Rev. Rul. 86-58

1986-1 C.B. 365, 1986-16 I.R.B. 7.

PENALTIES; UNDERPAYMENT; AMENDED RETURN; CORPORATIONS

Published: April 21, 1986

Section 6655.-Failure by Corporation to Pay Estimated Income Tax, 26 CFR

1.6655-1: Addition to the tax in the case of a corporation

  Penalties; underpayment; amended return; corporations. In applying the exception to the addition to tax for underpayment of estimated tax, it is the tax shown on the original tax return and not the tax shown on an amended return that is the basis for the computation. Rev. Rul. 64-138 revoked.

ISSUE

  For purposes of determining any underpayment of estimated tax by a corporation under section 6655 of the Internal Revenue code, does the term 'tax shown on the return for the taxable year' in section 6655(b) mean only the tax shown on the original tax return filed by the taxpayer or does the term include the tax shown on an amended return filed after the due date of the return, including any extensions?

FACTS

  Situation 1

  X, a corporation, files its federal income tax return on a calendar year basis. X made estimated tax payments of $6,000 during 1984. On March 15, 1985, X filed its 1984 tax return showing a tax liability of $20,000 and paid the balance of $14,000. Subsequently, X discovered an error and on April 30, 1985, filed an amended return for 1984 showing a reduced tax liability of $8,000.

  Situation 2

  The facts are the same as in Situation 1. In addition, on April 15, 1985 X made its first estimated tax payment for 1985. The amount of this payment was

$5,000, which is one fourth of what then appeared to be X's 1984 tax liability of $20,000. X paid a total of $3,000 as its other 1985 estimated tax payments due in 1985. As a result, the total paid was equal to the reduced tax liability shown on X's 1984 amended return filed April 30, 1985. On March 15, 1986, X filed its 1985 return showing a tax liability of $25,000.

LAW AND ANALYSIS

  Under section 6154(a) of the Code, every corporation subject to taxation under section 11 or 1201(a), or subchapter L of chapter 1, is required to make payments of estimated tax if it reasonably expects to have an estimated tax liability for the taxable year of $40 or more.

  A corporation is subject to an addition to tax under section 6655(a) of the Code on the amount of the underpayment of any estimated tax for the period of the underpayment if the corporation fails to make an estimated tax payment when due. The addition to tax will not be imposed, however, if the corporation comes within an exception under section 6655(d).

  Section 6655(b) of the Code provides that the amount of the underpayment is the excess of (1) the amount of the installment that would be required to be paid if the estimated tax were equal to 90 percent of the tax shown on the return for the taxable year or, if no return for the taxable year or, if no return was filed, 90 percent (80 percent for taxable years beginning before January 1, 1983) of the tax for the year, over (2) the amount, if any, of the installment paid on or before the last date prescribed for payment.

  Under section 6655(d) of the Code, the addition to tax with respect to any underpayment of any installment will not be imposed if the total amount of all payments of estimated tax made on or before the last date prescribed for payment of the installment equals or exceeds the amount that would have been required to be paid on or before the date if the estimated tax were based on the lesser of (1) the tax shown on the return of the corporation for the preceding year if a return showing a tax liability was filed and was a taxable year of 12 months, (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, and (3) an amount equal to 90 percent of the tax for the taxable year computed by placing the taxable income for certain shorter period on an analyzed basis by multiplying each period's taxable income by 12 and dividing the resulting amount by the number of months in the period.

  In Evans Cooperage Co., Inc. v. United States, 712 F.2d 199 (5th Cir. 1983), through an error a corporation underpaid its estimated tax for 1977, which was

based upon the tax shown on the corporation's original 1976 return. In 1979, the corporation amended its 1976 and 1977 tax returns to reflect less tax liability in each year, and argued that on the basis of the tax liability shown on its amended returns, its payment of estimated tax for 1977 was within the

'safe harbor' minimum payment provisions of section 6655(d)(1). The appellate court affirmed the judgment of the district court, that dismissed the taxpayer's suit. The appellate opinion stated that '(t)he taxpayer's argument that the ultimate tax liability, rather than the amount reflected on the return, should trigger (or remove) the protection of the safe harbor provision is in the face of express statutory language to the contrary.' Evans Cooperage Co., 712 F.2d at 203.

  Citing Rev. Rul. 78-256, 1978-1 C.B. 438, the court noted that as a matter of administrative discretion the Commissioner has ruled that an amended return filed on or before the due date of the return for the taxable year, including extensions, is the return for purposes of section 6655(b) of the Code. Similarly, Rev. Rul. 83-36, 1983-1 C.B. 358, holds that an amended return must be filed by the due date of the return for the taxable year for purposes of

computing the penalty for underpayment of estimated tax under section 6654(b).

HOLDING

  In determining any underpayment of estimated tax by a corporation under section 6655 of the Code, the 'tax shown on the return for the taxable year' is the tax shown on the corporation's original tax return for the taxable year, unless an amended return is filed on or before the due date of the original return, including extensions. Thus, in Situation 1, for purposes of determining the addition to tax on X's 1984 tax return for underpayment of estimated tax, the underpayment is determined by reference to X's original tax return showing a tax liability of $20,000.

  this holding is equally applicable to section 6655(d) of the Code. Therefore, in Situation 2, if X chooses to rely on section 6655(d) of the Code. Therefore, in Situation 2, if X chooses to rely on section 6655(d)(1) to avoid the addition to tax for an underpayment of estimated tax payments for 1985, X must make payments of at least $20,000.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 64-138, 1964-1 (Part 1) C.B. 509, held that the addition to tax on account of an underpayment of estimated tax by a corporation was computed on the corrected tax shown on an amended return. The ruling reasoned that the addition to tax for underpayment of estimated tax by a corporation is based on the corporation's tax liability for the year, as adjusted in the case there considered to take into account the investment credit claimed on an amended return. The amended return reflected a lowered tax liability because of the retroactive application of the investment credit allowed by section 38 of the Code for investment in certain depreciable property. Section 38, added to the Code by the Revenue Act of 1962, 1962-3 C.B. 111, was made retroactive with respect to taxable years ending after December 31, 1961. Because that reasoning is inconsistent with the reasoning set forth above, Rev. Rul. 64-138 is revoked.

Rev. Rul. 86-58, 1986-1 C.B. 365, 1986-16 I.R.B. 7.