability of $88,900 on its return
due March 15, 2010. X had a $5,000 credit against tax for tax year
2009 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 2009 for any of the four installments, determined as follows:
(A) Tax as defined in paragraph (g) of this section for 2009
($88,900-$5,000) = $83,900
(B) Tax as defined in paragraph (g) of this section for 2008 =
$74,900
(C) 100% of the lesser of this paragraph (j), Example 1 (i)(A)
or (i)(B) = $74,900
(D) Amount of estimated tax required to be paid on or before
each installment date (25% of $74,900) = $18,725
(E) Deduct amount paid on or before each installment date =
$18,725
(F) Amount of underpayment for each installment date = $0
(ii) [Reserved].
Example 2. (i) Facts. Y, a calendar year corporation, estimates
its tax liability for its taxable year ending December 31, 2009,
will be $70,000. Y is not a large corporation as defined in section
6655(g)(2) and Sec. 1.6655-4. Y reported a Federal income tax
liability of $90,000 for its taxable year ending December 31, 2008.
Y paid no installment of estimated tax on or before April 15, 2009,
June 15, 2009, or September 15, 2009, but made a payment of $63,000
on December 15, 2009. On March 15, 2010, Y filed its income tax
return showing a tax of $70,000. Y had no credits against tax for
tax year 2009. Of the $63,000 paid by Y on December 15, 2009,
$17,500 is applied to each of the first three installments due on
April 15, June 15, and September 15, 2009, 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:
(A) Tax as defined in paragraph (g) of this section for 2009 =
$70,000
(B) Tax as defined in paragraph (g) of this section for 2008 =
$90,000
(C) 100% of the lesser of this paragraph (j), Example 2 (i)(A)
or (i)(B) = $70,000
(D) Amount of estimated tax required to be paid on or before
each installment date (25% of $70,000) = $17,500
(E) Amount paid on or before the first, second, and third
installment dates = $0
(F) Amount paid on or before the fourth installment date =
$63,000
(G) Amount of underpayment for each of the first, second, and
third installment dates = $17,500
(H) Amount of underpayment for the fourth installment date =
$7,000
(ii) Addition to tax. Assuming that neither the annualized
income installment method nor the adjusted seasonal installment
method described in Sec. Sec. 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:
(A) First installment (underpayment period 4-16-09 through 12-
15-09), computed as 244/365 x $17,500 x 8% = $936
(B) Second installment (underpayment period 6-16-09 through 12-
15-09), computed as 183/365 x $17,500 x 8% = $702
(C) Third installment (underpayment period 9-16-09 through 12-
15-09), computed as 91/365 x $17,500 x 8% = $349
(D) Fourth installment (underpayment period 12-16-09 through 3-
15-10), computed as 90/365 x $7,000 x 8% = $138
(E) Total of this paragraph (j), Example 2 (ii)(A) through (D) =
$2,125
(k) Effective/applicability date. This section applies to taxable
years beginning after September 6, 2007.
Sec. 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 Sec. 1.6655-3, is less than the amount determined
under Sec. 1.6655-1--
(1) The amount of such required installment is 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 Sec. 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 (after
reducing the annualized tax by the amount of any allowable credits) for
the taxable year
[[Page 44351]]
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 Sec. 1.6655-5(d) with respect to short taxable years--
------------------------------------------------------------------------
The applicable
In the case of the following required installments percentage is
------------------------------------------------------------------------
1st.................................................. 25
2nd.................................................. 50
3rd.................................................. 75
4th.................................................. 100
------------------------------------------------------------------------
(2) Partial month. Except as otherwise provided, for purposes of
paragraph (b) of this section a partial month is treated as a month.
(3) Annualization period not a short taxable year. An annualization
period is not treated as a short taxable year for purposes of
determining the taxable income of an annualization period.
(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''.
(3) The application of the annualized income installment method is
illustrated by the following example:
Example. (i) ABC, a calendar year corporation, had a taxable
year of less than twelve months for tax year 2008 and no credits
against tax for tax year 2009. ABC made an estimated tax payment of
$15,000 on the installment dates of April 15, 2009, June 15, 2009,
September 15, 2009, and December 15, 2009, respectively. Assume
that, under paragraph (d)(1) of this section, ABC 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:
$25,000 x 12/2 = $150,000
$64,000 x 12/4 = $192,000
$125,000 x 12/7 = $214,286
$175,000 x 12/10 = $210,000
(ii)(A) To determine whether the installment payment made on
April 15, 2009, 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:
(1) Annualized income for the 2 month period = $150,000
(2) Tax on this paragraph (d)(3), Example (ii)(A)(1) = $41,750
(3) 100% of this paragraph (d)(3), Example (ii)(A)(2) = $41,750
(4) 25% of this paragraph (d)(3), Example (ii)(A)(3) = $10,438
(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
($10,438), 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, 2009.
(iii)(A) To determine whether the installment payments made on
or before June 15, 2009, 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:
(1) Annualized income for the 4 month period = $192,000
(2) Tax on this paragraph (d)(3), Example (iii)(A)(1) = $58,130
(3) 100% of this paragraph (d)(3), Example (iii)(A)(2) = $58,130
(4) 50% of this paragraph (d)(3), Example (iii)(A)(3) less
$10,438 (amount due with the first installment) = $18,627
(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 ($18,627), 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, 2009.
(iv)(A) To determine whether the installment payments made on or
before September 15, 2009, 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:
(1) Annualized income for the 7 month period = $214,286
(2) Tax on this paragraph (d)(3), Example (iv)(A)(1) = $66,821
(3) 100% of this paragraph (d)(3), Example (iv)(A)(2) = $66,821
(4) 75% of this paragraph (d)(3), Example (iv)(A)(3) less
$29,065 (amount due with the first and second installment) = $21,051
(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 ($21,051), 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, 2009, installment unless another
exception applies to this installment payment.
(v)(A) To determine whether the installment payments made on or
before December 15, 2009, 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:
(1) Annualized income for the 10 month period = $210,000
(2) Tax on this paragraph (d)(3), Example (v)(A)(1) = $65,150
(3) 100% of this paragraph (d)(3), Example (v)(A)(2) = $65,150
(4) 100% of this paragraph (d)(3), Example (v)(A)(3) less
$50,116 (amount due with the first, second and third installment) =
$15,034
(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
[[Page 44352]]
100 percent of the tax determined by placing on an annualized basis
the taxable income for the first 10-month period ($15,034), 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, 2009, 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:
(A) First installment (no underpayment) = $0
(B) Second installment (no underpayment) = $0
(C) Third installment (underpayment period 9-16-09 through 12-
15-09), computed as \91/365\ x $5,116 x 8% = $102
(D) Fourth installment (underpayment period 12-16-09 through 3-
15-10), computed as \90/365\ x $5,150 x 8% = $102
(E) Total of this paragraph (d)(3), Example (vi)(A) through (D)
= $204
(e) 52-53 week taxable year. (1) Generally, except as provided in
the alternative rule in paragraph (e)(4) of this section, in the case
of a taxpayer whose taxable year constitutes 52 or 53 weeks in
accordance with section 441(f), the rules prescribed by Sec. 1.441-2
are 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 is--
(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 number of 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 is
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) As an alternative to using the 52/53 week taxable year rules
provided in paragraphs (e)(1), (e)(2), and (e)(3) of this section, a
taxpayer whose taxable year constitutes 52 or 53 weeks in accordance
with section 441(f) may base its annualization period on the month that
ends closest to the end of its applicable 4-week period or 13-week
period that ends within the applicable annualization period. This
alternative may only be used if it is used for determining
annualization periods for all required installments for the taxable
year.
(5) The following examples illustrate the rules of this paragraph
(e):
Example 1. Corporation ABC, 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 28,
2007, ABC 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 28th, the
thirteenth Friday of ABC's taxable year. For purposes of its third
required installment, the first 6 months of ABC's taxable year will
end on June 27th, the twenty-sixth Friday of ABC's taxable year. For
purposes of its fourth required installment, the first 9 months of
ABC's taxable year will end on September 26th, the thirty-ninth
Friday of ABC's taxable year.
Example 2. Same facts as Example 1 except that ABC uses thirteen
four-week periods and there are 52 weeks during ABC's taxable year
beginning December 28, 2007, and ending December 26, 2008. For
purposes of computing ABC's first and second required installments,
ABC's annualized taxable income for the first three months will be
the taxable income for the first three four-week periods of ABC's
taxable year (December 28, 2007, through March 21, 2008) 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 ABC's third required
installment, ABC's annualized taxable income for the first six
months will be the taxable income for the first six four-week
periods of ABC's taxable year (December 28, 2007, through June 13,
2008) divided by 24 and multiplied by 52. For purposes of computing
ABC's fourth required installment, ABC's annualized taxable income
for the first nine months will be the taxable income for the first
nine four-week periods of ABC's taxable year (December 28, 2007,
through September 5, 2008) divided by 36 and multiplied by 52.
Example 3. Same facts as Example 1 except that ABC uses the
alternative method under paragraph (e)(4) of this section for
computing its required installments for 2008. For purposes of
computing its first and second required installments, the first
three months of ABC's taxable year under paragraph (b)(1)(i) of this
section will end on March 31, 2008, the month that ends closest to
the end of ABC's applicable thirteen-week period for the first and
second required installments. For purposes of ABC's third required
installment, the first six months of ABC's taxable year will end on
June 30, 2008, the month that ends closest to the end of ABC's
applicable thirteen-week period for the third required installment.
For purposes of ABC's fourth required installment, the first nine
months of ABC's taxable year will end on September 30, 2008, the
month that ends closest to the end of ABC's applicable thirteen-week
period for the fourth required installment.
(f) Determination of taxable income for an annualization period--
(1) In general. This paragraph (f) applies for purposes of 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 Sec. 1.6655-3 (relating to annualization of
income for corporations with seasonal income). An item of income,
deduction, gain or loss is to be taken into account in determining the
taxable income and alternative minimum taxable income (and applicable
tax and alternative minimum tax) for an annualization period in the
manner provided in this paragraph (f). An item may not be taken into
account in determining taxable income for any annualization period
unless the item is properly taken into account by the last day of that
annualization period and the item is properly taken into account in
determining the taxpayer's taxable income and alternative minimum
taxable income (and applicable tax and alternative minimum tax) for the
taxable year that includes the annualization period.
(i) Items of income. An item of income is taken into account in the
annualization period in which the item is properly includible under the
method of accounting employed by the taxpayer with respect to the item
and in accordance with the appropriate provision of the Internal
Revenue Code (for example, section 451 for accrual method taxpayers,
section 453 for
[[Page 44353]]
installment sales or section 460 for long-term contracts).
(ii) Items of deduction. An item of deduction is taken into account
in the annualization period in which the item is properly deductible
under the method of accounting employed by the taxpayer with respect to
the item and in accordance with the appropriate provision of the
Internal Revenue Code (for example, under the cash receipts and
disbursements method of accounting, the deduction must be paid under
Sec. 1.461-1(a)(1) and be otherwise deductible in computing taxable
income; under an accrual method of accounting, the deduction must be
incurred under Sec. 1.461-1(a)(2) and be otherwise deductible in
computing taxable income). Section 170(a)(2) and Sec. 1.170A-11(b)
(charitable contributions by accrual method corporations) and Sec.
1.461-5 (recurring item exception) may not be taken into consideration
by an accrual method taxpayer in any annualization period in
determining whether an item of deduction has been incurred under Sec.
1.461-1(a)(2) during that annualization period.
(iii) Losses. An item of loss is to be taken into account during
the annualization period in which events have occurred that permit the
loss to be taken into account under the appropriate provision of the
Internal Revenue Code.
(2) Certain deductions required to be allocated in a reasonably
accurate manner--(i) In general. The following deductions allowed for a
taxable year must be allocated throughout the taxable year in a
reasonably accurate manner (as defined in paragraph (f)(2)(iii) of this
section), regardless of the annualization period in which the item is
paid or incurred:
(A) Real property tax deductions.
(B) Employee and independent contractor bonus compensation
deductions (including the employer's share of employment taxes related
to such compensation).
(C) Deductions under sections 404 (deferred compensation) and 419
(welfare benefit funds).
(D) Items allowed as a deduction for the taxable year by reason of
section 170(a)(2) and Sec. 1.170A-11(b) (certain charitable
contributions by accrual method corporations), Sec. 1.461-5 (recurring
item exception) or Sec. 1.263(a)-4(f) (12-month rule).
(E) Items of deduction designated by the Secretary by publication
in the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of
this chapter).
(ii) Application of the reasonably accurate manner requirement to
certain charitable contributions, recurring items, and 12-month rule
items. For purposes of paragraph (f)(2)(i)(D) of this section, the
total amount of the item deducted in the computation of taxable income
for the taxable year must be allocated in a reasonably accurate manner,
notwithstanding the fact that section 170(a)(2) and Sec. 1.170A-11(b),
Sec. 1.461-5, or Sec. 1.263(a)-4(f) applies to only a portion of the
total amount of the item deducted for the taxable year. For example, if
a portion of a taxpayer's rebate liabilities are deducted in the
computation of taxable income under the recurring item exception, all
rebate liabilities deducted in the computation of taxable income for
the taxable year must be allocated in a reasonably accurate manner.
(iii) Reasonably accurate manner defined. (A) An item is allocated
throughout the taxable year in a reasonably accurate manner if the item
is allocated ratably throughout the taxable year or if the allocation
provides a reasonably accurate estimate of taxable income for the
taxable year based upon the facts known as of the end of the
annualization period. In determining that an allocation of an item
provides a reasonably accurate estimate of taxable income for the
taxable year, relevant considerations include--
(1) The extent to which the allocation is consistent with the
taxpayer's accounting for the item on its non-tax books and records;
(2) The extent to which the allocable portion of the item becomes
fixed and determinable (under Sec. 1.461-1(a)(2)) during the
applicable annualization period; and
(3) The extent to which the allocation, if compared to the ratable
allocation of the item, results in a better matching of the item of
deduction to revenue, earnings, the use of property or the provision of
services occurring during the annualization period.
(B) None of the relevant considerations above override the general
requirement that the allocation must be done in a reasonably accurate
manner based upon the facts known as of the end of the annualization
period. For example, the fact that a liability for an annual expense
becomes fixed and determinable during an annualization period will not
establish that allocating all of the expense to that annualization
period has been done in a reasonably accurate manner if the facts known
as of the end of the annualization period indicate otherwise.
(iv) Special rule for certain real property tax liabilities.
Notwithstanding paragraph (f)(2)(iii) of this section, real property
tax liabilities for which an election under section 461(c) is in effect
must be allocated ratably throughout the taxable year for purposes of
this section.
(v) Examples. Unless otherwise stated, the following examples
assume that the taxpayer uses the 3-3-6-9 annualization period:
Example 1. (i) Corporation ABC, a calendar year taxpayer, uses
an accrual method of accounting and the annualized income
installment method under section 6655(e)(2)(A)(i) to calculate all
of its required installment payments for its 2008 taxable year. ABC
has adopted a plan under which ABC pays an annual bonus to its
employees. As of March 31, 2008, ABC estimates that it will pay a
year-end bonus of $500,000 to its employees if earnings remain
constant throughout the tax year. ABC does not pay any of the
estimated bonus liability as of March 31, 2008. On October 31, 2008,
ABC declares a $600,000 bonus to its employees which is paid out on
November 15, 2008, and properly deducted in ABC's December 31, 2008,
tax year. No other bonus liabilities are incurred by ABC during the
tax year.
(ii) Under the general rule provided in paragraph (f)(2)(i) of
this section, ABC is required to allocate its employee bonus
liability in a reasonably accurate manner for annualization
purposes. Under paragraph (f)(2)(iii) of this section, ABC's
employee bonus liability will be deemed to be allocated in a
reasonably accurate manner if the item is allocated ratably
throughout the taxable year. Therefore, ABC is permitted to
recognize a $150,000 bonus deduction (one quarter of the $600,000
bonus liability properly recognized by ABC in the tax year ending
December 31, 2008) in the first annualization period ending March
31, 2008.
Example 2. (i) Corporation ABC, a calendar year taxpayer, uses
an accrual method of accounting and the annualized income
installment method under section 6655(e)(2)(A)(i) to calculate all
of its required installment payments for its 2008 taxable year. ABC
has adopted a plan under which ABC pays an annual bonus to its
employees. ABC's employee bonus plan generally calls for an annual
bonus equal to 2% of earnings. A bonus reserve for this amount is
reported each quarter in ABC's non-tax books and records. ABC's
quarterly revenues throughout the year are $10,000,000; $6,000,000;
$7,000,000; and $7,000,000 respectively. As of March 31, 2008, ABC
estimates that it will pay a year-end bonus of $800,000 ($10,000,000
x 4 x 2%) to its employees if earnings remain constant throughout
the year. ABC does not pay any of the estimated bonus payment as of
March 31, 2008. On December 31, 2008, ABC declares a $600,000 bonus
to its employees which is paid out on January 15, 2009, and properly
deducted in ABC's December 31, 2008, tax year.
(ii) Under the general rule provided in paragraph (f)(2)(i) of
this section, ABC must allocate its employee bonus liability in a
reasonably accurate manner for annualization purposes. Under
paragraph (f)(2)(iii) of this section, ABC's employee bonus
liability will be deemed to be allocated in a reasonably accurate
manner if the allocation provides a reasonable estimate of taxable
income based upon the facts known as of the end of the
[[Page 44354]]
annualization period. Based upon its earnings activities and other
information available as of March 31, 2008, ABC estimated that its
total deduction for employee bonuses for the taxable year ending
December 31, 2008, would be $800,000 ($10,000,000 first quarter
earnings x 4 x 2%). Allocating $200,000 ($10,000,000 x 2%) of ABC's
annual bonus liability of $600,000 to ABC's first quarter based upon
earnings during the quarter represents a better matching of ABC's
bonus expense to earnings in the quarter as compared to allocating
$150,000 to ABC's first quarter under a ratable accrual method and
is consistent with the allocation provided in ABC's non-tax books
and records. Accordingly, allocating ABC's employee bonus deductions
based upon ABC's earnings will be considered allocated in a
reasonably accurate manner.
Example 3. (i) Corporation ABC, a calendar year taxpayer, uses
an accrual method of accounting and the annualized income
installment method under section 6655(e)(2)(A)(i) to calculate all
of its required installment payments for its 2008 taxable year. ABC
has adopted a plan under which ABC pays a bonus to its employees
each quarter based upon earnings for that quarter. On March 31,
2008, ABC pays out $2,000,000 to its employees as a quarterly bonus
based upon the earnings of ABC for the period January 1, 2008,
through March 31, 2008. The $2,000,000 bonus is recognized as an
expense on ABC's audited financial statements in the quarter ending
March 31, 2008. As of March 31, 2008, ABC anticipates that its
earnings will continue throughout the year resulting in future
quarterly bonus payments in 2008 similar to the $2,000,000 first
quarter payment.
(ii) Under the general rule provided in paragraph (f)(2)(i) of
this section, ABC is required to allocate its employee bonus
liability in a reasonably accurate manner for annualization
purposes. Under paragraph (f)(2)(iii) of this section , ABC's
employee bonus liability will be deemed to be allocated in a
reasonably accurate manner if the item is allocated ratably
throughout the taxable year. Therefore, ABC may recognize a $500,000
bonus deduction (one quarter of the $2,000,000 bonus liability
properly recognized by ABC in the tax year ending December 31, 2008)
in the first annualization period ending March 31, 2008 (as well as
one quarter of any additional bonus liability properly recognized by
ABC in the tax year ending December 31, 2008).
(iii) In addition, paragraph (f)(2)(iii) of this section
provides that an allocation will be considered reasonable if the
allocation provides an accurate estimate of taxable income for the
taxable year based upon the facts known as of the end of the
annualization period. Based upon its earnings activities and other
information available as of March 31, 2008, ABC estimates that its
total deduction for employee bonuses for the taxable year ending
December 31, 2008, would be $8,000,000. In addition, the $2,000,000
bonus liability became fixed and determinable during the first
quarter. Allocating $2,000,000 to ABC's first quarter earnings is
also consistent with ABC's non-tax books and records and represents
a better matching of ABC's bonus expense to earnings in the quarter
as compared to a ratable accrual. Accordingly, allocating ABC's
bonus liability based upon earnings will be considered a reasonably
accurate manner for estimated tax purposes.
Example 4. (i) Corporation ABC, a calendar year taxpayer, uses
an accrual method of accounting with the recurring item exception
and the annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required installment
payments for its 2009 taxable year. ABC regularly incurs rebate
obligations related to the sale of its products. Rebate coupons that
are received and validated by ABC are generally paid in the
following month. During the tax year ending December 31, 2009, ABC
received, validated and paid $400,000 in rebates. In addition, as of
the end of December 31, 2009, ABC had received and validated
$100,000 in rebate claims that were paid in January of 2010 and
deducted in ABC's December 31, 2009, tax year under the recurring
item exception. Therefore, ABC properly recognized a $500,000 rebate
liability deduction on ABC's December 31, 2009, tax return.
(ii) Under the rule provided in paragraph (f)(2)(ii) of this
section, an item must be allocated in a reasonably accurate manner
if any portion of the item is deducted under the recurring item
exception. Therefore, ABC will be required to allocate its entire
$500,000 rebate liability deduction in a reasonably accurate manner
as defined in paragraph (f)(2)(iii) of this section.
(3) Special rules--(i) Advance payments--(A) Advance payments under
Sec. 1.451-5(b)(1)(ii). An advance payment for which the taxpayer uses
the method of accounting provided in Sec. 1.451-5(b)(1)(ii) is
includible in computing taxable income for an annualization period in
accordance with that method of accounting except that, if Sec. 1.451-
5(c) applies, any amount not included in computing taxable income by
the end of the second taxable year following the year in which
substantial advance payments are received, and not previously included
in accordance with the taxpayer's accrual method of accounting, is
includible in computing taxable income on the last day of such second
taxable year.
(B) Advance payments under Rev. Proc. 2004-34. An advance payment
for which the taxpayer uses the Deferral Method provided in section
5.02 of Rev. Proc. 2004-34 (2004-1 CB 991), (see Sec.
601.601(d)(2)(ii)(b) of this chapter) is includible in computing
taxable income for an annualization period in accordance with that
method of accounting, except that any amount not included in computing
taxable income by the end of the taxable year succeeding the taxable
year of receipt is includible in computing taxable income on the last
day of such succeeding taxable year.
(ii) Extraordinary items--(A) In general. In general, extraordinary
items must be taken into account after annualizing the taxable income
for the annualization period. For purposes of the preceding sentence an
extraordinary item is any item identified in Sec. 1.1502-
76(b)(2)(ii)(C)(1), (2), (3), (4), (7), and (8), a net operating loss
carryover, a section 481(a) adjustment, net gain or loss from the
disposition of 25 percent or more of the fair market value of a
taxpayer's business assets during a taxable year, and any other item
designated by the Secretary by publication in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
(B) De minimis extraordinary items. A taxpayer may treat any de
minimis extraordinary item, other than a net operating loss carryover
or section 481(a) adjustment, as an item under the general rule of
paragraph (f)(1) of this section rather than an extraordinary item as
provided for in paragraph (f)(3)(ii) of this section. A de minimis
extraordinary item is any item identified in paragraph (f)(3)(ii)(A) of
this section resulting from a transaction in which the total
extraordinary items resulting from such transaction is less than
$1,000,000.
(C) Special rule for net operating loss deductions and section
481(a) adjustments. For purposes of paragraph (f)(3)(ii) of this
section, a taxpayer must treat a net operating loss deduction and
section 481(a) adjustment as extraordinary items arising on the first
day of the tax year in which the item is taken into account in
determining taxable income. Notwithstanding the preceding sentence, a
taxpayer may choose to treat the portion of a section 481(a) adjustment
recognized during the tax year of the accounting method change as an
extraordinary item arising on the date the Form 3115, ``Application for
Change in Accounting Method,'' requesting the change was filed with the
national office of the Internal Revenue Service.
(iii) Credits--(A) Current year credits. With respect to a current
year credit, the items upon which the credit is computed are
annualized, the amount of the credit is computed based on the
annualized items, and the amount of the credit is deducted from the
annualized tax. For example, for an annualization period consisting of
three months in a full 12-month taxable year, the items upon which the
credit is based that are taken into account for the three month period
are multiplied by four, the credit is determined based on the
annualized amount of the items, and the credit reduces the annualized
tax.
[[Page 44355]]
(B) Credit carryovers. Any credit carryover to the current taxable
year is taken into account in computing an annualized income
installment only after annualizing the taxable income for the
annualization period and computing the applicable tax, and before
applying the applicable percentage.
(iv) Depreciation and amortization--(A) Estimated annual
depreciation and amortization. In general, in determining taxable
income for any annualization period, a proportionate amount of the
taxpayer's estimated annual depreciation and amortization
(depreciation) expense may be taken into account. For purposes of the
preceding sentence, estimated annual depreciation expense is the
estimated depreciation expense to be properly taken into account in
determining the taxpayer's taxable income 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, additional first-year depreciation and expense deductions and
section 179 or any similar provision, and other events that, based on
all 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), are reasonably expected to occur or apply during the
taxable year.
(B) Safe harbors--(1) Proportionate depreciation allowance. In
determining taxable income for any annualization period, in lieu of the
rule provided in paragraph (f)(3)(iv)(A) of this section a taxpayer may
take into account a proportionate amount of the depreciation and
amortization (depreciation) expense, including special depreciation and
expense deductions such as those provided for in section 168(k) and
section 179 or any similar provision, allowed for the taxable year
from--
(i) Assets that were in service on the last day of the prior
taxable year, are in service on the first day of the current taxable
year, and that have not been disposed of during the annualization
period;
(ii) Assets placed in service during the annualization period and
have not been disposed of during that period; and
(iii) Assets that were in service on the last day of the prior
taxable year and that are disposed of during the annualization period.
(2) 90 percent of preceding year's depreciation. In determining
taxable income for any annualization period, in lieu of the general
rule provided in paragraph (f)(3)(iv)(A) of this section, a
proportionate amount of 90 percent of the amount of depreciation and
amortization (depreciation) expense taken on the taxpayer's Federal
income tax return for the preceding taxable year may be taken into
account. If the taxpayer's preceding taxable year is less than 12
months (a short taxable year), the amount of depreciation expense taken
into account is annualized by multiplying the depreciation and
amortization for the short taxable year by 12, and dividing the result
by the number of months in the short taxable year.
(3) Safe harbor operational rules. If a taxpayer selects one of the
two safe harbors provided in paragraph (f)(3)(iv)(B)(1) or paragraph
(f)(3)(iv)(B)(2) of this section, the taxpayer must use that safe
harbor for all depreciation expenses within the annualization period
for the annualized income installment. However, a taxpayer may use
either the method provided for in paragraph (f)(3)(iv)(A) of this
section or a method provided for in this paragraph (f)(3)(iv)(B) of
this section for each annualized income installment during the taxable
year. For example, a taxpayer may use the safe harbor provided in
paragraph (f)(3)(iv)(B)(1) of this section for its first annualized
income installment and may use the general rule provided in paragraph
(f)(3)(iv)(A) of this section for its second annualized income
installment.
(C) Short taxable years. If the taxable year is, or will be, a
short taxable year (based on all relevant information available as of
the last day of the annualization period), annual depreciation expense
is computed using the rules applicable for computing depreciation
during a short taxable year for purposes of determining the annual
depreciation expense to be allocated to an annualization period. For
this purpose, the rules applicable for computing depreciation during a
short taxable year are applied on the basis of the date the taxable
year is expected to end based on all relevant information available as
of the last day of the annualization period. See Rev. Proc. 89-15
(1989-1 CB 816) for computing depreciation expense under section 168
(see Sec. 601.601(d)(2)(ii)(b) of this chapter). An annualization
period is not treated as a short taxable year for purposes of
determining the depreciation expense for an annualization period. See
paragraph (c)(3) of this section.
(v) Distributive share of items--(A) Member of partnership. In
determining a partner's distributive share of partnership items that
must be taken into account during an annualization period, the rules
set forth in Sec. 1.6654-2(d)(2) are applicable.
(B) Treatment of subpart F income and income under section 936(h)--
(1) General rule. Any amounts required to be included in gross income
under section 936(h) or section 951(a), and credits properly allocable
thereto, are taken into account in computing any annualized income
installment in a manner similar to the manner under which partnership
inclusions, and credits properly allocable thereto, are taken into
account in accordance with paragraph (f)(3)(v)(A) of this section.
(2) Prior year safe harbor--(i) General rule. If a taxpayer elects
to have the safe harbor in this paragraph (f)(3)(v)(B)(2) apply for any
taxable year, then paragraph (f)(3)(v)(B)(1) of this section does not
apply; and, for purposes of computing any annualized income installment
for the taxable year, the taxpayer is treated as having received
ratably during the taxable year items of income and credit described in
paragraph (f)(3)(v)(B)(1) of this section in an amount equal to 115
percent of the amount of such items shown on the return of the taxpayer
for the preceding taxable year (the second preceding taxable year in
the case of the first and second required installments for such taxable
year).
(ii) Special rule for noncontrolling shareholder. If a taxpayer
making the election under paragraph (f)(3)(v)(B)(2)(i) of this section
is a noncontrolling shareholder of a corporation, paragraph
(f)(3)(v)(B)(2)(i) of this section is applied with respect to items of
such corporation by substituting ``100 percent'' for ``115 percent''.
For purposes of paragraph (f)(3)(v)(B)(2)(ii) of this section, the term
noncontrolling shareholder means, with respect to any corporation, a
shareholder that, as of the beginning of the taxable year for which the
installment is being made, does not own within the meaning of section
958(a), and is not treated as owning within the meaning of section
958(b), more than 50 percent by vote or value of the stock in the
corporation.
(C) Dividends from closely held real estate investment trust--(1)
General rule. Any dividend received from a closely held real estate
investment trust by any person that owns, after the application of
section 856(d)(5), 10 percent or more by vote or value of the stock or
beneficial interests in the trust is taken into account in computing
annualized income installments in a manner similar to the manner under
[[Page 44356]]
which partnership income inclusions are taken into account.
(2) Closely held real estate investment trust. For purposes of
paragraph (f)(3)(v)(C)(1) of this section, the term closely held real
estate investment trust means a real estate investment trust with
respect to which 5 or fewer persons own, after the application of
section 856(d)(5), 50 percent or more by vote or value of the stock or
beneficial interests in the trust.
(D) Other passthrough entities. A taxpayer's distributive share of
items from a passthrough entity, other than those described in
paragraphs (f)(3)(v)(A) and (f)(3)(v)(C) of this section, is taken into
account in computing any annualized income installment in a manner
similar to the manner under which partnership items are taken into
account under paragraph (f)(3)(v)(A) of this section.
(vi) Alternative minimum taxable income exemption amount. The
alternative minimum taxable income exemption amount provided by section
55(d)(2) is applied after the alternative minimum taxable income for
the annualization period is annualized.
(vii) Examples. The provisions of this paragraph (f) are
illustrated by the following examples. Unless otherwise stated, the
following examples assume that the taxpayer uses the 3-3-6-9
annualization period.
Example 1. Expense paid or incurred in the installment period.
Corporation ABC, a calendar year taxpayer, uses an accrual method of
accounting and the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate all of its required
installment payments for its 2008 taxable year. ABC has licensed
technology from Corporation XYZ. Pursuant to the license agreement,
ABC pays a license fee to XYZ equal to $.01 for every dollar of
gross receipts earned by ABC. For 2008, ABC projects gross receipts
of $200,000,000, of which $100,000,000 is earned by March 31, 2008.
Pursuant to paragraph (f)(1) of this section, a license fee expense
of $1,000,000 ($100,000,000 x $.01) is incurred by March 31, 2008,
and may be taken into account for purposes of determining the
taxable income to be annualized in computing ABC's first annualized
income installment.
Example 2. Expense not paid or incurred in the installment
period. Same facts as Example 1 except that ABC does not earn any
gross receipts by March 31, 2008. In accordance with paragraph
(f)(1) of this section, because the license fee expense was not
incurred under Sec. 1.461-1(a)(2) by the last day of the
annualization period, no license fee expense is taken into account
for purposes of determining the taxable income to be annualized in
computing ABC's first annualized income installment, which is based
on the income and deductions from the first three months of the
taxable year.
Example 3. Bad debt expense. Corporation ABC, a calendar year
taxpayer, uses an accrual method of accounting and the annualized
income installment method under section 6655(e)(2)(A)(i) to
calculate all of its required installment payments for its 2008
taxable year. As of December 31, 2007, ABC had a $100,000 account
receivable due from XYZ related to the sale of goods from ABC to XYZ
during 2007. On March 30, 2008, ABC determined that its receivable
from XYZ was worthless under section 166 and the regulations. No
other receivables were determined to be worthless between January 1,
2008, and March 31, 2008. In accordance with paragraph (f)(1) of
this section, a $100,000 bad debt write-off is taken into account
for purposes of determining the taxable income to be annualized in
computing ABC's first annualized income installment.
Example 4. Bad debt expense. Same facts as Example 3 except that
ABC determines that the receivable from XYZ was worthless under
section 166 and the regulations on April 10, 2008. As of March 31,
2008, ABC had not determined that any receivables were worthless
under section 166 and the regulations. In accordance with paragraph
(f)(1) of this section, the $100,000 bad debt expense attributable
to the receivable from XYZ is not taken into account for purposes of
determining the taxable income to be annualized in computing ABC's
first annualized income installment, which is based on the income
and deductions from the first three months of the taxable year,
because the receivable from XYZ became worthless after the last day
of the annualization period.
Example 5. Employer deductions under section 404 and 419. (i)
Corporation ABC, a calendar year taxpayer, uses an accrual method of
accounting and uses the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate all of its required
installment payments for its 2008 taxable year. On March 1, 2008,
the board of directors of ABC makes a binding, irrevocable
commitment to fund a minimum contribution of $10,000,000 to ABC's
qualified retirement plan by March 14, 2009. ABC remits a $1,000,000
payment to the retirement plan on March 1, 2008, and a $9,000,000
payment on March 3, 2009. ABC does not incur any other related
retirement plan deductions during its 2008 taxable year.
(ii) Under the rule provided in paragraph (f)(2)(i) of this
section, ABC's employer deduction for payment made to the qualified
plan must be allocated throughout the tax year for estimated tax
purposes in a reasonably accurate manner. Therefore, ABC will not be
permitted to allocate the $10,000,000 deduction to its first
installment period. Under paragraph (f)(2)(iii) of this section,
ABC's qualified plan deduction will be deemed to be allocated in a
reasonably accurate manner if the item is allocated ratably
throughout the taxable year. Therefore, ABC will be permitted to
allocate $2,500,000 of its qualified plan deduction in its first
installment period.
Example 6. Prepaid expense. (i) Corporation ABC, a calendar year
taxpayer, uses an accrual method of accounting and does not
capitalize qualifying costs under the exception provided for in
Sec. 1.263(a)-4(f). ABC uses the annualized income installment
method under section 6655(e)(2)(A)(i) to calculate all of its
required installment payments for its 2008 taxable year. On July 1,
2008, ABC purchases an annual business license from State X which
permits ABC to operate its business in State X from July 1, 2008,
through June 30, 2009. An annual payment of $12,000 is due on July
1, 2008, and ABC pays the fee on this date. ABC has not elected out
of the 12-month rule provided by Sec. 1.263(a)-4(f) and therefore
ABC is not required to capitalize any amount paid for the license
and will recognize a $12,000 deduction for the tax year ending
December 31, 2008, with respect to this license.
(ii) Under the rule provided in paragraph (f)(2)(ii) of this
section, ABC's $12,000 business license expense must be allocated in
a reasonably accurate manner because ABC utilizes the 12-month rule
exception provided for in the Sec. 1.263(a)-4(f). Under paragraph
(f)(2)(iii) of this section, ABC's deduction will be deemed to be
allocated in a reasonably accurate manner if the item is allocated
ratably throughout the taxable year. Therefore, ABC will be
permitted to allocate $3,000 of its business license deduction in
its first installment period.
Example 7. Real property tax liability. (i) Corporation ABC, a
calendar year taxpayer, uses an accrual method of accounting and the
annualized income installment method under section 6655(e)(2)(A)(i)
to calculate all of its required installment payments for its 2008
taxable year. ABC owns real property in State Y and uses the real
property in its trade or business. ABC incurs a $400,000 deduction
for State Y real estate taxes during ABC's December 31, 2008,
taxable year. ABC has elected to recognize its real property taxes
ratably under section 461(c).
(ii) Under the rule provided in paragraph (f)(2)(i) of this
section, ABC's $400,000 real property tax liabilities must be
allocated in a reasonably accurate manner. However, paragraph
(f)(2)(iv) of this section provides that with respect to real
property taxes for which an election has been made under section
461(c), ratable accrual is the only method which will be considered
a reasonably accurate method. Therefore, ABC will be required to
allocate its $400,000 real property taxes ratably for estimated tax
purposes and thus $100,000 will be allocated to the ABC's first
annualized income installment.
Example 8. NOL (Net Operating Loss) deduction. Corporation ABC,
a calendar year taxpayer, uses an accrual method of accounting and
the annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required installment
payments for its 2008 taxable year. ABC has a net operating loss
carryover to 2008 of $2,000,000. ABC's taxable income from January
1, 2008, through March 31, 2008, without regard to any net operating
loss deduction, is $1,500,000 (pre-NOL taxable income). Under the
special rule for net operating loss deductions provided in paragraph
(f)(3)(ii) of this section, the NOL deduction is treated as an
extraordinary item incurred on the first day of ABC's December 31,
2008, tax year. Therefore, the NOL
[[Page 44357]]
deduction is taken into account after annualization for purposes of
determining ABC's first annualized income installment.
Example 9. Advance payment. (i) Corporation ABC, a calendar year
taxpayer, uses an accrual method of accounting and the annualized
income installment method under section 6655(e)(2)(A)(i) to
calculate all of its required installment payments for its 2008 and
2009 taxable years. ABC is in the business of giving dancing lessons
and receives advance payments. For Federal income tax purposes, ABC
uses the Deferral Method provided in section 5.02 of Rev. Proc.
2004-34 for the advance payments it receives for dance lessons. On
November 1, 2008, ABC receives an advance payment of $2,400 for a 2-
year contract commencing on November 1, 2008, and providing for up
to 24 individual, 1-hour lessons. ABC provides 2 lessons in 2008, 12
lessons in 2009, and 10 lessons in 2010. ABC recognizes $200 in
revenues in its financial statements for the last quarter of 2008.
ABC recognizes $300 in revenues in its financial statements for each
quarter of 2009 for a total of $1,200 in 2009. ABC recognizes the
remaining $1,000 in revenues in its financial statements during
2010. For tax purposes, ABC recognizes $200 into revenue in 2008 and
$2,200 into revenue in 2009 under Rev. Proc. 2004-34. See Sec.
601.601(d)(2)(ii)(b).
(ii) Pursuant to paragraph (f)(3)(i)(B) of this section, ABC is
not required to take into account any of the advance payment for
purposes of computing any required installment payment for ABC's
2008 taxable year because no part of the $2,400 advance payment was
recognized as income in ABC's financial statements during the first
nine months of ABC's 2008 taxable year. In 2009, ABC must take into
account $300 of revenue for purposes of computing its first and
second required installment payments, $600 of revenue for purposes
of computing its third required installment payment and $900 for
purposes of computing its fourth required installment payment.
Pursuant to paragraph (f)(3)(i)(B) of this section, the remaining
deferred revenue is recognized on December 31, 2009, for purposes of
computing ABC's annualized income installments for 2009.
Example 10. Section 481(a) adjustment. Corporation ABC, a
calendar year taxpayer, uses an accrual method of accounting and the
annualized income installment method under section 6655(e)(2)(A)(i)
to calculate all of its required installment payments for its 2008
taxable year. On December 20, 2008, ABC files a Form 3115 requesting
permission to change its method of accounting. The requested change
results in a negative section 481(a) adjustment of $80,000. ABC
subsequently receives the consent of the Commissioner to make the
change and therefore, the negative $80,000 section 481(a) adjustment
is properly recognized in ABC's tax return for the year ending
December 31, 2008. Under paragraph (f)(3)(ii) of this section ABC is
permitted to recognize the negative $80,000 section 481(a)
adjustment as an extraordinary item occurring on January 1, 2008
(the first day of ABC's December 31, 2008, tax year), or December
20, 2008 (the date ABC filed the Form 3115). ABC chooses to
recognize the negative $80,000 section 481(a) adjustment as an
extraordinary item occurring in January 1, 2008. Accordingly,
$80,000 of the negative section 481(a) adjustment is taken into
account after annualization for purposes of determining ABC's first
annualized income installment. In addition, under Sec. 1.6655-6(b),
ABC is required to use its new method of accounting as of January 1,
2008 for estimated tax purposes, consistent with the recognition of
the section 481(a) adjustment for estimated tax purposes. Therefore,
ABC will be required to use the new method of accounting in
determining taxable income to be annualized in computing ABC's first
annualized income installment.
Example 11. Section 481(a) adjustment. Corporation ABC, a
calendar year taxpayer, uses an accrual method of accounting and
uses the annualized income installment method under section
6655(e)(2)(A)(i) to calculate all of its required installment
payments for its 2008 taxable year. On June 15, 2008, ABC files a
Form 3115 requesting permission to change its method of accounting.
The requested change results in a positive section 481(a) adjustment
of $240,000. ABC subsequently receives the consent of the
Commissioner to make the change and therefore, $60,000 of the
section 481(a) adjustment (one quarter of the positive $240,000
section 481(a) adjustment) is properly recognized in ABC's tax
return for the year ending December 31, 2008. Under paragraph
(f)(3)(ii) of this section, ABC is permitted to recognize the
positive $60,000 section 481(a) adjustment as an extraordinary item
occurring on January 1, 2008 (the first day of ABC's December 31,
2008, tax year), or June 15, 2008 (the date ABC filed the Form
3115). ABC chooses to recognize the positive $60,000 section 481(a)
adjustment as an extraordinary item occurring on June 15, 2008.
Accordingly, the $60,000 positive section 481(a) adjustment is not
taken into account for purposes of determining ABC's first
annualized income installment. However, in all futures years any
portion of the section 481(a) adjustment related to this change in
method of accounting will be treated as an extraordinary item
occurring on the first day of the tax year under paragraph
(f)(3)(ii) of this section. In addition, under Sec. 1.6655-6(b),
ABC is required to use its new method of accounting as of June 15,
2008 for estimated tax purposes, consistent with the recognition of
the section 481(a) adjustment for estimated tax purposes. Therefore,
ABC will be required to use the new method of accounting (as of the
beginning of the tax year) for purposes of determining taxable
income to be annualized in computing ABC's third and fourth
annualized income installments (which are based upon annualization
periods that include June 15, 2008.)
Example 12. Extraordinary item. Corporation ABC, a calendar year
taxpayer, uses an accrual method of accounting and the annualized
income installment method under section 6655(e)(2)(A)(i) to
calculate all of its required installment payments for its 2008
taxable year. On May 10, 2008, ABC reaches a settlement agreement
with XYZ over a tort action filed by ABC. As a result, ABC receives
a payment of $10,000,000 on June 15, 2006, that is recognized as
income by ABC. The settlement of a tort action is an extraordinary
item defined in paragraph (f)(3)(ii)(A) of this section.
Accordingly, the $10,000,000 of income will be taken into account by
ABC on May 10, 2008, for purposes of computing ABC's annualized
income installments for 2008. Therefore, the $10,000,000 settlement
will only be taken into account in computing ABC's third and fourth
annualized income installments (which are based upon annualization
periods that include May 10, 2008). In addition, the $10,000,000
settlement income will be taken into account as an extraordinary
item of income after annualization for purposes of determining ABC's
third and fourth annualized installment payments.
Example 13. Credit carryover. Corporation ABC, a calendar year
taxpayer, uses an accrual method of accounting and the annualized
income installment method under section 6655(e)(2)(A)(i) to
calculate all of its required installment payments for its 2008
taxable year. ABC projects its annualized tax for its 2008 taxable
year, based on annualizing ABC's taxable income for its first
annualization period from January 1, 2008, through March 31, 2008,
to be $1,500,000 before reduction for any credits. ABC has an unused
section 38 credit from 2007 for increasing research activities from
2007 of $500,000 that is carried over to 2008. For purposes of
determining ABC's first annualized income installment, ABC's
annualized tax for 2008 is $1,000,000, determined as the tax for the
taxable year computed by placing on an annualized basis ABC's
taxable income from its first annualization period from January 1,
2008, through March 31, 2008 ($1,500,000) reduced by the $500,000
credit carryover from 2007. Therefore, ABC's first required
installment payment for 2008 is $250,000 ($1,000,000 x 25%).
Example 14. Current year credit. Corporation ABC, a calendar
year taxpayer, uses an accrual method of accounting and the
annualized income installment method under section 6655(e)(2)(A)(i)
to calculate all of its required installment payments for its 2008
taxable year. ABC projects its annualized tax for its 2008 taxable
year, based on annualizing ABC's taxable income for its first
annualization period from January 1, 2008, through March 31, 2008,
to be $2,000,000 before reduction for any credits. ABC has
historically earned a section 41 credit for increasing research
activities and, for 2008, ABC estimates that it will earn a credit
for increasing research activities under section 41 of $1,200,000.
However, pursuant to paragraph (f)(3)(iii) of this section, if ABC
were to annualize all components involved in computing the current
year credit based on ABC's activity from January 1, 2008, through
March 31, 2008, ABC would generate a credit of $1,600,000 for 2008.
For purposes of determining ABC's first annualized income
installment, ABC's annualized tax for 2008 is $400,000, determined
as the tax for the 2008 taxable year ($2,000,000) computed by
placing on an annualized basis ABC's taxable income from its first
annualization period January 1, 2008, through March 31, 2008,
reduced by a $1,600,000 current year section
[[Page 44358]]
41 credit from increasing research activities. Therefore, ABC's
first required installment payment for 2008 is $100,000 ($400,000 x
25%).
Example 15. Current year credit. Same facts as Example 14 except
that ABC does not begin any research activities until April 3, 2008,
and will not incur any research expenses described in paragraph
(f)(1)(ii) of this section. As a result, if ABC were to annualize
all components involved in computing the current year credit based
on ABC's activity from January 1, 2008, through March 31, 2008, ABC
would generate no section 41 research credit for purposes of
determining its first annualized income installment. Pursuant to
paragraph (f)(3)(iii) of this section, ABC cannot take into account
any credit for its first annualization period because ABC did not
incur any qualified research expenses by the last day of the first
annualization period. Accordingly, for purposes of determining ABC's
first annualized income installment, ABC's annualized tax for its
first annualization period January 1, 2008, through March 31, 2008,
is $2,000,000. Therefore, ABC's first required installment payment
for 2008 is $500,000 ($2,000,000 x 25%).
Example 16. Depreciation and amortization expense. Corporation
ABC, a calendar year taxpayer that began business on January 2,
2007, adopted an accrual method of accounting and will use the
annualized income installment method under section 6655(e)(2)(A)(i)
to calculate all of its required installment payments for its 2008
taxable year. On January 2, 2007, ABC purchased and placed in
service a tangible depreciable asset that costs $50,000 and is 5-
year property under section 168(e). ABC depreciates its 5-year
property placed in service in 2007 under the general depreciation
system using the 200-percent declining balance method, a 5-year
recovery period, and the half year convention. On January 2, 2008,
ABC purchased and placed in service qualified Gulf Opportunity Zone
property (GO Zone property) that costs $30,000 and is 5-year
property under section 168(e). ABC will depreciate its 5-year
property placed in service in 2008 under the general depreciation
system using the 200-percent declining balance method, a 5-year
recovery period, and the half-year convention. ABC will deduct the
50% additional first year depreciation deduction under section
1400N(d) with respect to the GO Zone property. For tax year 2007,
ABC takes a depreciation deduction under section 168 of $10,000
($50,000 x 20% = $10,000). ABC does not anticipate being subject to
the mid-quarter convention for the 2008 taxable year, does not
anticipate making any depreciation elections for any class of
property, does not anticipate making a section 179 election, does
not anticipate any sales or other dispositions of depreciable
property, and no events have occurred, nor does ABC know, based on
all relevant information available as of the due date of ABC's first
required installment for 2008, of any event that will occur to cause
ABC's 2008 taxable year to be a short taxable year. The optional
amounts of depreciation expense ABC may take into account for its
first annualized income installment for its 2008 taxable year are
determined as follows:
(i) General rule--Estimated annual depreciation. In accordance
with the general rule provided in paragraph (f)(3)(iv)(A) of this
section, ABC may take a depreciation expense of $8,500 ($34,000 x
\3/12\ = $8,500) into account in computing ABC's January 1, 2008,
through March 31, 2008, taxable income. ABC's estimated annual
depreciation expense for 2008 of $34,000 is computed as follows:
$15,000 for the 50% additional first year depreciation deduction
under section 1400N(d) ($30,000 x 50% = $15,000) plus annual
depreciation of $16,000 ($40,000 x 40% = $16,000) and $3,000
($15,000 x 20% = $3,000). Under paragraphs (c)(3) and (f)(3)(iv)(C)
of this section, ABC may not consider its first annualization period
to be a short taxable year for purposes of determining the
depreciation allowance for such annualization period.
(ii) Safe Harbor--Proportionate depreciation allowance. In
accordance with the safe harbor provided in paragraph
(f)(3)(iv)(B)(1) of this section, ABC may take a depreciation
expense of $8,500 ($34,000 x \3/12\ = $8,500) into account in
computing ABC's January 1, 2008, through March 31, 2008, taxable
income based on annual depreciation expense for 2008 of $34,000,
computed as follows: $15,000 for the 50% additional first year
depreciation deduction under section 1400N(d) ($30,000 x 50% =
$15,000) plus annual depreciation of $16,000 ($40,000 x 40% =
$16,000) and $3,000 ($15,000 x 20% = $3,000). Under paragraphs
(c)(3) and (f)(3)(iv)(C) of this section, ABC may not consider its
first annualization period to be a short taxable year for purposes
of determining the depreciation allowance for such annualization
period.
(iii) Safe Harbor--90 percent of preceding year's depreciation.
In accordance with the safe harbor in paragraph (f)(3)(iv)(B)(2) of
this section, ABC may take a depreciation expense of $2,250 ($10,000
prior year's depreciation x 90% = $9,000 x \3/12\ = $2,250) into
account in computing ABC's January 1, 2008, through March 31, 2008,
taxable income. Under paragraphs (c)(3) and (f)(3)(iv)(C) of this
section, ABC may not consider its first annualization period to be a
short taxable year for purposes of determining the depreciation
allowance for such annualization period.
(g) Items that substantially affect taxable income but cannot be
determined accurately by the installment due date--(1) In general. In
determining the applicability of the annualization exceptions described
in paragraphs (a) and (b) of this section and Sec. 1.6655-3,
reasonable estimates may be made from existing data for items that
substantially affect income if the amount of such items cannot be
determined accurately by the installment due date. This paragraph (g)
applies only to the inflation index for taxpayers using the dollar-
value LIFO (last-in, first-out) inventory method, adjustments required
under section 263A, the computation of a taxpayer's section 199
deduction, intercompany adjustments for taxpayers that file
consolidated returns, the liquidation of a LIFO layer at the
installment date that the taxpayer reasonably believes will be replaced
at the end of the year, deferred gain on a qualifying conversion or
exchange of property under sections 1031 and 1033 that the taxpayer
reasonably believes will be replaced with qualifying replacement
property, and any other item designated by the Secretary by publication
in the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of
this chapter).
(2) Example. The following example illustrates the rules of this
paragraph (g):
Example. Section 199 deduction. Corporation ABC, a calendar year
taxpayer, uses an accrual method of accounting and the annualized
income installment method under section 6655(e)(2)(A)(i) to
calculate all of its required installment payments for its 2008
taxable year. ABC engages in production activities that generate
qualified production activities income (QPAI), as defined in Sec.
1.199-1(c), and projects taxable income of $50,000 for its first
annualization period from January 1, 2008, through March 31, 2008,
without taking into account the section 199 deduction. During its
first annualization period from January 1, 2008, through March 31,
2008, ABC incurs W-2 wages allocable to domestic production gross
receipts pursuant to section 199(b)(2) of $10,000. Pursuant to
paragraph (g)(1) of this section, ABC is permitted to take into
account its estimated section 199 deduction before annualizing
taxable income based on the lesser of its estimated QPAI or taxable
income and W-2 wages for its first installment period for 2008. For
the first installment period in 2008, ABC's is permitted to
recognize a deduction under section 199 of $3,000 ($50,000 x .06 =
$3,000) subject to the wage limitation of $5,000 (50 percent of
$10,000 of W-2 wages incurred during the first installment period).
Accordingly, ABC's annualized income for the first installment for
2008 is $188,000 (($50,000-$3,000) x 1\2/3\ = $188,000). The tax on
$188,000 is $56,570 and ABC's first required installment for 2008 is
$14,143 ($56,570 x .25 = $14,143).
(h) Effective/applicability date. This section applies to taxable
years beginning after September 6, 2007.
0
Par. 8A. Section 1.6655-3 is revised to read as follows:
Sec. 1.6655-3 Adjusted seasonal installment method.
(a) In general. In the case of any required installment, the amount
of the adjusted seasonal installment is the excess (if any) of--
(1) 100 percent of the amount determined under paragraph (c) of
this section; over
(2) The aggregate amount of all prior required installments for the
taxable year.
[[Page 44359]]
(b) Limitation on application of section. This section applies only
if the base period percentage (as defined in section 6655(e)(3)(D)(i)
and paragraph (d)(1) of this section) for any six consecutive months of
the taxable year equals or exceeds seventy percent.
(c) Determination of amount. The amount determined under this
paragraph (c) for any installment will be determined in the following
manner--
(1) Take the taxable income for all months during the taxable year
preceding the filing month;
(2) Divide such amount by the base period percentage for all months
during the taxable year preceding the filing month;
(3) Determine the tax on the amount determined under paragraph
(c)(2) of this section; and
(4) Multiply the tax computed under paragraph (c)(3) of this
section by the base period percentage for the filing month and all
months during the taxable year preceding the filing month.
(d) Special rules--(1) Base period percentage. The base period
percentage for any period of months is the average percent that the
taxable income for the corresponding months in each of the three
preceding taxable years bears to the taxable income for the three
preceding taxable years. If there is no taxable income for the
corresponding months, taxable income for this purpose is zero.
(2) Filing month. The term filing month means the month in which
the installment is required to be paid.
(3) Application of the rules related to the annualized income
installment method to the adjusted seasonal installment method. The
rules governing the computation of taxable income (and resulting tax)
for purposes of determining any required installment payment of
estimated tax under the annualized income installment method under
Sec. 1.6655-2 apply to the computation of taxable income (and
resulting tax) for purposes of determining any required installment
payment of estimated tax under the adjusted seasonal installment
method.
(4) Alternative minimum tax. The amount determined under paragraph
(c) of this section must properly take into account the amount of any
alternative minimum tax under section 55 that would apply for the
period of the computation. The amount of any alternative minimum tax
that would apply is determined by applying to alternative minimum
taxable income, tentative minimum tax, and alternative minimum tax, the
rules described in paragraph (c) of this section for taxable income and
tax.
(e) Example. The provisions of this section may be illustrated by
the following example:
Example. (i) X, a corporation that reports on a calendar year
basis, expects to have an estimated tax liability of $1,200,000 for
its taxable year ending December 31, 2009. On its 2008 tax return, X
reports a tax liability of $652,800. X pays four installments of
estimated tax, each in the amount of $250,000, $250,000, $250,000,
and $450,000 on April 15, 2009, June 15, 2009, September 15, 2009,
and December 15, 2009, respectively. X reports a tax liability of
$1,152,600 on its return due March 15, 2010, with no credits against
tax. Under the general provision of section 6655(b) and section
6655(d), there was an underpayment in the amount of $76,300 for the
second installment through September 15, 2009, and $114,450 for the
third installment through December 15, 2009, determined as follows:
(A) Tax as defined in section 6655(g) = $1,152,600
(B) 100% of this paragraph (e), Example (i)(A) = $1,152,600
(C) Amount of estimated tax required to be paid on or before the
first installment (25% of $652,800) = $163,200
(D) Deduction of amount timely paid on or before the first
installment due date under the general rule of section 6655(b) =
$250,000
(E) Amount of overpaid estimated tax for the first installment
date = $86,800
(F) Amount of estimated tax required to be paid on or before the
second installment (25% of $1,152,600 plus the recapture amount
under section 6655(d)(2)(B) of $124,950 (25% of $1,152,600 less
$163,200)) = $413,100
(G) Deduction of amount paid on or before the due date of the
second installment less amount applied towards the first installment
under the general rule of section 6655(b) ($250,000 paid in each of
the first and second installments less this paragraph (e), Example
(i)(C)) = $336,800
(H) Amount of underpayment for the second installment date =
$76,300
(I) Amount of estimated tax required to be paid on or before the
third installment (25% of $1,152,600) = $288,150
(J) Deduction of amount paid on or before the due date of the
third installment less amount applied towards the first and second
installments under the general rule of section 6655(b) ($250,000
paid in each of the first, second, and third installments less this
paragraph (e), Example (i)(C) less this paragraph (e), Example
(i)(F)) = $173,700
(K) Amount of underpayment for the third installment date =
$114,450
(L) Amount of estimated tax required to be paid on or before the
fourth installment (25% of $1,152,600) = $288,150
(M) Deduction of amount paid on or before the due date of the
fourth installment less amount applied towards the first, second,
and third installments under the general rule of section 6655(b)
($250,000 paid in each of the first, second, and third installments
plus $450,000 paid in the fourth installment less this paragraph
(e), Example (i)(C) less this paragraph (e), Example (i)(F) less
this paragraph (e), Example (i)(I)) = $335,550
(N) Amount of overpaid estimated tax for the fourth installment
date = $47,400
(ii) X wants to determine if it qualifies for the adjusted
seasonal installment method. X determines that its monthly taxable
income for the preceding three taxable years and for the current
taxable year 2009 is as follows:
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
January February March April May June July August September October November December
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006:
$100,000 $90,000 $80,000 $70,000 $60,000 $20,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000
2007:
200,000 170,000 170,000 130,000 125,000 45,000 21,000 19,000 20,000 20,000 20,000 20,000
2008:
410,000 350,000 330,000 270,000 240,000 80,000 40,000 40,000 40,000 40,000 40,000 40,000
2009:
600,000 680,000 650,000 560,000 460,000 170,000 70,000 60,000 50,000 40,000 30,000 20,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(iii) X must initially determine if its base period percentage
for the same 6 consecutive months of the 3 preceding taxable years
equals or exceeds 70 percent (see section 6655(e)(3) and paragraphs
(b) and (c) of this section). By using its taxable income for the
first 6 months of 2006, 2007, and 2008, X qualifies for the adjusted
seasonal installment method because its base period percentage is
87.5 percent (which exceeds 70 percent) computed as follows:
(A) Taxable income for first 6 months of 2006 = $420,000
(B) Total taxable income for 2006 = $480,000
(C) Divide this paragraph (e), Example (iii)(A) by this
paragraph (e), Example (iii)(B) = .875
(D) Taxable income for first 6 months of 2007 = $840,000
(E) Total taxable income for 2007 = $960,000
(F) Divide this paragraph (e), Example (iii)(D) by this
paragraph (e), Example (iii)(E) = .875
(G) Taxable income for first 6 months of 2008 = $1,680,000
[[Page 44360]]
(H) Total taxable income for 2008 = $1,920,000
(I) Divide this paragraph (e), Example (iii)(G) by this
paragraph (e), Example (iii)(H) = .875
(J) Add this paragraph (e), Example (iii)(C), (F), and (I) =
$2.625
(K) Divide this paragraph (e), Example (iii)(J) by 3 = .875
(iv) To determine the amount of the first installment under the
rules of section 6655(e)(3) and paragraph (a) of this section, the
following computation is necessary:
(A) Taxable income for first 3 months of 2009 = $1,930,000
(B) Taxable income for first 3 months of 2006 ($270,000) divided
by total taxable income for 2006 ($480,000) = .5625
(C) Taxable income for first 3 months of 2007 ($540,000) divided
by total taxable income for 2007 ($960,000) = .5625
(D) Taxable income for first 3 months of 2008 ($1,090,000)
divided by total taxable income for 2008 ($1,920,000) = .5677
(E) Add this paragraph (e), Example (iv)(B), (C), and (D) and
divide by 3 = .5642
(F) Divide this paragraph (e), Example (iv)(A) by this paragraph
(e), Example (iv)(E) = $3,420,773
(G) Determine the tax on this paragraph (e), Example (iv)(F) =
$1,163,049
(H) Taxable income for first 4 months of 2006 ($340,000) divided
by total taxable income for 2006 ($480,000) = .7083
(I) Taxable income for first 4 months of 2007 ($670,000) divided
by total taxable income for 2007 ($960,000) = .6979
(J) Taxable income for first 4 months of 2008 ($1,360,000)
divided by total taxable income for 2008 (1,920,000) = .7083
(K) Add this paragraph (e), Example (iv)(H), (I), and (J) and
divide by 3 = .7048
(L) Multiply this paragraph (e), Example (iv)(G) by this
paragraph (e), Example (iv)(K) = $819,717
(M) 100% of this paragraph (e), Example (iv)(L) = $819,717
(N) Amount of all prior required installments for 2009 = $0
(O) Amount of adjusted seasonal installment for the first
installment payment (this paragraph (e), Example (iv)(M) less this
paragraph (e), Example (iv)(N)) = $819,717
(v) To determine the amount of the second installment under the
rules of section 6655(e)(3) and paragraph (a) of this section, the
following computation is necessary:
(A) Taxable income for first 5 months of 2009 = $2,950,000
(B) Taxable income for first 5 months of 2006 ($400,000) divided
by total taxable income for 2006 ($480,000) = .8333
(C) Taxable income for first 5 months of 2007 ($795,000) divided
by total taxable income for 2007 ($960,000) = .8281
(D) Taxable income for first 5 months of 2008 ($1,600,000)
divided by total taxable income for 2008 ($1,920,000) = .8333
(E) Add this paragraph (e), Example (v)(B), (C), and (D) and
divide by 3 = .8316
(F) Divide this paragraph (e), Example (v)(A) by this paragraph
(e), Example (v)(E) = $3,547,379
(G) Determine the tax on this paragraph (e), Example (v)(F) =
$1,206,109
(H) Taxable income for first 6 months of 2006 ($420,000) divided
by total taxable income for 2006 ($480,000) = .875
(I) Taxable income for first 6 months of 2007 ($840,000) divided
by total taxable income for 2007 ($960,000) = .875
(J) Taxable income for first 6 months of 2008 ($1,680,000)
divided by total taxable income for 2008 ($1,920,000) = .875
(K) Add this paragraph (e), Example (v)(H), (I), and (J) and
divide by 3 = .875
(L) Multiply this paragraph (e), Example (v)(G) by this
paragraph (e), Example (v)(K) = $1,055,345
(M) 100% of this paragraph (e), Example (v)(L) = $1,055,345
(N) Amount of all prior required installments for 2009 =
$163,200
(O) Amount of adjusted seasonal installment for the second
installment payment (this paragraph (e), Example (v)(M) less this
paragraph (e), Example (v)(N)) = $892,145
(vi) To determine the amount of the third installment under the
rules of section 6655(e)(3) and paragraph (a) of this section, the
following computation is necessary:
(A) Taxable income for first 8 months of 2009 = $3,250,000
(B) Taxable income for first 8 months of 2006 ($440,000) divided
by total taxable income for 2006 ($480,000) = .9167
(C) Taxable income for first 8 months of 2007 ($880,000) divided
by total taxable income for 2007 ($960,000) = .9167
(D) Taxable income for first 8 months of 2008 ($1,760,000)
divided by total taxable income for 2008 ($1,920,000) = .9167
(E) Add this paragraph (e), Example (vi)(B), (C), and (D) and
divide by 3 = .9167
(F) Divide this paragraph (e), Example (vi)(A) by this paragraph
(e), Example (vi)(E) = $3,545,326
(G) Determine the tax on this paragraph (e), Example (vi)(F) =
$1,205,411
(H) Taxable income for first 9 months of 2006 ($450,000) divided
by total taxable income for 2006 ($480,000) = .9375
(I) Taxable income for first 9 months of 2007 ($900,000) divided
by total taxable income for 2007 ($960,000) = .9375
(J) Taxable income for first 9 months of 2008 ($1,800,000)
divided by total taxable income for 2008 ($1,920,000) = .9375
(K) Add this paragraph (e), Example (vi)(H), (I), and (J) and
divide by 3 = .9375
(L) Multiply this paragraph (e), Example (vi)(G) by this
paragraph (e), Example (vi)(K) = $1,130,073
(M) 100% of this paragraph (e), Example (vi)(L) = $1,130,073
(N) Amount of all prior required installments for 2009 =
$576,300
(O) Amount of adjusted seasonal installment for the third
installment payment (this paragraph (e), Example (vi)(M) less this
paragraph (e), Example (vi)(N)) = $553,773
(vii) To determine the amount of the fourth installment under
the rules of section 6655(e)(3) and paragraph (a) of this section,
the following computation is necessary:
(A) Taxable income for first 11 months of 2009 = $3,370,000
(B) Taxable income for first 11 months of 2006 ($470,000)
divided by total taxable income for 2006 ($480,000) = .9792
(C) Taxable income for first 11 months of 2007 ($940,000)
divided by total taxable income for 2007 ($960,000) = .9792
(D) Taxable income for first 11 months of 2008 ($1,880,000)
divided by total taxable income for 2008 ($1,920,000) = .9792
(E) Add this paragraph (e), Example (vii)(B), (C), and (D) and
divide by 3 = .9792
(F) Divide this paragraph (e), Example (vii)(A) by this
paragraph (e), Example (vii)(E) = $3,441,585
(G) Determine the tax on this paragraph (e), Example (vii)(F) =
$1,170,139
(H) Taxable income for first 12 months of 2006 ($480,000)
divided by total taxable income for 2006 ($480,000) = 1.0000
(I) Taxable income for first 12 months of 2007 ($960,000)
divided by total taxable income for 2007 ($960,000) = 1.0000
(J) Taxable income for first 12 months of 2008 ($1,920,000)
divided by total taxable income for 2008 ($1,920,000) = 1.0000
(K) Add this paragraph (e), Example (vii)(H), (I), and (J) and
divide by 3 = 1.0000
(L) Multiply this paragraph (e), Example (vii)(G) by this
paragraph (e), Example (vi)(K) = $1,170,139
(M) 100% of this paragraph (e), Example (vii)(L) = $1,170,139
(N) Amount of all prior required installments for 2009 =
$864,450
(O) Amount of adjusted seasonal installment for the fourth
installment payment (this paragraph (e), Example (vii)(M) less this
paragraph (e), Example (vii)(N)) = $305,689
(viii) Because the total amount of each required estimated tax
payment determined under section 6655(e)(3) and paragraph (a) of
this section exceeds the amount of each required estimated tax
payment determined under section 6655(d) and Sec. 1.6655-1(d) and
(e), the exception described in section 6655(e) and this section
does not apply and the addition to the tax with respect to the
underpayment for the June 15, 2009, and September 15, 2009,
installments will be imposed unless another exception (for example,
see section 6655(e)(2)) applies with respect to these installments.
(f) Effective/applicability date. This section applies to taxable
years beginning after September 6, 2007.
0
Par. 9. Section 1.6655-4 is added to read as follows:
Sec. 1.6655-4 Large corporations.
(a) Large corporation defined. The term large corporation means any
corporation (or a predecessor corporation) that had taxable income of
at least $1,000,000 for any taxable year during the testing period. For
purposes of this section, a predecessor corporation is the distributor
or transferor corporation in a transaction to which section 381
(relating to carryovers in certain corporate acquisitions) applies.
(b) Testing period. For purposes of paragraph (a) of this section,
the term testing period means the 3 taxable years immediately preceding
the taxable year
[[Page 44361]]
for which estimated tax is being determined (the current taxable year)
or, if less, the number of taxable years the taxpayer has been in
existence.
(c) Computation of taxable income during testing period--(1) Short
taxable year. In the case of a corporation (or predecessor corporation)
that had a short taxable year during the testing period, for purposes
of determining whether the $1,000,000 amount referred to in paragraph
(a) of this section is equaled or exceeded, the taxable income for the
short taxable year is computed by--
(i) Multiplying the taxable income for the short taxable year by
12; and
(ii) Dividing the resulting amount by the number of months in the
short taxable year.
(2) Computation of taxable income in taxable year when there occurs
a transaction to which section 381 applies. (i) For purposes of
determining whether an acquiring corporation had taxable income of
$1,000,000 or more for a taxable year in which a section 381
transaction occurs, the acquiring corporation's taxable income will be
the sum of--
(A) The taxable income of the acquiring corporation for its taxable
year; plus
(B) The taxable income (or loss) of the distributor or transferor
corporation for that portion of its taxable year corresponding to the
acquiring corporation's taxable year up to and including the date of
distribution or transfer (as defined in Sec. 1.381(b)-1(b)).
(ii) For purposes of determining whether a transferor or
distributor corporation had taxable income of $1,000,000 or more for a
taxable year in which a section 381 transaction occurs, the distributor
or transferor corporation's taxable income (or loss) is reduced by the
amount of taxable income (or loss) that is included in the acquiring
corporation's taxable income for the taxable year in which the
distribution or transfer (as defined in Sec. 1.381(b)-1(b)) occurs, as
described in paragraph (c)(2)(i)(B) of this section.
(d) Members of controlled group--(1) In general. For purposes of
applying paragraph (a) of this section, the taxable income of members
of a controlled group of corporations (as defined in section 1563(a))
must be aggregated for each year of the testing period. The provisions
of this section do not apply to a controlled group for any taxable year
in which the aggregate taxable income of the members of the controlled
group is less than $1,000,000.
(2) Aggregation. For purposes of paragraph (d)(1) of this section,
a taxable loss of any member of the controlled group for a taxable year
during the testing period is not taken into account.
(3) Allocation rule. If the aggregate taxable income of members of
a controlled group computed pursuant to paragraph (d)(1) of this
section exceeds $1,000,000 during the testing period, the $1,000,000
amount that is relevant for purposes of determining, under paragraph
(a)(1) of this section, whether a corporation is a large corporation is
divided equally among the component members of such group (including
component members excluded pursuant to paragraph (d)(2) of this
section) unless all of such component members consent to an
apportionment plan providing for an alternative allocation of such
amount. The procedure for making and filing this plan will be the same
as the procedure used for making and filing an apportionment plan under
section 1561. See section 1561 and the regulations.
(4) Controlled group members. (i) In the case of any corporation
that was a member of a controlled group of corporations at any time
during the testing period but is not a member of such group during the
taxable year involved, the taxable income of the former member for the
testing period is determined as if such corporation were not a member
of a group at any time during that period. With respect to the
controlled group, the taxable income of its former member will not be
taken into account in determining such group's taxable income for any
taxable year during the testing period for purposes of applying
paragraph (a)(1) of this section.
(ii) For purposes of paragraph (d)(4)(i) of this section, the
determination of whether a corporation is a member of a controlled
group during the testing period is based on whether the corporation was
a member of the controlled group on the last day of the month preceding
the due date of the required installment.
(e) Effect on a corporation's taxable income of items that may be
carried back or carried over from any other taxable year. In
determining whether a corporation (or predecessor corporation) is a
large corporation for its current taxable year, items that could offset
taxable income during a taxable year included in the testing period
(for example, those described in sections 172 and 1212) are not to be
taken into account and the taxable income of a corporation for any
taxable year during the testing period is determined without regard to
items carried back or carried over from any other taxable year.
(f) Consolidated returns. [Reserved].
(g) Example. The provisions of this section may be illustrated by
the following example:
Example. Y Corporation and Z Corporation are calendar year
taxpayers. In 2008, Z acquires all of the assets of Y in a
transaction to which section 381 applies. Z's taxable income for
both 2006 and 2007 was less than $1,000,000. Y's taxable income for
2008 is determined under paragraph (c)(2) of this section to be
$300,000 for that portion of Y's taxable year corresponding to Z's
taxable year up to and including the date of transfer. Z's taxable
income for 2008 is $800,000. Under the provisions of paragraph
(c)(2) of this section, Z's 2008 taxable income for purposes of
determining whether it is a large corporation for taxable year 2009
is $1,100,000 ($800,000 + $300,000). Thus, Z is a large corporation
for the 2009 taxable year. In addition, if Z's 2008 taxable income,
as determined under paragraph (c)(2) of this section, had been less
than $1,000,000 but Y's taxable income in 2006 or 2007 had been
$1,000,000 or more, Z would be a large corporation for taxable year
2009 because Y is a predecessor corporation.
(h) Effective/applicability date. This section applies to taxable
years beginning after September 6, 2007.
Sec. 1.6655-7 [Removed].
0
Par. 10. Section 1.6655-7 is removed.
Sec. 1.6655-5 [Redesignated as Sec. 1.6655-7].
0
Par. 11. Section 1.6655-5 is redesignated as Sec. 1.6655-7.
0
Par. 12. Sections 1.6655-5 and 1.6655-6 are added to read as follows:
Sec. 1.6655-5 Short taxable year.
(a) In general. Except as otherwise provided in this section, the
provisions of section 6655 and these regulations are applicable in the
case of a short taxable year (including an initial taxable year) for
which a payment of estimated tax is required to be made.
(b) Exception to payment of estimated tax. In the case of a short
taxable year, no payment of estimated tax is required if--
(1) The short taxable year is a period of less than 4 full calendar
months; or
(2) The tax shown on the return for such taxable year (or, if no
return is filed, the tax) is less than $500.
(c) Installment due dates--(1) In general--(i) Taxable year of at
least four months but less than twelve months. Except as otherwise
provided, in the case of a short taxable year, if such year results in
a taxable year of four or more full calendar months but less than
twelve full calendar months, the due dates prescribed in Sec. 1.6655-
1(f)(2) apply.
(ii) Exceptions. (A) If the date determined under paragraph
(c)(1)(i) of this section for the first required
[[Page 44362]]
installment due during the taxpayer's short taxable year is earlier
than the 15th day of the fourth month of the taxpayer's short taxable
year, the taxpayer's first required installment is due on the first due
date otherwise determined under paragraph (c)(1)(i) of this section
that is on or after the 15th day of the fourth month of the short
taxable year.
(B) A taxpayer with an initial short taxable year may make
estimated tax payments as though it were a calendar year taxpayer until
it files its tax return for its initial taxable year and will not be
subject to an addition to tax under section 6655 for making estimated
tax payments as though it were a calendar year taxpayer for the period
beginning with its initial short taxable year to the time it files its
tax return for its initial short taxable year if, when filing its tax
return for its initial short taxable year, the taxpayer chooses to be a
fiscal year taxpayer.
(2) Early termination of taxable year--(i) In general. Except as
provided in paragraph (c)(2)(ii) of this section, if a taxable year
ends early (for example, as a result of an acquisition or a change in
taxable year), the due date for the final required installment is the
date that would have been the due date of the next required installment
if the event that gave rise to the short taxable year had not occurred.
(ii) Exception. If the date determined under paragraph (c)(2)(i) of
this section is within thirty days of the last day of the short taxable
year, the due date for the final required installment is the fifteenth
day of the second month following the month that includes the last day
of the short taxable year.
(d) Amount due for required installment--(1) In general. The amount
due for any required installment determined under section
6655(d)(1)(B)(i) for a short taxable year is 100% of the required
annual payment for the short taxable year divided by the number of
required installments due (as determined under this section) for the
short taxable year.
(2) Tax shown on the return for the preceding taxable year. If the
current taxable year is a short taxable year, the amount due for any
required installment determined under section 6655(d)(1)(B)(ii) is
determined in the following manner--
(i) Take 100% of the tax shown on the return of the corporation for
the preceding taxable year;
(ii) Multiply such amount by the number of full calendar months in
the current short taxable year and divide by 12; and
(iii) Divide the amount determined under paragraph (d)(2)(ii) of
this section by the number of required installments due (as determined
under this section) for the current short taxable year.
(3) Applicable percentage. In the case of any required installment
determined under section 6655(e), the applicable percentage under
section 6655(e)(2)(B)(ii) is--
(i) 25%, 50%, 75%, and 100% for the first, second, third, and
fourth (last) required installments, respectively, if the taxpayer will
have four required installments due for the short taxable year;
(ii) 33.33%, 66.67%, and 100% for the first, second, and third
(last) required installments, respectively, if the taxpayer will have
three required installments due for the short taxable year;
(iii) 50% and 100% for the first and second (last) required
installments, respectively, if the taxpayer will have two required
installments due for the short taxable year; or
(iv) 100% for the first (and last) required installment if the
taxpayer will have one required installment for the short taxable year.
(4) Applicable percentage for installment period in which taxpayer
does not reasonably expect that the taxable year will be an early
termination year. In the case of any required installment determined
under section 6655(e) in which the taxpayer does not reasonably expect
that the taxable year will be an early termination year, the applicable
percentage under section 6655(e)(2)(B)(ii) is the applicable percentage
provided by paragraph (d)(3)(i) of this section with the remaining
balance of the estimated tax payment for the year due with the final
installment.
(e) Examples. The following examples illustrate the rules of this
section:
Example 1. Short year of less than 4 months. Corporation A is a
calendar year taxpayer that was acquired by corporation B, a member
of a consolidated group (as defined in Sec. 1.1502-1(h)) on April
16, 2009, resulting in A having a short taxable year from January 1,
2009, through April 16, 2009. Because A has a taxable year of less
than four full calendar months, no estimated tax payments are
required by A for the short taxable year.
Example 2. Initial short year with four required installments.
Corporation B began business on January 9, 2009, and adopted a
calendar year as its taxable year. B computes its required
installments based on 100 percent of the tax shown on the return for
the taxable year in accordance with section 6655(d)(1)(B)(i).
Pursuant to Sec. 1.6655-1(f)(2)(i), the due dates of B's required
installments for B's initial taxable year from January 9, 2009,
through December 31, 2009, are April 15, 2009, June 15, 2009,
September 15, 2009, and December 15, 2009. Pursuant to paragraph
(d)(1) of this section, the amount due with each required
installment is 25% of the required annual payment for B's first
required installment, 50% of the required annual payment for B's
second required installment, 75% of the required annual payment for
B's third required installment, and 100% of the required annual
payment for B's fourth required installment.
Example 3. Initial short year with three required installments.
Corporation C began business on February 12, 2009, and adopted a
calendar year as its taxable year. C computes its required
installments based on 100 percent of the tax shown on the return for
the taxable year in accordance with section 6655(d)(1)(B)(i).
Pursuant to Sec. 1.6655-1(f)(2)(i), the due dates of C's required
installments for C's initial taxable year from February 12, 2009,
through December 31, 2009, are April 15, 2009, June 15, 2009,
September 15, 2009, and December 15, 2009. However, in accordance
with paragraph (c)(1)(ii)(A) of this section, C's first required
installment is due June 15, 2009, because April 15, 2009, is earlier
than the fifteenth day of the fourth month of C's taxable year. As a
result, C's second required installment is due September 15, 2009,
and C's third (and last) installment is due December 15, 2009.
Pursuant to paragraph (d)(1) of this section, the amount due with
each required installment is 33.33% of the required annual payment
for C's first required installment, 66.67% of the required annual
payment for C's second required installment, and 100% of the
required annual payment for C's third (and last) required
installment.
Example 4. Initial short year with two required installments.
Same facts as Example 3 except C began business on April 10, 2009.
In accordance with paragraph (c)(1)(ii)(A) of this section, C's
first required installment is due September 15, 2009, because April
15, 2009, and June 15, 2009, are earlier than the fifteenth day of
the fourth month of C's taxable year. As a result, C's second (and
last) required installment is due December 15, 2009. Pursuant to
paragraph (d)(1) of this section, the amount due with each required
installment is 50% of the required annual payment for C's first
required installment, and 100% of the required annual payment for
C's second (and last) required installment.
Example 5. Initial short year for fiscal year taxpayer with two
required installments. Corporation D began business on February 12,
2009, and adopted a fiscal year ending October 31 as its taxable
year. D computes its required installments based on 100 percent of
the tax shown on the return for the taxable year in accordance with
section 6655(d)(1)(B)(i). Pursuant to Sec. 1.6655-1(f)(2)(ii), the
due dates of D's required installments for D's initial taxable year
from February 12, 2009, through October 31, 2009, are February 15,
2009, April 15, 2009, July 15, 2009, and October 15, 2009. However,
in accordance with paragraph (c)(1)(ii)(A) of this section, D's
first required installment is due July 15, 2009, because February
15, 2009, and April 15, 2009, are earlier than the fifteenth day of
the fourth month of D's
[[Page 44363]]
taxable year. As a result, D's second (and last) installment is due
October 15, 2009. Pursuant to paragraph (d)(1) of this section, the
amount due with each required installment is 50% of the required
annual payment for D's first required installment, and 100% of the
required annual payment for D's second (and last) required
installment.
Example 6. Initial short year for fiscal year taxpayer with one
required installment. Same facts as Example 5 except D corporation
began business on May 11, 2009. In accordance with paragraph
(c)(1)(ii)(A) of this section, D's first (and last) installment is
due October 15, 2009, because July 15, 2009, is earlier than the
fifteenth day of the fourth month of D's taxable year. Pursuant to
paragraph (d)(1) of this section, the amount due with D's required
installment is 100% of the required annual payment, computed as 100%
divided by the number of required installments due for the short
taxable year.
Example 7. Short termination year with three required
installments. Corporation E is a calendar year taxpayer that
computes its required installments based on 100 percent of the tax
shown on the return for the taxable year in accordance with section
6655(d)(1)(B)(i). E computes its 2009 required installments based on
a projected 2009 total tax liability of $600,000. On July 31, 2009,
E is acquired by corporation F, a member of a consolidated group (as
defined in Sec. 1.1502-1(h)), resulting in E having a short taxable
year from January 1, 2009, through July 31, 2009. E determines that
its total tax liability for the short period is $350,000. The due
dates for E's first and second required installments are April 15,
2009, and June 15, 2009, respectively. Pursuant to section
6655(d)(1)(A), E paid $150,000 with each required installment.
Pursuant to paragraph (c)(2) of this section, E's third (and last)
required installment of estimated tax is due on September 15, 2009,
and the percentage of the required annual payment due with such
installment is 100% pursuant to paragraph (d)(1) of this section.
Accordingly, E is required to pay $50,000 with its final required
installment on September 15, 2009 ($350,000 total tax liability for
the short taxable year less prior installment payments of $300,000).
Example 8. Unexpected short termination year with three required
installments using the annualization method. Same facts as Example 7
except that E uses the annualized income installment method under
section 6655(e)(2)(A)(i) to calculate all of its required
installment payments for its 2009 taxable year. In addition, E does
not reasonably expect until July 28, 2009, that it will have a short
termination year caused by E being acquired by F on July 31, 2009.
Had E known about its acquisition by F in the first quarter of 2009,
E's applicable percentages for computing the amount of its three
required installments would be 33.33%, 66.67%, and 100% for the
first, second, and third (last) required installments, respectively,
pursuant to paragraph (d)(3)(ii) of this section. However, because E
had an unexpected short termination year that E was not aware of
until after its second required installment payment, E's applicable
percentages for computing the amount of its three required
installment are 25%, 50%, and 100% for the first, second, and third
(last) required installments, respectively, pursuant to paragraph
(d)(4) of this section.
Example 9. Short termination year ending within 30 days of the
regular final installment due date. Same facts as Example 7 except
that E is acquired by F on August 31, 2009. Pursuant to paragraph
(c)(2)(ii) of this section, E's third (and last) required
installment of estimated tax is due on October 15, 2009, because
September 15, 2009, the date that would have been the due date of
E's next required installment if F's acquisition of E had not
occurred, is within thirty days of the last day of E's short taxable
year, and 100% of the required annual payment is due with such
installment.
Example 10. Short termination year ending within 30 days of the
regular final installment due date. Corporation F is a calendar year
taxpayer that computes its required installments based on 100
percent of the tax shown on the return for the taxable year in
accordance with section 6655(d)(1)(B)(i). F computes its 2009
estimated tax payments based on a projected 2009 total tax liability
of $900,000. On December 3, 2009, F is acquired by corporation G, a
member of a consolidated group (as defined in Sec. 1.1502-2(h)),
resulting in F having a short taxable year from January 1, 2009,
through December 3, 2009. F determined its total tax liability for
the short period to be $800,000. The due dates for F's first,
second, and third required installments are April 15, 2009, June 15,
2009, and September 15, 2009, respectively. Pursuant to section
6655(d)(1)(A), F paid $225,000 with each required installment.
Pursuant to paragraph (c)(2)(ii) of this section, F's fourth (and
last) required installment of estimated tax is due on February 15,
2010, and the percentage of the required annual payment due with
such installment is 100% pursuant to paragraph (d)(1) of this
section. However, because the due date for the fourth required
installment falls on a legal holiday, F's required installment
payment will be timely if paid on or before the first business day
following the actual due date of the fourth required installment,
that is, February 16, 2010. Accordingly, F is required to pay
$125,000 with its final required installment on February 16, 2010
($800,000 total tax liability for the short taxable year less prior
installment payments of $675,000).
Example 11. Short termination year using the tax shown on the
return for the preceding taxable year. Corporation G, a calendar
year taxpayer, reported a tax liability of $75,000 on its return for
the taxable year ending December 31, 2008, and is not a large
corporation as defined in section 6655(g). On July 31, 2009, G makes
a final distribution of its assets, in connection with a plan of
complete liquidation, resulting in a short taxable year from January
1, 2009, through July 31, 2009. To satisfy the requirements of the
exception described in section 6655(d)(1)(B)(ii) for payments
determined by reference to the tax shown on the return of the
corporation for the preceding taxable year, pursuant to paragraph
(d)(2) of this section, G must pay in a proportionate amount of its
2008 tax liability based on the number of months in the current
taxable year. Accordingly, G must pay $43,750 ($75,000 x \7/12\)
through payments of estimated tax payments in 2009, with $14,583 due
on April 15, 2009, June 15, 2009, and September 15, 2009.
Example 12. Short termination year using the tax shown on the
return for the preceding taxable year. Same facts as Example 11
except that G makes a final distribution of its assets, in
connection with a plan of complete liquidation, on October 1, 2009,
resulting in a short taxable year from January 1, 2009, through
October 1, 2009. To satisfy the requirements of the exception
described in section 6655(d)(1)(B)(ii), G must pay $56,250 ($75,000
x \9/12\) through payments of estimated tax in 2009, with $14,063
due on April 15, 2009, June 15, 2009, September 15, 2009, and
December 15, 2009, respectively.
Example 13. Short initial year with three required installments
resulting in an underpayment. (i) Corporation H began business on
February 17, 2009, and adopted a calendar year. H computes its
required installments based on 100 percent of the tax shown on the
return for the taxable year in accordance with section
6655(d)(1)(B)(i). H estimated at the beginning of its short taxable
year that its estimated tax liability for short taxable year
February 17, 2009, through December 31, 2009, would be $180,000. H
paid its first required installment of estimated tax of $60,000 on
June 15, 2009, its second required installment of estimated tax of
$60,000 on September 15, 2009, and its third (and last) required
installment of estimated tax of $60,000 on December 15, 2009
($180,000 total estimated tax liability for the short taxable year
less prior installment payments of $120,000). H reported a tax
liability of $240,000 on its return for the short period February
17, 2009, through December 31, 2009, with no credits against tax.
There was an underpayment in the amount of $20,000 on the first
installment date through September 15, 2009, $40,000 on the second
installment date through December 15, 2009, and $60,000 on the third
(and last) installment date through March 15, 2010, determined as
follows:
(A) Tax as defined in section 6655(d)(1)(B)(i) = $240,000
(B) 100% of this paragraph (e), Example 13 (A) = $240,000
(C) Amount of estimated tax required to be paid by the first
installment date (33.33% of $240,000) = $80,000
(D) Amount of estimated tax required to be paid by the second
installment date (66.67% of $240,000 less $80,000 (amount due with
first installment)) = $80,000
(E) Amount of estimated tax required to be paid by the third
installment date (100% of $240,000 less $160,000 (amount due with
first and second installment)) = $80,000
(F) Deduction of amount paid on or before the first installment
date = $60,000
(G) Amount of underpayment for the first installment date (this
paragraph (e), Example 13 (i)(C) minus this paragraph (e), Example
13 (i)(F)) = $20,000
(H) Deduction of amount available for the second installment
date ($60,000 second installment payment less this paragraph (e),
Example 13 (i)(G) applied towards the first installment
underpayment) = $40,000
[[Page 44364]]
(I) Amount of underpayment for the second installment date (this
paragraph (e), Example 13 (i)(D) minus this paragraph (e), Example
13 (i)(H)) = $40,000
(J) Deduction of amount available for the third installment date
($60,000 third installment payment less this paragraph (e), Example
13 (i)(I) applied towards the second installment underpayment) =
$20,000
(K) Amount of underpayment for the third installment date (this
paragraph (e), Example 1 (i)(E) minus this paragraph (e), Example 13
(i)(J)) = $60,000
(ii) [Reserved].
(f) 52 or 53 week taxable year. For purposes of this section a
taxable year of 52 or 53 weeks is deemed a period of 12 months in the
case of a corporation that computes its taxable income in accordance
with the election permitted by section 441(f).
(g) Use of annualized income or seasonal installment method--(1) In
general. Regardless of the annual accounting period used by a
corporation (for example, calendar year, fiscal year) the taxpayer may
use the method described in Sec. 1.6655-2 (annualized income
installment method) or Sec. 1.6655-3 (adjusted seasonal installment
method) to compute its required installments of estimated tax when the
current taxable year is a short taxable year.
(2) Computation of annualized income installment. To the extent a
short taxable year includes an annualization period elected by the
taxpayer, the taxpayer computes its annualized income installment by
determining the tax on the basis of such annualized income for the
annualization period, divided by 12, multiplied by the number of months
in the short taxable year, and multiplied by the applicable percentage
for the required installment.
(3) Annualization period for final required installment. For
purposes of determining the final required installment (as described in
paragraph (c)(2) of this section) for a short taxable year, annualized
taxable income is determined by placing on an annualized basis the
taxable income for the last complete annualization period that occurs
within the short taxable year.
(4) Examples. The provisions of paragraph (g) of this section may
be illustrated by the following examples:
Example 1. Corporation X began business on February 12, 2009,
and adopted a calendar year as its taxable year. X adopts an accrual
method of accounting and uses the annualized income installment
method under section 6655(e)(2)(A)(i) to calculate all of its
required installment payments for its 2009 taxable year. Pursuant to
Sec. 1.6655-1(f)(2)(i), the due dates of X's required installments
for X's initial taxable year from February 12, 2009, through
December 31, 2009, are April 15, 2009, June 15, 2009, September 15,
2009, and December 15, 2009. However, in accordance with paragraph
(c)(1)(ii)(A) of this section, X's first required installment is due
June 15, 2009. As a result, X's second required installment is due
September 15, 2009, and X's third (and last) required installment is
due December 15, 2009. The amount of X's first and second required
installments are each based on annualizing X's taxable income from
February 12, 2009, through April 30, 2009, (the first three months
of X's taxable year) and X's third (and last) required installment
is based on annualizing X's taxable income from February 12, 2009,
through July 31, 2009 (the first six months of X's taxable year).
Because X will have three required installments due for its short
taxable year, pursuant to paragraph (d)(3)(ii) of this section, the
applicable percentage is 33.33% for X's first required installment,
66.67% for X's second required installment, and 100% for X's third
(and last) required installment.
Example 2. (i) Y, a calendar year corporation, made a final
distribution of its assets, in connection with a plan of complete
liquidation, on August 3, 2009. Y filed a timely election to use the
alternative annualization periods described under section
6655(e)(2)(C)(i) and determined that its taxable income for the
first 2, 4 and 7 months of the taxable year was $25,000, $50,000 and
$140,000. The due dates for Y's required installments for its short
taxable year January 1, 2009, through August 3, 2009, are April 15,
2009, June 15, 2009, and September 15, 2009. Y made installment
payments of $10,000, $10,000, and $20,000, respectively, on April
15, 2009, June 15, 2009, and September 15, 2009. The taxable income
for each period is annualized as follows:
$25,000 x 12/2 = $150,000
$50,000 x 12/4 = $150,000
$140,000 x 12/7 = $240,000
(ii)(A) To determine whether the first required installment
equals or exceeds the amount that would have been required to have
been paid if the estimated tax were equal to one hundred percent of
the tax computed on the annualized income for the 2-month period
taking into account the number of months in the short taxable year,
the following computation is necessary:
(1) Annualized income for the 2 month period = $150,000
(2) Tax on this paragraph (g)(4), Example 2 (ii)(A)(1) = $41,750
(3) Tax determined under this paragraph (g)(4), Example 2
(ii)(A)(2) divided by 12 multiplied by 7 (the number of months in
the short taxable year) = $24,354
(4) 100% of this paragraph (g)(4), Example 2 (ii)(A)(3) =
$24,354
(5) 33.33% of this paragraph (g)(4), Example 2 (ii)(A)(4) = $
8,117
(B) Because the total amount of estimated tax that is timely
paid on or before the first installment date ($10,000) exceeds the
amount required to be paid on or before this date if the estimated
tax were one hundred percent of the tax determined by placing on an
annualized basis the taxable income for the first 2-month period
taking into account the number of months in the short taxable year,
the exception described in Sec. 1.6655-2(a) applies and no addition
to tax will be imposed for the installment due on April 15, 2009.
(iii)(A) To determine whether the required installments made on
or before June 15, 2009, equal or exceed the amount that would have
been required to have been paid if the estimated tax were equal to
one hundred percent of the tax computed on the annualized income for
the 4-month period taking into account the number of months in the
short taxable year, the following computation is necessary:
(1) Annualized income for the 4 month period = $150,000
(2) Tax on this paragraph (g)(4), Example 2 (iii)(A)(1) =
$41,750
(3) Tax determined under this paragraph (g)(4), Example 2
(iii)(A)(2) divided by 12 multiplied by 7 (the number of months in
the short taxable year) = $24,354
(4) 100% of this paragraph (g)(4), Example 2 (iii)(A)(3) =
$24,354
(5) 66.67% of this paragraph (g)(4), Example 2 (iii)(A)(4) less
$8,117 (amount due with first installment) = $8,120
(B) Because the total amount of estimated tax available to apply
towards the amount due for the second installment ($11,883 ($10,000
paid on the second installment date plus $1,883 overpayment of the
first installment)) exceeds the amount required to be paid on or
before this date if the estimated tax were one hundred percent of
the tax determined by placing on an annualized basis the taxable
income for the first 4-month period for the taxable year taking into
account the number of months in the short taxable year, the
exception described in Sec. 1.6655-2(a) applies and no addition to
tax will be imposed for the installment due on June 15, 2009.
(iv)(A) Pursuant to paragraph (c) and (d) of this section, the
final required installment is due by September 15, 2009, and the
applicable percentage due for the final required installment is
100%. To determine whether the installment payments made on or
before September 15, 2009, equal or exceed the amount that would
have been required to have been paid if the estimated tax were equal
to one hundred percent of the tax computed on the annualized income
for the 7-month period taking into account the number of months in
the short taxable year, the following computation is necessary:
(1) Annualized income for the 7 month period = $240,000
(2) Tax on this paragraph (g)(4), Example 2 (iv)(A)(1) = $76,850
(3) Tax determined under this paragraph (g)(4), Example 2
(iv)(A)(2) divided by 12 multiplied by 7 (the number of months in
the short taxable year) = $44,829
(4) 100% of this paragraph (g)(4), Example 2 (iv)(A)(3) =
$44,829
(5) 100% of this paragraph (g)(4), Example 2 (iv)(A)(4) less
$16,237 (amount due with first and second installment) = $28,592
(B) Because the total amount of estimated tax available to apply
towards the amount due for the final installment ($23,763 ($20,000
that is timely paid on the third installment date plus $3,763
overpayment of the second installment)) does not exceed the
[[Page 44365]]
amount required to be paid on or before this date if the estimated
tax were one hundred percent of the tax determined by placing on an
annualized basis the taxable income for the first 7-month period for
the taxable year taking into account the number of months in the
short taxable year, the exception described in Sec. 1.6655-2(a)
does not apply and an addition to tax will be imposed for the final
installment due on September 15, 2009, unless another exception (for
example, see section 6655(e)(3)) applies with respect to these
installments.
(h) Effective/applicability date. This section applies to taxable
years beginning after September 6, 2007.
Sec. 1.6655-6 Methods of accounting.
(a) In general. In computing any required installment, a
corporation must use the methods of accounting used in computing
taxable income for the taxable year for which estimated tax is being
determined (the current taxable year).
(b) Accounting method changes. A taxpayer that changes its method
of accounting with the consent of the Commissioner for the current
taxable year must use the new method of accounting (as of the beginning
of the taxable year) in the determination of taxable income for
annualization periods ending on or after the date the related section
481(a) adjustment is treated as arising. See Sec. 1.6655-
2(f)(3)(ii)(C) for the date a section 481(a) adjustment is treated as
arising. If the change in method of accounting does not result in a
section 481(a) adjustment, the taxpayer may choose to use the new
method of accounting (as of the beginning of the taxable year) in the
determination of taxable income for all annualization periods during
the year of change or only those annualization periods ending on or
after the date the Form 3115 ``Application for Change in Accounting
Method'' was filed with the national office of the Internal Revenue
Service. This paragraph (b) only applies to the extent a taxpayer
changes a method of accounting for the taxable year with the consent of
the Commissioner. Therefore, a taxpayer may be subject to a section
6655 addition to tax for an underpayment of estimated tax if an
underpayment results from a change in a method of accounting the
taxpayer anticipates making for the taxable year but for which the
consent of the Commissioner is not subsequently received.
(c) Examples. The following examples illustrate the rules of this
section:
Example 1. Accounting method used in computing taxable income
for the taxable year. Corporation ABC, a calendar year taxpayer,
uses an accrual method of accounting and the annualization method
under section 6655(e)(2)(A)(i) to calculate all of its 2008 required
installments. ABC receives advance payments each taxable year with
respect to agreements for the sale of goods properly includible in
ABC's inventory. The advance payments received by ABC qualify for
deferral under Sec. 1.451-5(c). Although ABC is eligible to defer
the advance payments in accordance with Sec. 1.451-5(c), ABC's
method of accounting with respect to the advance payments is to
include the advance payments in income when received and ABC does
not change its accounting method for advance payments for the 2008
taxable year. ABC must use its current method of recognizing advance
payments as income in the year received for purposes of computing
its 2008 required installments.
Example 2. Change of accounting method. Corporation ABC, a
calendar year taxpayer, uses an accrual method of accounting and the
annualization method under section 6655(e)(2)(A)(i) to calculate all
of its 2008 required installments. On June 15, 2008, ABC files a
Form 3115 requesting permission to change its method of accounting
for future litigation reserves for the tax year ending December 31,
2008. On February 15, 2009, ABC receives consent from the
Commissioner to make the change for the tax year ending December 31,
2008. The change results in a positive section 481(a) adjustment of
$100,000. Under the provisions of Sec. 1.6655-2(f)(3)(ii) ABC
chooses to treat the section 481(a) adjustment as arising on the
date the Form 3115 is filed with the national office of the Internal
Revenue Service. Therefore, ABC is required to use the new method of
accounting (as of the beginning of the year) in the determination of
taxable income for annualization periods ending on or after June 15,
2008.
(d) Effective/applicability date. This section applies to taxable
years beginning after September 6, 2007.
0
Par. 13. Newly-designated Sec. 1.6655-7 is revised to read as follows:
Sec. 1.6655-7 Addition to tax on account of excessive adjustment
under section 6425.
(a) Section 6655(h) imposes an addition to the tax under chapter 1
of the Internal Revenue Code in the case of any excessive amount (as
defined in paragraph (c) of this section) of an adjustment under
section 6425 that is made before the 15th day of the third month
following the close of a taxable year beginning after December 31,
1967. This addition to tax is imposed whether or not there was
reasonable cause for an excessive adjustment.
(b) If the amount of an adjustment under section 6425 is excessive,
there shall be added to the tax under chapter 1 of the Internal Revenue
Code for the taxable year an amount determined at the annual rate
referred to in the regulations under section 6621 upon the excessive
amount from the date on which the credit is allowed or refund paid to
the 15th day of the third month following the close of the taxable
year. A refund is paid on the date it is allowed under section 6407.
(c) The excessive amount is equal to the lesser of the amount of
the adjustment or the amount by which--
(1) The income tax liability (as defined in section 6425(c)) for
the taxable year, as shown on the return for the taxable year; exceeds
(2) The estimated income tax paid during the taxable year, reduced
by the amount of the adjustment.
(d) The computation of the addition to the tax imposed by section
6425 is made independent of, and does not affect the computation of,
any addition to the tax that a corporation may otherwise owe for an
underpayment of an installment of estimated tax.
(e) The following example illustrates the rules of this section:
Example. (i) Corporation X, a calendar year taxpayer, had an
underpayment as defined in section 6655(b), for its fourth
installment of estimated tax that was due on December 15, 2009, in
the amount of $10,000. On January 4, 2010, X filed an application
for adjustment of overpayment of estimated income tax for 2009 in
the amount of $20,000.
(ii) On February 16, 2010, the Internal Revenue Service, in
response to the application, refunded $20,000 to X. On March 15,
2010, X filed its 2009 tax return and made a payment in settlement
of its total tax liability. Assuming that the addition to tax is
computed under section 6621(a)(2) at a rate of 8% per annum for the
applicable periods of underpayment, under section 6655(a), X is
subject to an addition to tax in the amount of $197 (90/365 X
$10,000 X 8%) on account of X's December 15, 2009, underpayment.
Under section 6655(h), X is subject to an addition to tax in the
amount of $118 (27/365 X $20,000 X 8%) on account of X's excessive
adjustment under section 6425. In determining the amount of the
addition to tax under section 6655(a) for failure to pay estimated
income tax, the excessive adjustment under section 6425 is not taken
into account.
(f) An adjustment is generally to be treated as a reduction of
estimated income tax paid as of the date of the adjustment. However,
for purposes of Sec. Sec. 1.6655-1 through 1.6655-6, the 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.
(g) Effective/applicability date: This section applies to taxable
years beginning after September 6, 2007.
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 14. The authority citation for part 301 continues to read in part
as follows:
[[Page 44366]]
Authority: 26 U.S.C. 7805 * * *
Sec. 301.6154-1 [Removed].
0
Par. 15. Section 301.6154-1 is removed.
0
Par. 16. Section 301.6655-1 is revised to read as follows:
Sec. 301.6655-1 Failure by corporation to pay estimated income tax.
(a) For regulations under section 6655, see Sec. Sec. 1.6655-1
through 1.6655-7 of this chapter.
(b) Effective/applicability date: This section applies to taxable
years beginning after September 6, 2007.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 17. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101 [Amended].
0
Par. 18. Section 602.101, paragraph (b) is amended by removing the
entries for Sec. Sec. 1.6154-2, 1.6154-3, 1.6154-5, 1.6655-1, 1.6655-
2, 1.6655-3 and 1.6655-7.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Approved: July 17, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-14946 Filed 8-6-07; 8:45 am]
BILLING CODE 4830-01-P