Rev. Rul. 77-475

Advice has been requested concerning the effect of a credit, attributable to an overpayment of income tax for the preceding taxable year, on the computation of an addition to the tax for underpayment of estimated tax under the following circumstances.

On March 15, 1977, X, a calendar year corporation, filed a Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, showing a tentative 1976 income tax liability of 6x dollars and elected to pay the tax in installments by depositing 3x dollars as the first installment. On June 15, 1977, X deposited 3x dollars as the second and final installment payment of the tentative 1976 income tax liability. X then requested and was granted an additional three month extension of time to file. On September 15, 1977, X filed a Form 1120, U.S. Corporation Income Tax Return, for 1976 on which it reported an income tax liability of 4x dollars. X elected to apply the 2x dollar overpayment shown on the return as a credit against its 1977 estimated income tax.

During 1977, X also made four installment payments of 1977 estimated tax. The first installment (April) was underpaid by 2x dollars. The remaining 1977 installment payments were timely made and met the minimum amount requirements of section 6655 (b) of the Internal Revenue Code of 1954.

The specific question presented is what effect will X's election to credit its 1976 overpayment against its 1977 estimated tax liability have on the computation of the addition to the tax for underpayment of the April installment of 1977 estimated tax.

Section 6152(a) of the Code provides that a corporation may elect to pay the unpaid amount of its income tax in two equal installments for taxable years ending on or after December 31, 1954.

Under section 1.6152-1 (a) (2) of the Income Tax Regulations, a corporation is considered to have made an election to pay its income tax in installments if, on or before the date prescribed for filing its income tax return, it files a Form 7004 and pays 50 percent of the unpaid amount of the tax at such time.

Section 6154(b) of the Code provides, in the case of a calendar year corporation liable for estimated tax during the entire year, that such tax shall be paid in equal installments on April 15, June 15, September 15 and December 15, of the taxable year.

Section 6402(b) of the Code provides that the Secretary is authorized to prescribe regulations providing for the crediting against estimated income tax for any taxable year of the amount determined by the taxpayer or the Secretary or the Secretary's delegate to be an overpayment of the income tax for a preceding taxable year.

Section 301.6402-3(b) (5) of the Regulations on Procedure and Administration provides that if the taxpayer elects to have all or part of the overpayment shown on a return applied to the taxpayer's estimated income tax for the succeeding taxable year, no interest shall be allowed on such portion of the overpayment credited and such amount shall be applied as a payment on account of the estimated income tax for such year or the installments thereof.

The credit procedure authorized by section 6402(b) of the Code and the regulations thereunder contains no provision for the retroactive application of a credit against estimated tax.

Section 6655(a) of the Code provides that in the case of any underpayment of estimated tax by a corporation, with exceptions not applicable here, there shall be added to the tax under chapter 1 of the Code for the taxable year an amount determined at an annual rate established under section 6621 upon the amount of the underpayment for the period of the underpayment.

Section 6655(c) of the Code provides that the period of underpayment shall run from the date the installment was required to be paid to the earlier of (1) the 15th day of the third month following the close of the taxable year, or (2) the date on which the underpayment is paid. Section 6655 (c) further provides that a payment of estimated tax on any installment date shall be considered a payment of any previous underpayment only to the extent such payment exceeds the amount of the installment determined under section 6655(b) (1) for such installment date.

If an overpayment of income tax for a taxable year occurs on or before the due date of the first installment of estimated tax for the succeeding taxable year, the overpayment is available for credit against any installment of estimated tax for such succeeding taxable year and will be credited in accordance with the taxpayer's election.

If the overpayment occurs after the due date of the first installment of estimated tax for the succeeding taxable year, it may be credited only against an installment of estimated taxes due on or after the date the overpayment was made. Under such circumstances, if the amount of the credit exceeds 80 percent of the first installment of estimated tax due on or after the date the overpayment was made. Such excess may, under section 6655(c) of the Code, be applied as payment of any previous underpayment. Any portion of the credit remaining after satisfaction of previous underpayment (s) may be credited against the balance of estimated tax due for the succeeding taxable year.

Accordingly, the credit arising from the overpayment of 1976 tax should be applied to the June installment of 1977 tax rather than the April installment and the addition to tax arising with respect to the April underpayment of 2x dollars is not eliminated by the June overpayment, but the period of underpayment with respect to that underpayment is terminated by the June overpayment.