Rev. Rul. 55-348

The purpose of this Revenue Ruling is to provide answers to some of the question which have been raised regarding the filing of declarations and payment of estimated income tax by individuals and to clarify the instructions pertaining to the `Declaration of Estimated Tax,' Form 1040-ES, for the year 1955.

Attention is called to the statement made in paragraph 9 of the instructions on Form 1040-ES relative to the nonimposition of the charge for underpayment where the amount paid on or before the installment date equals 90 percent of the tax computed on the actual taxable income received for the months in the taxable year ending before the month in which the installment date falls. It is possible to construe the language used in this paragraph to mean that, in determining whether the charge should be imposed, 90 percent of the tax so computed is to be treated as if it were the entire estimated tax but such interpretation is not correct. The correct interpretation is made clear in paragraph 4 of the answer to question 2.

New rules are provided by the Internal Revenue Code of 1954 which will govern whether you are required to file a declaration of estimated tax, Form 1040-ES, for 1955, on or before April 15, 1955, or on or before a subsequent installment date. Such rules are contained in the instructions on Form 1040-ES. Problems affecting certain classes of taxpayers, as well as problems which may be encountered by taxpayers generally, are discussed in the following questions and answers:

PROBLEMS AFFECTING TAXPAYERS GENERALLY

1. Q. What factors should I take into account in computing the amount of estimated tax to be shown on my declaration?

A. You may compute your estimated tax by taking into account the amount of gross income which you can reasonably expect to report for 1955, and the amount of your estimated allowable deductions and credits for that year. You should determine these estimates of income, deductions, and credits upon the basis of facts and circumstances existing at the time prescribed for filing your declaration. You are also permitted to use any of the methods of computation described in the answer to question 2. These methods take into account your tax liability for last year, or your income and deductions for last year, or the amount of your taxable income received in the current year during the months preceding the month in which the installment date falls.

2. Q. Is it true that I will not be subject to any charge for underpayment of my estimated tax for 1955 if I file a declaration showing as my estimated tax for that year the amount of my tax for 1954, and make proper installment payments on that basis?

A. Yes. No charge for underpayment of an installment is made if the total amount of all payments made on or before the last date prescribed for the payment of the installment equals or exceeds any of the amounts under the following four methods:

(1) The amount which you would have been required to pay on or before the installment date if your estimated tax was the tax shown on your return for 1954 (if your return for 1954 showed a liability for tax and covered a taxable year of 12 months);

(2) The amount which you would have been required to pay on or before the installment date if your estimated tax was an amount determined by conputing a tax on the basis of the facts shown on your return for 1954 and the law applicable to that year but using in the computation the rates applicable for 1955 and the personal exemptions to which you are entitled for 1955 in lieu of the rates and exemptions applicable for 1954;

(3) The amount which you would have been required to pay on or before the installment date if your estimated tax was an amount determined by computing 70 percent (66 2/3 percent of the case of farmers) of a tax computed on your taxable income for the months in 1955 preceding the month in which the installment date falls. For the purpose of this computation your taxable income is placed on an annual basis by using the method described in the answer to question 3.

(4) The amount determined by computing 90 percent of a tax, at the rates applicable to 1955, on the basis of your actual taxable income for the months in 1955 preceding the month in which the installment date falls as if such months constituted a taxable year. (This method requires payment on or before the installment date of 90 percent of such tax.)

If you use either the first or second method as a basis for determining and paying your estimated tax, you may not adjust these amounts by eliminating the portion of the tax which is attributable to capital gains or other non-recurring items of income received in 1954.

If you use either the third or fourth method as a basis for determining and paying your estimated tax, it will usually be necessary for you to make amended declarations and adjust the amount of your installment payments at subsequent installment dates since the amount of your taxable income to be used in computations under these methods will usually charge between installment dates.

3. Q. How do I place my taxable income for months preceding the month in which the installment date falls on an annual basis for the purpose of making the computation required by the third method discussed in the answer to question 2?

A. The following method should be used in the case of a taxable year of 12 months:

(1) Multiply by 12 the amount of your taxable income computed without deduction of personal exemptions for the months in your taxable year which precede the month in which the installment date falls:

(2) Divide the resulting amount by the number of months in your taxable year which precede the month in which the installment date falls; and

(3) Subtract from such amount your allowable deductions for personal exemptions (determined as of the installment date).

4. O. My income is derived from a business which I operate and in which the production, purchase, or sale of merchandise is an income-producing factor. I use the accrual method of accounting for reporting income. If I use the fourth method discussed in the answer to question 2 for the purpose of determining my estimated tax, must I take inventories and determine the amount of accrued items so that actual taxable income for the months preceding the month in which the installment date falls can be determined?

A. If you use this method, it will be necessary for you to establish the amounts of your inventories and accruals at the end of the month preceding the month in which the installment date falls.

5. Q. I own and operate a retail hardware store and employ 10 persons. It is my custom to distribute year-end bonuses to my employees but the size of the bonuses is not determined until the last month of the taxable year. I intend to use the fourth method discussed in the answer to question 2 for determining and paying my estimated tax. May I take into account as a deduction in determining my actual taxable income for the months which precede the month in which the April 15 installment date falls a proportionate part of the year-end bonus to employees?

A. No. Deductions are not allowable until paid or accrued, depending on the method of accounting used by the taxpayer.

6. Q. I now discover that the estimated tax shown on my original declaration, filed April 15, and the payments made on April, June, and September 15 are insufficient in amount to prevent existence of underpayments as of such installment dates. None of the relief provisions discussed in the answer to question 2 will apply to relieve me from the imposition of the addition to the tax for such underpayments. Will the filing of an amended declaration, or a final return in lieu of such amended declaration, on January 15, together with payment of any tax shown to be due on such amended declaration or final return, relieve me of such imposition?

A. No. However, payment on January 15 will terminate the period of time for which the addition to the tax is to be computed.

7. Q. I intend to use the forth method discussed in the answer to question 2 in computing my estimated tax for 1955 to be show on my Form 1040-ES to be filed on April 15. If I file an amended Form 1040-ES on or before any of the subsequent installment dates must I use the same method in computing the estimated tax to be shown on such amended declaration?

A. No. The fact that you originally used one of the available methods in computing your estimated tax does not prevent you from later using any of the other methods. 8. Q. How is the amount of an underpayment determined?

A. The amount of any underpayment of any installment is always determined by subtracting (i) the amount actually paid in respect of such installment from (ii) the amount required to be paid on or before the installment date. The amount of the underpayment is never determined by subtracting the amount actually paid from the amount computed under any of the methods discussed in the answer to question 2 . However, no penalty will be imposed if any of these methods applies. The amount required to be paid is determined by dividing 70 percent (66- 2/3 percent in the case of farmers) of the tax which is shown on your Form 1040 return for 1955 by the number of installment dates in your taxable year. The amount actually paid in respect of the installment includes amounts paid on prior installments in excess of the amounts required to be paid by such prior installment dates.

To illustrate the foregoing, assume that a taxpayer (other than a farmer) who reports tax liability of $40,000 on his final return, has paid a total of $20,000 estimated tax in equal installments of $5,000 during the year. There is an underpayment of estimated tax as of each installment date computed as follows:

 Tax liability.....................................  $40,000

 Installment                 Required                Under-

A. Yes. The total amount of the credit for tax withheld at source on wages is considered to be a payment of estimated tax and, in general, an equal part of such amount is considered to have been paid on each installment date. For example, if $1,000 tax has been withheld from the wages of a taxpayer who makes his return on the basis of the calendar year, one-fourth of such amount or $250 is considered to have been paid in respect of each installment. However, if the taxpayer can establish dates and amounts of the actual withholding, the actual amount withheld during each installment period will be considered as a payment in respect of that installment. In the above example, if the taxpayer can establish that $800 of the $1,000 was withheld during the first three months of the taxable year, such such $800 will be considered as a payment on the installment due April 15.

10. Q. How is the addition to the tax computed in the case of an underpayment?

A. The amount of addition to the tax is computed at the rate of six precent a year on the amount of the underpayment for the period from the installment date when the underpayment arises until the date paid or the date prescribed for filing the Form 1040 return for the taxable year, whichever date is the earlier.

11. Q. If I should move from the district in which I filed my original declaration on Form 1040-ES, where should I make installment payments and file amendments to my original declaration?

A. If you move from the district in which you filed your original declaration, you should continue to make installment payments of file amendments of this declaration with the District Director with whom you filed your original declaration. Provision is made for you to show on your Form 1040 return the District Director's office to which you paid the amounts claimed as a credit on account of estimated tax paid.

PROBLEMS AFFECTING MEMBERS OF PARTNERSHIPS

12. Q. I am a member of a partnership in which profits and losses are shared according to a ratio prescribed in the partnership agreement. Both the partnership return and my return are made on the basis of a calendar year. What amount, if any, of the income of the partnership should I take into account for the purpose of filing a declaration of estimated tax on April 15?

A. You should take into account your distributive share of the partnership's estimated income for 1955. As in the case of all other individual taxpayers, you are entitled to use any method of computation described in the answer to question 2. However, if you use the third or fourth method described in the answer to that question, you must take into account in determining the amount of your taxable income for the months preceding the month in which the installment date falls your distributive share of the partnership income for such months, whether or not actually distributed to you in those months.

13. Q. Assume the same set of circumstances as in the preceding question, except that I receive guaranteed payments under the preceding ship agreement. What then do I take into account for the purpose of determining the amount of my estimated tax?

A. Guaranteed payments, to the extent determined without regard to the income of the partnership, are included in gross income of the partner. Accordingly, you should take into account the total amount of guaranteed payments to which you are entitled plus any other amount of the partnership earnings to which you are also entitled.

14. Q. I am a partner in a law firm and I receive a guaranteed payment each month determined without regard to the income of the partnership. Both the partnership return and my return are made on a calendar-year basis. The partnership agreement provides that any earnings in excess of guaranteed payments shall be allocated to the various partners during the last month of the year. It further provides that the allocation is to be made by the senior partner after taking into consideration each partner's work during the year. How can I use the fourth method discussed in the answer to question 2 to determine the amount of my estimated tax to be declared and paid by April 15?

A. In order for any taxpayer to use this method with certainty, he must establish his actual taxable income for the months in his taxable year preceding the month in which the installment date falls. Your actual taxable income will include both the amount of guaranteed payments and your distribute share of and your distributive share of months that precede the month in which the installment date falls, whether or not your share was catually distributed to you in those months. If, prior to the installment date, the partnership in good faith furnishes the partners with information enabling them to determine their distributive shares of partnership earnings for such months, you will be able to use the fourth method with certainty by taking into account your distributive share so determined of the actual partnership earnings for such months and all your other income for those months, even though the partnership may later reconsider and fix a different percentage allocation of partnership earnings for the year. If, prior to the installment date, the partnership does not furnish you with information that will enable you to determine your distributive share of the partnership earnings for such months, you will be unable to use the fourth method with certainty that your installment payment will be in an amount sufficient to relieve you from a possible addition to the tax for underpayment. Under such circumstances, you may find it desirable to use the first or second method discussed in the answer to question 2.

15. Q. The partnership of which I am a member reports income on the basis of a fiscal year ending, June 30 while my returns are made on the basis of a calendar year. I do not intend to use any of the methods discussed in question 2 for the purpose of determining any estimated tax. What portion of the partnership earnings for the fiscal year ending June 30, 1955, and for the fiscal year ending June 30, 1956, should I take into account for the purpose of determining the amount of my estimated tax for 1955?

A. You should take into account in connection with your declaration of estimated tax due April 15, 1955, all of your estimated distributive share of the partnership earnings for the fiscal year ending June 30, 1955, since this amount will be properly reportable by you in your Form 1040 return for 1955. No part of the partnership earnings for the fiscal year ending June 30, 1956, should be taken into account in determining the amount of your estimated tax for 1955.

16. Q. Assume the same circumstances as in question 15 except that I intend to use the fourth method discussed in the answer to question 2 in determining and paying my estimated tax. What portion of the partnership earnings for the fiscal year ending June 30, 1955, should I take into account in determining the amount of each installment payment?

A. You should take into account in determining the amount of the April 15 installment your distributive share of the partnership earnings for the period July 1, 1954, to March 31, 1955; for the June 15 installment, your distributive share of the partnership earnings for period July 1, 1954, to May 31, 1955; and for the September 15 and January 15 installments, your distributive share of the partnership earnings for the period July 1, 1954, to June 30, 1955. (Note that in determining the amount of an installment, you should take into account the total amount paid on prior installments.)

17. Q. Assume the same circumstances as in question 16, except that the partnership uses a fiscal year ending January 31. What portion of the partnership earnings for the fiscal year ending January 31, 1955, should I take into account in determining the amount of the April 15 installment payment?

A. You should take into account in determining the amount of the April 15 installment payment your distributive share of the partnership earnings for the period February 1, 1954 to January 31, 1955.

PROBLEMS AFFECTING BENEFICIARIES OF ESTATES AND TRUSTS

18. Q. I am the beneficiary of a trust. How should I take into account distributions of income from the trust in computing any estimated tax?

A. You may use any of the methods discussed in the answer to question 2 in computing your estimated tax. For the purpose of using eithr of the methods based on actual taxable income, you must take into a account your distributable share of the trust income (whether or not actually distributed) for the months preceding the month in which the installment date falls if the trust is one which is required to distribute income to you currently. If the trust is not required to distribute income to you currently, you will be required to take into account only the amounts actually distributed to you during such months.

Where you report income on a calendar-year basis and the trust reports on a fiscal-year basis, portions of the trust income should be taken into account in determining your income at the same time as income from a partnership. See the answers to questions 15, 16, and 17.

Regulations will be issued under sections 6015, 6073, 6153, and 6654 of the Internal Revenue Code of 1954. The opportunity to comment on the proposed construction of these sections, provided by the Administrative Procedure Act, will be available when the regulations are published as a notice of proposed rulemaking.

¹ Based on IRS Publication No. 186, dated March 30, 1955