Tax News

CCH (cch.taxgroup.com) reports:

Final regulations explaining how to compute corporate estimated tax payments have been adopted. The regulations apply to tax years beginning after September 6, 2007, and reflect law changes made since 1984. Proposed regulations were published in the Federal Register on December 12, 2005 (NPRM REG-107722-00).
Corporations are required to make quarterly installments of estimated tax on the fifteenth day of the fourth, sixth, ninth, and twelfth months of the tax year. Generally, each payment must be at least 25 percent of the required annual payment. The required annual payment is 100 percent of the tax shown on the return for the current tax year. However, certain small corporations may base the required annual payment on 100 percent of the tax shown on the return for the preceding tax year if this amount is less. Corporations may elect to use an annualized income installment or an adjusted seasonal installment if the installment is less than the amount computed under the general rules (Code Sec. 6655).
The final regulations make a number of changes and clarifications to the proposed regulations, based primarily on practitioner comments, as follows.
General rules
The final regulations provide that recaptured tax credits are not usually treated as a tax for estimated tax purposes. Rev. Rul. 78-257, 1978-1 CB 440, which held that a recaptured investment tax credit is a tax within the meaning of the estimated tax rules, is removed.
A rule contained in Proposed Reg. §1.6655-1(g)(3) which required a taxpayer to compute its prior year's tax liability using the current year's tax rates if those rates differed from the prior year's rates was eliminated since it was inconsistent with statutory language.
The final regulations clarify that, for purposes of the preceding tax year safe harbor, the tax shown on an amended return is only taken into account in computing installments that are due after an amended return is filed.
Annualized income installment exception
The recurring expense rules contained in the proposed regulations are eliminated in favor of special rules for specified items of deduction that are routinely incurred on an annual basis or for which a special exception to the general accounting rules exists. These specified items need only be allocated in a reasonably accurate manner, such as a ratable allocation throughout the tax year. The IRS may designate additional items in future guidance that will be subject to this rule.
The final regulations eliminate the alternative rule of the proposed regulations that allows taxpayers to take into account a proportionate amount of 50 percent of the current year estimated depreciation expense (Proposed Reg. §1.6655-2(f)(2)(v)(A)). The general rule allowing taxpayers to estimate their annual depreciation expense and include a proportionate amount of such expense for annualization purposes is retained but two new safe harbors, including a safe harbor based on the actual amount of the prior year's depreciation, are provided.
The unforeseeable events exception contained in Proposed Reg. 1.6655-2(h) is eliminated. Under this exception, unforeseeable events arising subsequent to an installment due date that caused the taxpayer's computation of its taxable income for a prior installment period to be understated did not result in a recomputation of its taxable income for the prior installment period. The IRS indicated that it now believes that it is more appropriate to provide relief from unforeseeable events in contemporaneous guidance.
Under the proposed regulations, in determining the applicability of the annualized income installment method or the adjusted seasonal installment method, reasonable estimates were made for items that substantially affected taxable income but could not be determined accurately by an installment due date (Proposed Reg. §1.6655-2(g)). The final regulations retain the rule but limit its application to specifically enumerated items such as the inflation index for taxpayers using the dollar-value LIFO inventory method, intercompany adjustments for taxpayers filing consolidated returns, and deferred gain under Code Secs. 1031 and 1033.
The final regulations allow taxpayers to make a reasonable estimate of the Code Sec. 199 deduction for purposes of determining annualized taxable income. The amount of adjustments required under Code Sec. 263A may also be reasonably estimated from existing data if it cannot be determined with reasonable accuracy by the installment due date.
A new rules allows a taxpayer to temporarily exclude certain advance payments from the calculation of annualized taxable income if those payments are deferred from inclusion in a taxpayer's taxable income and excluded from the taxpayer's income on financial statements.
The final regulations set forth a list of extraordinary items that will result in a distortion of annualized taxable income unless taken into account after annualizing taxable income. With the exception of NOL deductions and Code Sec. 481(a) adjustments, an item is not subject to this rule if it is less than $1 million. Special rules are provided for section 481(a) adjustments.
A new safe-harbor allows a taxpayer with a 52/53 week tax year to determine its annualization period on the month that ends closest to the end of its applicable thirteen-week period or four-week period that ends within the applicable annualization period.
Rules are now provided for taking into account subpart F income, a shareholder's intangible property income (Code Sec. 936(h)), and dividends received by closely held REITS when computing an annualized income installment. Items from passthrough entities other than partnerships and REITS are required to be taken into account in a manner similar to items from partnerships.
Adjusted seasonal installment method.
The final regulations clarify that the amount of any installment determined using the adjusted seasonal installment method must take into account the amount of any alternative minimum tax that would apply for the period of the computation and that the base period percentage cannot be a negative amount.
Large corporations.
The final regulations clarify that for purposes of determining whether a corporation is a "large" corporation (i.e., one with at least $1 million of taxable income during a testing period), an acquiring corporation takes into account the distributor or transferor corporations's taxable income or loss in a tax year in which a Code Sec. 381 transaction occurs.
Short tax years
The final regulations allow a taxpayer with an initial short tax year to make estimated tax payments as though it were a calendar-year taxpayer until it files its tax return for its initial tax year. As a result, the taxpayer will not be penalized if its subsequently chooses a fiscal year.
A special rule is added which allows a taxpayer that has an unforeseen termination of its tax year resulting in fewer than four installment payments to compute its estimated tax payments using the applicable percentage (normally 25 percent) and pay any outstanding balance with the final installment.
The computation provided in Proposed Reg. §1.6655-5(g)(2) for determining an annualized income installment is corrected to provide that the tax for an annualized period is divided by 12, multiplied by the number of months in the short tax year, and multiplied by the application percentage for the annualized income installment.
The rule contained in Proposed Reg. §1.6655-5(h) which required large corporations to compute the preceding year's tax on an annual basis if the preceding tax year was a short tax year when using the preceding year's tax to compute the first installment (Code Sec.6655(d)(2)) is eliminated as inconsistent with the Code.
T.D. 9347, 2007FED ¶47,059
Other References:
Code Sec. 56
CCH Reference - 2007FED ¶5201
CCH Reference - 2007FED ¶5202
Code Sec. 6425
CCH Reference - 2007FED ¶38,842
CCH Reference - 2007FED ¶38,843
Code Sec. 6655
CCH Reference - 2007FED ¶39,566
CCH Reference - 2007FED ¶39,566E
CCH Reference - 2007FED ¶39,567
CCH Reference - 2007FED ¶39,568
CCH Reference - 2007FED ¶39,570
CCH Reference - 2007FED ¶39,571
CCH Reference - 2007FED ¶39,572
CCH Reference - 2007FED ¶39,572C
CCH Reference - 2007FED ¶39,573
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