ESTIMATED TAX SAFE HARBOR APPLIES ONLY TO CORPORATION WITH 'POSITIVE' TAX LIABILITY FOR PRIOR YEAR.

Rev. Rul. 92-54

ISSUE

Does section 6655(d)(1)(B)(ii) of the Internal Revenue Code, which allows a taxpayer to base required installment payments of estimated tax on the tax shown on the return for the preceding taxable year, apply to a corporation that filed a return for the preceding taxable year showing $0 tax liability?

FACTS

For its 1990 taxable year (a taxable year of 12 months), X, a C corporation that is not a "large corporation" (as defined in section 6655(g)(2) of the Code), filed a tax return that reflected a net operating loss and $0 liability for "tax" (as defined in section 6655(g)(1)). For its 1991 taxable year, X filed a tax return showing a $1,000 liability for tax. During 1991, however, X did not make any installment payments of estimated tax.

For its 1991 taxable year, X claimed that it was not liable for an addition to tax for an underpayment of estimated tax under section 6655(a) of the Code because (1) under section 6655(d)(1)(B)(ii), X could base its installment payments on the tax shown on its return for the preceding taxable year, and (2) its 1990 tax return reflecting $0 tax liability constituted a return "showing a liability for tax."

LAW ANALYSIS

Section 6655(a) of the Code provides that an addition to tax will be imposed upon a corporation for any taxable year in which there is an underpayment of estimated tax.

Section 6655(g)(1) of the Code defines the term "tax" for purposes of section 6655 as the excess of: (A) the sum of the tax imposed by section 11 or section 1201(a), or subchapter L of chapter 1, whichever applies; the tax imposed by section 55; the tax imposed by section 59A; plus the tax imposed by section 887; over (B) the credits against tax provided in part IV of subchapter A of chapter 1.

Section 6655(c)(1) of the Code provides that there shall be four required installment payments of estimated tax for each taxable year.

Section 6655(d)(1)(A) of the Code provides that in general the amount of any required installment shall be 25 percent of the "required annual payment."

Section 6655(d)(1)(B) of the Code provides that the required annual payment equals the lesser of the amount determined under section 6655(d)(1)(B)(i) or (ii). For taxable years beginning in 1991, the amount determined under section 6655(d)(1)(B)(i) equals 90 percent of the tax shown on the return for the taxable year (or, if no return is filed, 90 percent of the tax for such year). The amount determined under section 6655(d)(1)(B)(ii) equals 10 percent of the tax shown on the return of the corporation for the preceding taxable year.

As provided in section 6655(d)(1)(B)(ii) of the Code, a corporation may not use the amount determined under section 6655(d)(1)(B)(ii) as its required annual payment if the preceding taxable year was not a taxable year of 12 months, or the corporation did not file a return for such preceding taxable year "showing a liability for tax."

Section 6655(d)(2)(A) of the Code provides that, except in the case of the first installment, section 6655(d)(1)(B)(ii) does not apply to a "large corporation." Section 6655(g)(2) defines a large corporation for purposes of section 6655 as any corporation if such corporation (or any predecessor corporation) had taxable income of $1,000,000 or more for any taxable year during the three taxable years immediately preceding the taxable year for which required installment payments are being determined.

Section 6655(g)(4)(D) of the Code explicitly excepts S corporations from the requirement under section 6655(d)(1)(B)(ii) that a corporation file a return for the preceding taxable year showing a liability for tax. Under section 6655(g)(4)(D), an S corporation may determine its required annual payment using a modified version of section 6655(d)(1)(B)(ii), even though its return for the preceding taxable year does not show a liability for tax.

Section 6654(d)(1)(B)(ii) of the Code, which is applicable in determining an individual's required installment payments, contains statutory language identical to that applying to corporations under section 6655(d)(1)(B)(ii), except that it omits the language requiring the filing of a return for the preceding taxable year showing a liability for tax. Furthermore, section 6654(e)(2) expressly provides that no addition for underpayment of estimated tax will be imposed upon an individual if, among other requirements, the individual did not have any liability for tax for the preceding taxable year.

The explicit rejection by Congress of the requirement that an S corporation file a tax return for the preceding taxable year "showing a liability for tax" in section 6655(g)(4)(D) of the Code, and the absence of this requirement for individuals in section 6654(d)(1)(B)(ii), indicate that Congress intended that the requirement have a separate and special significance for C corporations. This statutory language and legislative intent mandate a holding that corporate tax returns showing $0 tax liability for the taxable year are not returns "showing a liability for tax" for purposes of section 6655(d)(1)(B)(ii). Accordingly, only tax returns showing a positive tax liability are returns showing a liability for tax under section 6655(d)(1)(B)(ii).

In the instant case, X's 1990 tax return reflected a net operating loss and $0 tax liability and, therefore, was not a return showing a liability for tax for purposes of section 6655(d)(1)(B)(ii) of the Code. Thus, X may not use section 6655(d)(1)(B)(ii) to determine its required installment payments of estimated tax for 1991.

X filed its 1991 tax return showing that it owed $1,000 in tax, but it did not make any estimated tax payments for that year. Accordingly, there was an underpayment of estimated taxes by X for its 1991 taxable year, and X is liable for an addition to tax under section 6655(a) of the Code.

HOLDING

Section 6655(d)(1)(B)(ii) of the Code, which allows a taxpayer to base required installment payments of estimated tax on the tax shown on the return for the preceding taxable year, does not apply to a corporation that filed a return for the preceding taxable year showing $0 tax liability.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 60-200, 1960-1 C.B. 645, is obsolete. Rev. Rul. 60-200 holds that a taxpayer may base its estimated tax payments on the facts shown on its previous year's tax return, but calculated using the current year's tax rates, regardless of whether the taxpayer had a liability for tax in the prior year. Rev. Rul. 60-200 relies on former section 6655(d)(2) of the Code, which was repealed by section 10301 of the Revenue Act of 1987, 1987-3 C.B. 1, 144-45, effective for taxable years beginning after December 31, 1987.

DRAFTING INFORMATION

The principal author of this revenue ruling is Rochelle Pickard of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Pickard on (202) 566-3637 (not a toll-free call).