IRS PROVIDES SAFE HARBOR FOR COMPUTING ESTIMATED TAX INSTALLMENTS.

Rev. Proc. 95-23

SECTION 1. PURPOSE

This revenue procedure provides guidance regarding the estimated tax rules for individuals and corporations under sections 6654 and 6655 of the Internal Revenue Code that were enacted by section 711 of the Uruguay Round Agreements Act, Pub. L. No. 103-465 (1994), 1995-11 I.R.B. 7 (the Act). Under these rules, which apply to determine underpayments of estimated tax for taxable years beginning after December 31, 1994, estimated tax payments determined by annualizing income generally must take into account income under sections 936(h) and 951(a) of the Code (and credits properly allocable thereto) as that income is earned. However, the taxpayer may elect to use the safe harbor provided in this revenue procedure, and thereby determine the estimated tax installments based on the amount of income under sections 936(h) and 951(a) (and credits properly allocable thereto) shown on the taxpayer's tax returns for the two preceding taxable years.

SECTION 2. BACKGROUND

.01 Sections 6654 and 6655 impose additions to tax on individuals and corporations in the case of an underpayment of estimated tax.

.02 Section 6654(d)(1) provides, in general, that an individual required to pay estimated tax must make quarterly estimated tax payments equal to 25 percent of the "required annual payment," defined as the lesser of 90 percent of the tax for the current year or 100 percent of the tax for the prior year. However, under section 6654(d)(2), an addition to tax will not be imposed if the individual pays the lesser of the installment determined under section 6654(d)(1) or the annualized income installment. The annualized income installment for an individual is, in general, a specified percentage of the tax on annualized income for specified months of the taxable year, minus the aggregate amount of prior required installments for the taxable year.

.03 Section 6655(d) provides, in general, that a corporation must make quarterly estimated tax payments equal to 25 percent of the "required annual payment," defined as the lesser of 100 percent of the tax shown on the return for the taxable year or 100 percent of the tax shown on the return for the preceding taxable year. However, under section 6655(e)(1), an addition to tax will not be imposed if the corporation pays the lesser of the installment determined under section 6655(d) or the annualized income installment. The annualized income installment for a corporation is, in general, a specified percentage of the tax on the annualized income for specified months of the taxable year, minus the aggregate amount of prior required installments for the taxable year.

.04 Under sections 6654(d)(2)(D) and 6655(e)(4), as enacted by section 711 of the Act, amounts includible in income under sections 936(h) and 951(a) (and credits properly allocable thereto) generally must be taken into account in computing the amount of any annualized income installment. This computation is similar to that under which partnership income inclusions are taken into account in computing a partner's annualized income installments, as provided in section 1.6654-2(d)(2) of the Income Tax Regulations and the examples thereunder.

.05 Under sections 6654(d)(2)(D)(ii) and 6655(e)(4)(B), and in lieu of the computation described in section 2.04 of this revenue procedure, a prior year safe harbor may be elected under which a taxpayer is treated as having received ratably during the taxable year items includible in income under sections 936(h) and 951(a) (and credits properly allocable thereto) in an amount equal to a specified percentage of the amount of such items shown on the taxpayer's return for the preceding taxable year (the second preceding taxable year in the case of the first and second required installments).

.06 Under section 936(h), certain U.S. shareholders (or appropriate affiliates) of a domestic corporation electing the application of section 936 must include in income on a pro rata basis (or otherwise take into account under the cost-sharing or profit- split method) the intangible property income of the corporation for the taxable year.

.07 Under section 951(a), certain U.S. shareholders of a controlled foreign corporation (as defined in section 957) must include in gross income the sum of the amounts described in section 951(a)(1).

SECTION 3. SCOPE

.01 Except as provided in section 3.02 of this revenue procedure, any taxpayer required under section 6654(d)(2)(D) or section 6655(e)(4) to include an amount in income under section 936(h) or section 951(a) (as provided under sections 2.06 and 2.07 of this revenue procedure) may make the safe harbor election provided in this revenue procedure for any taxable year.

.02 Except as provided in the following sentence, a taxpayer cannot make the safe harbor election provided in this revenue procedure if the taxpayer did not file an income tax return for its immediately preceding taxable year and its second preceding taxable year. If a taxpayer did not file an income tax return for the second preceding taxable year, the taxpayer may make the safe harbor election and use the safe harbor computation provided in section 4 of this revenue procedure based entirely on the taxpayer's income tax return for the immediately preceding taxable year.

SECTION 4. SAFE HARBOR COMPUTATION

.01 Individuals. If an eligible individual makes the safe harbor election provided in this revenue procedure, then for purposes of computing any annualized income installment under section 6654(d)(2)(D)(ii), the individual will be treated as having received ratably during the taxable year items of income under sections 936(h) and 951(a) (and credits properly allocable thereto) in the amount of such items shown on the individual's return for the preceding taxable year (the second preceding taxable year in the case of the first and second required installments of a taxpayer that filed an income tax return for its second preceding taxable year).

.02 Corporations. If an eligible corporation, other than one that is a noncontrolling shareholder as described in section 4.03 of this revenue procedure, makes the safe harbor election provided in this revenue procedure, then for purposes of computing any annualized income installment under section 6655(e)(4)(B), the corporation will be treated as having received ratably during the taxable year items of income under sections 936(h) and 951(a) (and credits properly allocable thereto) equal to 115 percent of the amount of such items shown on the return of the corporation for the preceding taxable year (the second preceding taxable year in the case of the first and second required installments of a taxpayer that filed an income tax return for its second preceding taxable year).

.03 Noncontrolling Shareholders. If a corporation that is a "noncontrolling shareholder" makes the safe harbor election provided in this revenue procedure, the annualized income installment is computed under the rules of section 4.02 of this revenue procedure, except that the computation is based on 100 percent, rather than 115 percent, of the amount of such items of income and credit shown on the applicable prior year return. The term "noncontrolling shareholder" means, with respect to any corporation, a shareholder that (as of the beginning of the taxable year for which the installment is being made) does not own (within the meaning of section 958(a)), and is not treated as owning (within the meaning of section 958(b)), more than 50 percent (by vote or value) of the stock in the corporation.

SECTION 5. SAFE HARBOR ELECTION PROCEDURE

A safe harbor election under section 6654(d)(2)(D)(ii) or section 6655(e)(4)(B) is made for a taxable year by computing each annualized income installment of estimated tax for the taxable year in accordance with the applicable portion of section 4 of this revenue procedure.

SECTION 6. EFFECTIVE DATE

This revenue procedure applies to the determination of underpayments of estimated tax for taxable years beginning after December 31, 1994.

DRAFTING INFORMATION

The principal author of this revenue procedure is Michael L. Gompertz of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Gompertz on (202) 622-4910 (not a toll-free call).