Rev. Rul. 76-450

Advice has been requested whether, under the circumstances described below, the taxpayer can deduct state property taxes in full on the lien date and the franchise tax in full on the accrual date in computing annualized taxable income for the purpose of determining whether the exception to the addition to the tax for underpayment of estimated tax provided by section 6655(d)(3) of the Internal Revenue Code of 1954 is applicable.

The taxpayer, a corporation, files its Federal income tax returns on a calendar year basis. The taxpayer's state franchise tax is based on the net income it received during the previous calendar year. The taxpayer's state property taxes are imposed on a fiscal year basis beginning July 1, and become a lien on March 1 prior to the beginning of the fiscal year. Under the taxpayer's accounting method, for Federal income tax purposes, property taxes and the franchise tax are deducted in full on the accrual date. The accrual date for the state property taxes is March 1, the lien date.

Section 6655(a) of the Code provides that in the case of any underpayment of estimated tax by a corporation, except as provided in subsection (d), there shall be added to the tax under Chapter 1 for the taxable year an amount determined at an annual rate established under section 6621.

Section 6655(d)(3) of the Code provides that the addition to the tax with respect to any underpayment of any installment shall not be imposed if the total amount of all payments of estimated tax made on or before the last date prescribed for the payment of such installment equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax were an amount equal to 80 percent of the tax for the taxable year computed by placing on an annualized basis the taxable income for the first 3, 5, 6, 8, 9, or 11 months of the taxable year.

Section 6655(e) of the Code defines tax, for the purpose of section 6655(d), as the excess of the income tax imposed on corporations by section 11 or 1201(a) over the credits against tax provided by Part IV of subchapter A of chapter 1. State franchise taxes and state real estate taxes are deductible in arriving at taxable income on which the tax imposed by section 11 of the Code is determined.

The regulations under section 6655 of the Code do not specifically refer to the proper date for deducting state property and franchise taxes. However, section 1.6655-2(d) of the Income Tax Regulations does refer to section 1.6654-2(d)(1) of the regulations under section 6654(d)(2)(A), the counterpart of section 6655(d)(3), relating to individuals. Section 1.6654-2(d) provides that in determining the taxable income applicable to an installment period, deductions are not allowable until paid or accrued depending on the taxpayer's method of accounting.

Accordingly, since under the taxpayer's accounting method, for Federal income tax purposes state property taxes and the franchise tax are deducted in full on the accrual date, such taxes are deductible in full in computing annualized taxable income for the purpose of determining the applicability of the exception provided by section 6655(d)(3) of the Code to the addition to the tax for underpayment of estimated tax by the taxpayer. If, on the other hand, the taxpayer uses the accrual method of accounting and accrues real property taxes ratably under section 461(c), the taxpayer cannot take a deduction in computing annualized taxable income under section 6655(d)(3) for the full amount of real estate taxes accrued on March 1. The corporation accruing its real property taxes ratably may deduct only that amount that has accrued ratably during the period for which the taxable income is being annualized.