Rev. Rul. 62-22

Advice has been requested whether the provisions of sections 6651 and 6653 of the Internal Revenue Code of 1954, relating respectively to additions to tax imposed for delinquent filing of returns and to additions to tax imposed for failure to pay tax, are applicable to increases in tax arising by reason of an election under section 4(a) of the Dealer Reserve Income Adjustment Act of 1960, Public Law 86-459, C.B. 1960-1, 795.

The Dealer Reserve Income Adjustment Act of 1960 provided eligible taxpayers, who elected to have its provisions apply, with two alternatives for accounting for the adjustments to income resulting from a change to a proper method of reporting dealer reserve income.

Under section 3(a) of the Act, a taxpayer could elect to have such change treated as a change in method of accounting not initiated by the taxpayer to which the provisions of section 481 of the Code applied. If an election was made under section 3(a) of the Act, any necessary adjustments required by section 481 of the Code were taken into account only in the year of change. Thus, there would be no additions to tax for prior years on the basis of an increase resulting from an election under section 3(a) of the Act.

However, under section 4(a) of the Act, a taxpayer could elect to have the change treated as not to be a change in method of accounting to which the provisions of section 481 of the Code applied. If such an election was made, the taxpayer was required to redetermine separately the tax for each year affected by the election by taking into account adjustments needed to reflect the change to proper treatment of dealer reserve income and to file amended income tax returns reflecting the increase or decrease in tax attributable to the election for each of such years.

Section 6651 of the Code imposes additions to tax for failure to file a return on the date prescribed where there is no reasonable cause for delay. The penalty is computed on the net amount of tax due, i.e. , the amount required to be shown on the return as tax less tax paid and applicable credits. Thus, the penalty is imposed, not only on the net tax due as shown on the return when delinquently filed, but also on any deficiency subsequently determined.

Section 6653 of the Code imposes both negligence and fraud penalties for failure to pay tax. The penalties are for wilfulness, fraud or negligence amounting to wilfulness and are founded upon the existence of an underpayment of tax. Section 301.6653-1(c)(1)(i) of the Regulations on Procedure and Administration provides, in part, that an `underpayment' is `The total amount of all deficiencies as defined in section 6211, if a return was filed on or before the last date (determined with regard to any extension of time) prescribed for filing such return, * * *.'

The Dealer Reserve Income Adjustment Act of 1960 recognizes that reasonable cause normally existed for the failure of a taxpayer to include `dealer reserve income' in income of earlier years. See Senate Report No. 1045, Eighty-sixth Congress, C.B. 1960-1, 286, at 827 and 828.

Accordingly, it is held that if a penalty is imposed on a taxpayer under section 6651 of the Code for a prior year or years for failure to file his return at the time prescribed and additional tax is determined to be due for such year or years by reason of an election under section 4(a) of the Act, the penalty prescribed by section 6651 would also be imposed upon this deficiency since that penalty is computed on the net amount due on the return. Similarly, if a penalty is applicable under section 6653 of the Code for a prior year or years for failure to pay tax, or for underpayment of tax, and additional tax is determined to be due for such year or years by reason of an election under section 4(a) of the Act, the penalties prescribed by section 6653 would also be imposed upon this deficiency since the penalty is computed on the total amount of all deficiencies. See, for example, Rev. Rul. 60-215, C.B. 1960-1, 642.

However, a deficiency arising solely by reason of the application of the provisions of section 4(a) of the Act will not of itself give rise to the imposition of any of the penalties described in sections 6651 and 6653 of the Code.