Rev. Rul. 55-224

Advice has been requested whether the decision in the case of United States v. Claude E. Ridley, et al. , 120 Fed.Supp. 530, will be followed in determining the additions to the tax under section 294(d) of the Internal Revenue Code of 1939 in cases where no declarations of estimated tax are filed.

Section 294(d)(1)(A) of the Code provides, in part, that

In the case of a failure to make or file a declaration of estimated tax within the time prescribed * * * there shall be added to the tax 5 per centum of each installment due but unpaid, and in addition, with respect to each such installment due but unpaid, 1 per centum of the unpaid amount thereof for each month * * * during which such amounts remain unpaid. In no event shall the aggregate addition to the tax * * * exceed 10 per centum of the unpaid portion of such installment.

Section 294(d)(1)(B) of the Code provides, in part, that

* * * in the case of the failure to pay an installment of the estimated tax within the time prescribed * * * there shall be added to the tax 5 per centum of the unpaid amount of such installment, and in addition 1 per centum of such unpaid amount for each month * * * during which such amount remains unpaid. In no event shall the aggregate addition to the tax * * * exceed 10 per centum of the unpaid portion of such installment.

Section 294(d)(2) of the Code provides, in part that

If 80 per centum of the tax * * *, in the case of individuals * * *, exceeds the estimated tax * * *, there shall be added to the tax an amount equal to * * * 6 per centum of the amount by which such tax * * * exceeds the estimated tax * * *.

The taxpayer in the Ridley case had not filed a declaration of estimated tax and had not paid any installment of estimated tax. Among the penalties or additions to the tax asserted by the Commissioner were (1) 10 percent of the tax for failure to file a declaration of estimated tax as provided by section 294(d)(1)(A) of the Code and (2) 6 percent of the amount by which the tax exceeded the estimate (zero) for substantial underestimate of estimated tax as provided by section 294(d)(2) of the Code. The court held that the addition of 6 percent for substantial underestimate should not be added, stating that the greater addition to the tax imposed by section 294(d)(1)(A) for failure to file a declaration prohibited the assessment of the lesser addition to the tax for underestimating.

Section 39.294-1(a) of Regulations 118 states that section 294(d) provides for certain additions to the tax in the case of-

(1) Failure to file timely a declaration of estimated tax;

(2) Failure to pay within the time prescribed any installment of declared estimated tax; and

(3) Substantial underestimate of the estimated tax.

It has been the position of the Internal Revenue Service that where a declaration of estimated tax was not filed within the time prescribed and there is no showing of reasonable cause, the addition to the tax provided by section 294(d)(1)(A) is applicable. If in the same case a substantial underestimate of tax also occurs, the addition to the tax provided by section 294(d)(2) is also applicable. Section 39.294-1(b)(3)(i)(a) of Regulation 118 states that in the event of a failure to file the required declaration the amount of the estimated tax for the purposes of the addition to the tax imposed by section 294(d)(2) is zero.

This provision of the regulations has been upheld in several cases. For instance, in G.E. Fuller et ux. v. Commissioner , 20 T.C. 308, at page 316, the court states:

The failure of petitioners to file declarations of estimated tax within the time prescribed for each of these years necessarily resulted in a substantial understatement of estimated tax. We can not agree with petitioners' contention that because they filed no declaration of estimated tax under section 294(d)(1), they can not be held to have violated section 294(d)(2) for making a substantial underestimate of the estimated tax. The regulation provides that when a declaration of estimated tax is not filed, the amount of the estimated tax, for the purpose of the provisions of section 294(d)(2) shall be zero, and that is the basis used by respondent in computing the deficiency under this subsection. The petitioners attack the regulation as being void in that it distorted the will of Congress. The regulation is couched in the same language used by Congress in its Conference Report H.R. Report No. 510, 78th Cong.1st Sess., C.B. 1943, 1351, at page 1372 on legislation covering this subject and follows the procedure therein prescribed. It therefore appears that the regulation actually reflects, rather than distorts, the will of Congress, and we uphold its validity.

For other cases supporting this position, see Domenic DeFranco et ux. v. Commissioner , Tax Court Memorandum Opinion, entered December 19, 1950; J. Ray Cook v. Commissioner , Tax Court Memorandum Opinion, entered June 30, 1952; and J. D. Ledbetter v. Commissioner , Tax Court Memorandum Opinion, entered March 31, 1953.

Accordingly, in any case in which there has been a failure to file a declaration of estimated tax or to pay an installment of estimated tax declared and where there also has been a substantial underestimation of estimated tax, it is still the position of the Internal Revenue Service that both the addition to the tax provided by section 294(d)(1)(A) or (B) of the Code for failure to file a declaration or pay an installment of estimated tax, and the addition to the tax provided by section 294(d)(2) for substantial underestimation of estimated tax are applicable