Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 79-69

1979-1 C.B. 134

Section 312

IRS Headnote

Payment of estimated taxes; effect on earnings and profits. A corporation filing its federal income tax return on a calendar year basis and using the cash receipts and disbursements method of accounting must apply its estimated tax payments required under section 6154 of the Code to reduce its earnings and profits in the year paid irrespective of the ultimate federal income tax liability. If a refund is received in the following year, the corporation must increase its earnings and profits by the amount of the refund for the year in which it is received, and, if additional tax is paid in the following year, the corporation must reduce its earnings and profits by the additional amount.

Full Text

Rev. Rul. 79-69

ISSUE

Do estimated tax payments required under section 6154 of the Internal Revenue Code of 1954 reduce earnings and profits of a corporation using the cash receipts and disbursements method of accounting in the year of payment irrespective of the ultimate federal income tax liability reported on the return in each of the two situations described below?

FACTS

Corporations X and Y, unrelated domestic corporations, file their federal income tax returns on a calendar year basis and use the cash receipts and disbursements method of accounting. For the taxable year ended December 31, 1975, X and Y each made reasonable estimated tax payments of 500x dollars on March 15, June 15, September 15, and December 15, 1975, for a total of 2,000x dollars each.

Situation (1). On March 1, 1976, X filed its 1975 federal income tax return showing a total tax liability of 3,500x dollars. At the time of filing, X paid the additional 1,500x dollars, after reducing the liability shown on its return by its estimated tax payments.

Situation (2). On February 2, 1976, Y filed its 1975 federal income tax return showing a total tax liability of 1,500x dollars. Y subsequently received a refund of 500x dollars under normal refund procedures.

LAW AND ANALYSIS

Section 6154 of the Code provides, in part, that every corporation subject to taxation under section 11 or 1201(a) shall make payments of estimated tax during its taxable year if its estimated tax for such taxable year can reasonably be expected to be 40 dollars or more.

Section 6315 of the Code and the Income Tax Regulations thereunder provide that payment of the estimated income tax, or any installment thereof, shall be considered payment on account of the income taxes imposed by subtitle A for the taxable year for which the estimated payment is made.

Section 1.312-6(a) of the regulations provide that, in computing earnings and profits, due consideration must be given to the facts, and while mere bookkeeping entries to surplus will not be conclusive, the amount of earnings and profits will be dependent upon the method of accounting properly employed in computing taxable income.

A corporation on the cash receipts and disbursements methods of accounting must compute earnings and profits on the cash basis. Thus, Rev. Rul. 70-609, 1970-2 C.B. 78, provides that federal income taxes reduce earnings and profits of a cash-basis corporation in the year of payment.

Rev. Rul. 71-190, 1971-1 C.B. 70, provides that mandatory estimated payments of state income taxes are deductible for federal income tax purposes by a cash-basis corporation in the year of payment. Similarly, mandatory estimated payments of federal income taxes should reduce earnings and profits of a cash-basis corporation in the year of payment.

HOLDINGS

Situation (1)

In computing earnings and profits, X is to reduce the amount of its earnings and profits for 1975 by the 2,000x dollars paid as estimated tax for that year. For 1976, X is to reduce its earnings and profits by the additional 1,500x dollars paid at the time of filing the 1975 tax return.

Situation (2)

In computing earnings and profits, Y is to reduce the amount of its earnings and profits for 1975 by the 2,000x dollars paid as estimated tax for that year. For 1976, Y is to increase its earnings and profits by the estimated tax payments in excess of the liability computed on its 1975 federal income tax return (2,000x dollars minus 1,500x dollars) or 500x dollars, the amount refunded to Y in 1976.