Internal Revenue Service
Revenue Ruling
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smRev. Rul. 72-91
1972-1 C.B. 400
Sec. 6655
IRS Headnote
The termination of the investment credit by section 49 of the Code was a "change in rate" and such credit shown on a preceding year's tax return may not be considered in determining whether a taxpayer qualifies for exception from the addition to the tax for underpayment of estimated tax.
Full Text
Rev. Rul. 72-91
Advice has been requested whether, for the purpose of section 6655(d)(2) of the Internal Revenue Code of 1954, relating to an exception to the addition to the tax for underpayment of estimated tax by a corporation, the termination of the investment credit by section 49 of the Code was a change in tax rate within the meaning of section 1.6655-2(b)(2)(ii) of the Income Tax Regulations.
The taxpayer underpaid its estimated tax for the taxable year 1970. The taxpayer claimed that it qualified for relief from the addition to the tax for underpayment of estimated tax imposed by section 6655(a) of the Code under the exception provided by section 6655(d)(2) of the Code. The taxpayer's liability for the preceding taxable year was reduced by an investment credit allowed by section 38.
Section 6655(a) of the Code provides that in the case of any underpayment of estimated tax by a corporation, except as provided in section 6655(d), there shall be added to the tax for the taxable year an amount determined at the rate of 6 percent per annum upon the amount of underpayment for the period of underpayment.
Section 6655(d)(2) of the Code provides:
(d) Exception.--Notwithstanding the provisions of the preceding subsections, the addition to the tax with respect to any underpayment of any installment shall not be imposed if the total amount of all payments of estimated tax made on or before the last date prescribed for the payment of such installment equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax were whichever of the following is the lesser--
* * * * *
(2) 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.
* * * * *
Section 6655(e)(1) of the Code provides:
(e) Definition of Tax.--
(1) In General.--For purposes of subsections (b) and (d), the term "tax" means the excess of--
(A) the tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever is applicable, over
(B) the sum of--
(i) the credits against tax provided by part IV of subchapter A of chapter 1, * * *.
Section 1.6655-2(b)(2)(ii) of the Income Tax Regulations provides that the credits against the tax allowed by sections 32, 33, and 38 of the Code are such credits shown on the return for the preceding taxable year, except that if the amount of any such credit would be affected by any change in rates, the credits shall be determined by reference to the rates applicable to the current taxable year.
The regulations under section 6655 of the Code do not specifically refer to the effect of the termination of the investment credit by section 49 of the Code because section 49 was enacted after the regulations were promulgated. However, the regulations under section 6654(d)(4) of the Code, the counterpart of section 6655(d)(2), relating to individuals, deal with the treatment of the dividends received credit (repealed by Public Law 88-272, C.B. 1964-1 (Part 2), 6).
Section 1.6654-2(b) of the regulations provides:
(1) The term "tax" means the tax imposed by chapter 1 of the Code reduced by the credits against tax allowed by part IV, subchapter A, of such chapter, other than the credit against tax provided by section 31 (relating to tax withheld on wages), and without reduction for any payments of estimated tax.
(2) The credits against tax allowed by part IV, subchapter A, chapter 1 of the Code, are--
* * * * *
(ii) In the case of the exception described in paragraph (a)(2) of this section, the credits shown on the return for the preceding taxable year, except that if the amount of any such credit would be affected by any change in rates or status with respect to personal exemptions, the credits shall be determined by reference to the rates and status applicable to the current taxable year * * *.
A change in rate may be either a change in the rate of tax, such as a change in the rate of the tax imposed by section 1, or a change in any percentage affecting the computation of the credit, such as a change in the rate of withholding under chapter 3 of the Code or a change in the percentage of dividends received specified in section 34(a) [emphasis added] (for dividends received on or before December 31, 1964). The application of the preceding sentence may be illustrated by the following examples:
Example (1). Assume the percentage of dividends received which, subject to the limitations in section 34(b), is allowed as a credit against the tax under section 34(a) is changed from 4 to 5 percent. In determining the applicability of the exception described in paragraph (a)(2) of this section to an underpayment of estimated tax for the year in which such percentage changes, the 5 percent rate is applicable in determining the amount of the credit under section 34.
* * * * *
The investment credit provided by section 38 of the Code was, like the dividends received credit provided by section 34(a), a credit allowed by part IV, subchapter A, chapter 1 of the Code. The termination of a credit is essentially a reduction to zero in the rate of credit. A change in the rate of the dividends received credit is considered a change in rate within the meaning of section 1.6654-2(b)(2)(ii) of the regulations. Similarly, the termination of the investment credit is considered a change in rate within the meaning of section 1.6655-2(b)(2)(ii) of the regulations.
Accordingly, it is held that the termination of the investment credit by section 49 of the Code was a change in rate within the meaning of section 1.6655-2(b)(2)(ii). Thus the taxpayer may not take into consideration the investment credit shown on its preceding year's tax return for the purpose of determining whether it qualifies for relief from the addition to the tax for underpayment of estimated tax under the exception provided by section 6655(d)(2) of the Code.
The rationale of this Revenue Ruling also applies to the exception to the addition to the tax for underpayment of estimated tax by an individual provided by section 6654(d)(4) of the Code.