You are on page 1of 30

Tuesday,

August 7, 2007

Part IV

Department of the
Treasury
Internal Revenue Service

26 CFR Parts 1, 301 and 602


Corporate Estimated Tax; Final Rule
jlentini on PROD1PC65 with RULES3

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\07AUR3.SGM 07AUR3
44338 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

DEPARTMENT OF THE TREASURY Reconciliation Act of 1989, Public Law proposed regulations are adopted as
101–239 (103 Stat. 2106); the Omnibus revised by this Treasury decision.
Internal Revenue Service Budget Reconciliation Act of 1990,
Explanation of Provisions and
Public Law 101–508 (104 Stat. 1388);
26 CFR Parts 1, 301, and 602 Summary of Comments
the Tax Extension Act of 1991, Public
Law 102–227 (105 Stat. 1686); the Act Section 6655 generally requires
[TD 9347]
of Feb. 7, 1992, Public Law 102–244 corporations to make quarterly
RIN 1545–AY22 (106 Stat. 3); the Unemployment estimated tax payments or be assessed
Compensation Amendments of 1992, an addition to tax for any
Corporate Estimated Tax Public Law 102–318 (106 Stat. 290); the underpayment. As a general rule,
AGENCY: Internal Revenue Service (IRS), Omnibus Budget Reconciliation Act of payments are due on the fifteenth day
Treasury. 1993, Public Law 103–66 (107 Stat. of the fourth, sixth, ninth, and twelfth
ACTION: Final regulations. 312); the Uruguay Round Agreements months. Each quarterly payment must
Act of 1994, Public Law 103–465 (108 be at least twenty-five percent of the
SUMMARY: This document contains final Stat. 4809); the Small Business Job required annual payment in order to
regulations that provide guidance to Protection Act of 1996, Public Law 104– avoid an underpayment penalty.
corporations with respect to estimated 188 (110 Stat. 1755); the Taxpayer Relief Generally, the required annual payment
tax requirements. These final Act of 1997, Public Law 105–34 (111 equals one hundred percent of the tax
regulations generally affect corporate Stat. 788); the Ticket to Work and Work shown on the return for the current year
taxpayers who are required to make Incentives Improvement Act of 1999, tax, or for certain small taxpayers, the
estimated tax payments. These final Public Law 106–170 (113 Stat. 1860); lesser of one hundred percent of the tax
regulations reflect changes to the law the Community Renewal Tax Relief Act shown on the return for the current year
since 1984. This document also removes of 2000, Public Law 106–554 (114 Stat. tax or one hundred percent of the tax
the section 6154 regulations. 2763); the Economic Growth and Tax shown on the return for the preceding
DATES: Effective date: These regulations Relief Reconciliation Act of 2001, Public taxable year. Alternatively, corporations
are effective on August 7, 2007. Law 107–16 (115 Stat. 38); the Jobs and may elect to use an annualized income
Applicability date: These regulations Growth Tax Relief Reconciliation Act of installment or an adjusted seasonal
apply to tax years beginning after 2003, Public Law 108–27 (117 Stat. installment if less than the amount
September 6, 2007. 752); and the American Jobs Creation computed under the general rules.
FOR FURTHER INFORMATION CONTACT: Act of 2004, Public Law 108–357 (118 1. Comments Concerning § 1.6655–1
Timothy Sheppard, at (202) 622–4910 Stat. 1418). (Addition to Tax in the Case of a
(not a toll-free number). These regulations do not reflect Corporation) of the Proposed
SUPPLEMENTARY INFORMATION: changes made by the Tax Increase Regulations
Prevention and Reconciliation Act of
Background 2005, Public Law 109–222 (120 Stat. A. Recapture of a Tax Credit Not
This document contains amendments 345) (TIPRA), as amended by the U.S. Included in the Definition of ‘‘Tax’’
to the Income Tax Regulations (26 CFR Troop Readiness, Veterans’ Care, One commentator requested that the
part 1), the Procedure and Katrina Recovery, and Iraq final regulations clarify that the
Administration Regulations (26 CFR Accountability Act of 2007, Public Law recapture of a tax credit under Chapter
part 301), and the OMB Control 110–28 (121 Stat. 112), because TIPRA 1 is not a section 11 tax and not
Numbers under the Paperwork made temporary, targeted changes to the included within the definition of tax for
Reduction Act Regulations (26 CFR part time and amount of any required purposes of section 6655 unless there is
602) relating to corporate estimated installment otherwise due in September authority that provides that the
taxes under section 6425 and section 2010 and September 2011. TIPRA also recaptured credit is treated as a tax
6655 of the Internal Revenue Code changed the amount of required imposed by section 11.
(Code). This document also removes installments in 2006, 2012, and 2013 for Revenue Ruling 78–257 (1978–1 CB
§§ 1.6154–1, 1.6154–2, 1.6154–3, corporations with assets of not less than 440) provides that the term tax, as
1.6154–4, 1.6154–5, and 301.6154–1. $1 billion. Although these changes are defined in section 6655, includes the
The IRS is removing the section 6154 not reflected in these regulations, these amount of tax resulting from the
regulations because Congress repealed and any further changes made in the recomputation of a prior year’s
section 6154 in 1987. Code supersede the rules in these investment credit at the applicable rate
These regulations reflect changes to regulations. for the current year. However, Berkshire
the law made by the Deficit Reduction A notice of proposed rulemaking Hathaway, Inc. v. United States, 802
Act of 1984, Public Law 98–369 (98 Stat. under section 6655 (REG–107722–00) F.2d 429 (Fed. Cir. 1986), held that, for
494); the Superfund Amendments and was published in the Federal Register purposes of the definition of tax under
Reauthorization Act of 1986, Public Law (70 FR 73393) on December 12, 2005. section 6655, the recapture tax under
99–499 (100 Stat. 1613); the Tax Reform The proposed regulations provide former section 47 was not a tax imposed
Act of 1986, Public Law 99–514 (100 guidance on how to determine the by section 11. The Court concluded that
Stat. 2085); the Omnibus Budget amount of a corporation’s estimated tax because the taxpayer paid no tax
Reconciliation Act of 1987, Public Law due with each quarterly installment. No imposed by section 11 in the preceding
100–203 (101 Stat. 1330); the Revenue requests for a public hearing were taxable year, that taxpayer was not
Act of 1987, Public Law 100–203 (101 received, so the public hearing on the subject to an addition to tax for failing
Stat. 1330–382); the Omnibus Trade and proposed regulations, scheduled for to pay estimated tax in the current year
jlentini on PROD1PC65 with RULES3

Competitiveness Act of 1988, Public March 15, 2006, was cancelled. The IRS under the former provision in section
Law 100–418 (102 Stat. 1107); the received written and electronic 6655(d)(2) that allowed a taxpayer to
Technical and Miscellaneous Revenue comments responding to the notice of pay estimated tax in the current year
Act of 1988, Public Law 100–647 (102 proposed rulemaking. After based on the law applicable to (other
Stat. 3342); the Omnibus Budget consideration of all comments, the than the rates), and the known facts of,

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44339

the prior year’s return. Based on the easily determinable amount reflected on accurate estimate of annualized taxable
holding in Berkshire Hathaway, the preceding year’s return, but instead income. The final regulations make it
§ 1.6655–1(g)(1)(iii) of the final upon the ultimate tax liability, possibly clear that taxpayers may not determine
regulations provides that, unless determined by adverse tax audit, a year taxable income for an annualization
otherwise provided in the Internal or so after the tax year for * * * which period or an adjusted seasonal
Revenue Code, for purposes of the the estimated tax installments were installment period as though the period
definition of tax as used in section 6655, paid.’’ Mendes, 121 T.C. at 326 (quoting is a short taxable year.
a recapture of tax, such as a recapture Evans Cooperage, 712 F.2d at 204). Consistent with the general rejection
provided by section 50(a)(1)(A) and any Evans Cooperage held that the statutory of a short taxable year approach, the
other similar provision, is not reference to ‘‘tax shown on the return of final regulations recognize that certain
considered to be a tax imposed by the corporation for the preceding types of items that are generally
section 11. Therefore, Rev. Rul. 78–257 taxable year’’ refers to the timely filed incurred once (or otherwise
is removed. See § 601.601(d)(2)(ii)(b). return for the preceding year, not to any infrequently) during the taxable year or
later-filed amended return. Evans that are subject to special exceptions,
B. Tax Rate Changes for Preceding Year should not be annualized because doing
Cooperage, 712 F.2d at 204.
Safe Harbor Section 1.6655–1(g)(2) of the so would create a distortion in the
Section 6655(d)(1)(B)(ii) allows proposed regulations provides that the estimate of annualized taxable income.
taxpayers to determine their required reference in section 6655(d)(1)(B)(ii) to This approach also recognizes that
annual payment based on 100 percent of ‘‘return of the corporation of the although distortions may occur in the
the tax shown on the preceding year’s preceding taxable year’’ includes the annualization process due to general
return. Commentators suggested that the Federal income tax return as amended, fluctuations in the timing of items of
rule provided in § 1.6655–1(g)(3) of the only if an amended Federal income tax income and deductions incurred
proposed regulations, which requires return has been filed before the due date throughout the year, taxpayers should
taxpayers to recompute the tax for an installment. As long as a taxpayer generally be permitted to rely on such
determined for the preceding taxable has remaining estimated tax installment annualized estimates to the extent the
year based on the current year tax rates payments to make during the tax year estimate is based upon information
if the tax rates for the current year and and is basing the payments on the available to the taxpayer as of the end
the preceding year differ, is not preceding year return, the remaining of the annualization period.
authorized by section 6655. The payments should be made based on the A commentator expressed concern
commentators suggested that, prior to most recent information the IRS has on that the rules provided in the proposed
the effective date of its amendment in the preceding year return. This includes regulations were too mechanical and
1987, section 6655 allowed estimated the information on an amended return created traps for the unwary. In
tax payments to be based on the facts for the preceding year filed before an response to this comment, the final
shown on the return for the preceding installment due date. Section 1.6655– regulations provide rules which are
taxable year and the law applicable to 1(g)(2) of the final regulations retains intended to produce a reasonably
that year but using the tax rates for the this rule but clarifies that the term accurate estimate of annualized taxable
current taxable year. The commentators ‘‘return for the preceding taxable year’’ income for estimated tax purposes
requested that the final regulations not includes the Federal income tax return without imposing an undue compliance
adopt the rule provided in § 1.6655– as amended only if filed before the burden on taxpayers. Specifically, the
1(g)(3) of the proposed regulations. applicable installment due date if an final regulations address this general
Section 6655 no longer provides amended Federal income tax return is concern by allowing taxpayers to make
specific statutory authority to filed for the preceding taxable year. If an a reasonably accurate allocation of
recompute tax determined for the amended Federal income tax return is certain items of income or expense.
preceding taxable year using the rates filed on or after an installment due date, However, a taxpayer’s annualized
applicable to the current taxable year. then the term ‘‘return for the preceding taxable income for estimated tax
Therefore, the final regulations do not taxable year’’ does not include that purposes is primarily based on items of
adopt the rule provided in § 1.6655– amended Federal income tax return income and expense recognized during
1(g)(3) of the proposed regulations. with respect to the installments due the annualization period. Therefore, the
C. Return for the Preceding Taxable prior to the time the amended Federal annualization method is as inherently
Year income tax return is filed. This rule complex as computing taxable income.
applies regardless of whether the IRS
One commentator requested that the A. Reasonably Accurate Allocation
issues a notice of deficiency prior to the
final regulations clarify that the filing of the amended Federal income Commentators noted that many of the
regulations adopt the holding in Mendes tax return. rules provided in the proposed
v. Commissioner, 121 T.C. 308 (2003). In regulations with respect to economic
Mendes, the Tax Court held that a tax 2. Comments Concerning § 1.6655–2 performance and recurring expenses
return that is filed after the IRS issues (Annualized Income Installment would create significant administrative
a notice of deficiency is not a return for Method) of the Proposed Regulations burdens, result in similarly situated
purposes of section 6654(d)(1)(B)(i). Id. As a general comment to the proposed taxpayers being treated differently, and
at 324–325. Mendes cited Evans regulations, one commentator noted that did not further the underlying goal of
Cooperage Co., Inc. v. United States, the estimated tax payment rules should providing an accurate picture of
712 F.2d 199 (5th Cir. 1983), for the strive to provide the most accurate annualized taxable income.
proposition that the purpose of the picture of annualized taxable income The final regulations do not retain the
preceding year safe harbor is ‘‘to based on facts known as of the end of recurring expense rules provided in the
jlentini on PROD1PC65 with RULES3

provide a predictable escape from any an annualization period. The IRS and proposed regulations. The final
possible penalty liability [and this Treasury Department agree with this regulations provide special rules for
purpose] would be defeated if penalties comment and recognize that treating an specific items of deduction that are
for underpayment of estimated taxes annualization period as a short taxable routinely incurred on an annual basis or
during the year were based, not on the year does not necessarily result in an for which a special exception to the

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44340 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

general accounting rules exists. Given facts known as of the end of the to reduce the complexity and burden
the nature of these items, applying the annualization period. The IRS and associated with the computation of
general annualization rules to these Treasury Department recognize that estimate taxes by allowing taxpayers to
items could result in a significant various allocations may be considered allocate these specific items of expense
distortion in the estimate of annualized to be done in a reasonably accurate in a reasonably accurate manner while
taxable income. These items include manner and intend for taxpayers to have also preventing unintended distortions
real property tax deductions; employee flexibility in determining which under the annualization method.
and independent contractor bonus allocation to use, particularly when use
B. Net Operating Loss Deductions
compensation deductions (including the of a specific allocation reduces
employer’s share of employment taxes administrative burdens on the taxpayer. Several commentators addressed
related to such compensation); In general, allocations that are made provisions in the proposed regulations
deductions under sections 404 (deferred with the intent to distort will not be requiring a net operating loss (NOL)
compensation) and 419 (welfare benefit considered to have been made in a deduction to be taken into account in
funds); items allowed as a deduction for reasonably accurate manner. computing an annualized installment
the taxable year by reason of section Many of the items of deduction which after annualizing the taxable income for
170(a)(2) and § 1.170A–11(b) (certain are required to be allocated in a the annualization period. One
charitable contributions by accrual reasonably accurate manner include commentator argued that economic
method corporations), § 1.461–5 items that may not have otherwise been performance with respect to an NOL
(recurring item exception) or § 1.263(a)– allowed to be taken into account by carryover has already occurred and
4(f) (12-month rule); and items of taxpayers (for example, year-end bonus therefore, the NOL deduction should be
deduction designated by the Secretary liabilities, items paid after year end) taken into account in computing an
by publication in the Internal Revenue under the general annualization rules to annualized installment before
Bulletin (IRB) (see § 601.601(d)(2)(ii)(b)). the extent they were deemed to be annualizing the taxable income for the
The final regulations require that incurred in the last quarter of the year. annualization period. Another
these specified items of deduction be In this regard, the final regulations commentator suggested that special
allocated in a reasonably accurate provide a measure of relief to taxpayers rules be provided for extraordinary
manner. The item of deduction that with respect to such items. The final items such as NOL deductions noting
must be allocated in a reasonably regulations provide that the Secretary the unique nature of such items.
accurate manner includes the total may designate in future IRB guidance Comments were also received
amount of the item of deduction additional items of deduction that are suggesting that NOL deductions should
recognized by the taxpayer during the required to be allocated in a reasonably be treated the same as any other
taxable year regardless of whether the accurate manner. Taxpayers are deduction.
item is deemed to be paid or incurred encouraged to bring items to the NOL deductions are different from
during the taxable year as a result of attention of the IRS and Treasury other items of deduction occurring
events that occurred during the taxable Department that they believe should be throughout the year in that there is no
year, after the taxable year, or both. allocated in a reasonably accurate anticipation that similar deductions will
While a reasonably accurate allocation manner rather than applying the general recur throughout the year or in future
may permit certain items to be annualization rules. years. In this regard, NOL deductions
recognized in an annualization period Commentators requested that are more like extraordinary items.
prior to being paid or incurred, an taxpayers be permitted to take the Treating NOL deductions in the same
amount may only be taken into account exceptions provided in section 170(a)(2) manner as other recurring deductions
to the extent the item of deduction is and § 1.170A–11(b) (certain charitable would be inconsistent with attempting
properly recognized by the taxpayer contributions by accrual method to provide a reasonably accurate picture
during the taxable year. Therefore, corporations), § 1.461–5 (recurring item of annualized taxable income and could
taxpayers will be subject to a section exception) or § 1.263(a)–4(f) (12-month result in a distorted estimate of
6655 addition to tax for an rule) into account for purposes of annualized taxable income similar to
underpayment of estimated tax if an determining items of expense incurred the distortions created by the various
underpayment results from a deduction during an annualization period. As techniques the regulations are intended
the taxpayer expected to be incurred but noted above, these exceptions to prevent. The final regulations treat a
was not ultimately recognized as a frequently apply either to expenses paid NOL deduction as an extraordinary item
deduction by the taxpayer in the annually or to expenses paid after the that is treated as occurring on the first
computation of taxable income for that end of the taxable year. The specific day of the taxable year and is taken into
year. rules and underlying intent of these account after annualization. As a result
The final regulations provide that an exceptions do not easily translate to the of the final regulations, Rev. Rul. 67–93
allocation will be considered to be made concept of an annualization period. The (1967–1 CB 366) is removed. See
in a reasonably accurate manner if the final regulations provide that items of § 601.601(d)(2)(ii)(b).
item is allocated ratably throughout the expense that utilize these exceptions
tax year. In addition, an allocation will will be considered to be properly taken C. Credit Carryovers
be considered to be made in a into account if they are allocated among One commentator suggested that a
reasonably accurate manner to the annualization periods in a reasonably credit carryover should be taken into
extent it provides a reasonable estimate accurate manner. Therefore, the final account in computing an annualized
of taxable income for the taxable year regulations permit taxpayers for installment before annualizing the
based upon the facts known as of the estimated tax payment purposes to taxable income for the annualization
end of the annualization period. The allocate throughout the tax year items of period because economic performance
jlentini on PROD1PC65 with RULES3

final regulations provide a list of some deduction recognized in the taxable year has occurred for the credit carryover. In
relevant factors to be taken into as a result of these exceptions to the general, taxpayers annualize
consideration in determining whether extent the allocation is made in a components of a credit for the current
an allocation provides a reasonable reasonably accurate manner. The final taxable year to determine the amount of
estimate of taxable income based upon regulations adopt this approach in order a credit because the credit is based on

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44341

components for the current year. annualized income installment for do not include the alternative method in
However, credit carryovers are generally purposes of section 6655. § 1.6655–2(f)(2)(v)(A) of the proposed
based on the components for the entire regulations. The final regulations
E. Depreciation and Amortization
year in which the credit arose. provide a general rule that permits
Expense
Therefore, the credit carryover already taxpayers to estimate their annual
is computed based on annualized One commentator requested depreciation expense and include a
components for the year in which the clarification on the alternative method proportionate amount of such expense
credit arose. Because a credit carryover in § 1.6655–2(f)(2)(v)(A) of the proposed for annualization purposes. The final
is based on annualized components, the regulations. The proposed regulations regulations also provide that, in
final regulations provide that a credit provide that a taxpayer may claim for an determining the estimated annual
carryover must be taken into account annualization period at least a depreciation expense, a taxpayer may
after determining the annualized tax proportionate amount of 50 percent of take into account purchases, sales or
and before taking into account the the taxpayer’s estimated depreciation other dispositions, changes in use,
applicable percentage for the and amortization (depreciation) expense additional first-year depreciation
annualization period. for the current taxable year attributable deductions, and other similar events
to assets that a taxpayer had in service and provisions that, based on all the
D. Credits Incurred in an Annualization on the last day of the preceding taxable relevant information available as of the
Period and Recaptured Credits year, that remain in service on the first last day of the annualization period
One commentator suggested that the day of the current taxable year, and that (such as capital spending budgets,
final regulations provide that credits are subject to the half-year convention. financial statement data and projections,
incurred in an annualization period are Several commentators suggested that the or similar reports that provide evidence
not annualized. The commentator regulations were not clear on how a of the taxpayer’s capital spending plans
suggested that annualization should be taxpayer determines how much more for the current taxable year), are
than 50 percent may be used and reasonably expected to occur or apply
based on the underlying basis for the
requested that the final regulations during the taxable year. The IRS and
credit. The commentator also suggested
provide criteria for making this Treasury Department believe that
that if a credit is based on an item that
determination. prescribing special rules for
is annualized in computing the required Another commentator suggested that
installment for the annualization period, depreciation is appropriate because
the general rule in § 1.6655–2(f)(2)(v)(A)
the amounts should be annualized in unlike many other deductions,
of the proposed regulations for taking
determining the amount of the credit. depreciation generally accrues ratably
into account depreciation was
Finally, the commentator suggested that throughout the taxable year. Therefore,
impractical for many taxpayers because
similar rules should apply to the of the administrative burdens associated in contrast to the general annualization
recapture of credits that are included with the computation of actual and rules, the final regulations require
within the definition of tax. expected depreciation expense. The depreciation expense to be taken into
Section 1.6655–2(f)(3)(iii) of the final commentator also suggested that the account ratably throughout the taxable
regulations provides that the items upon rule does not provide an alternative year.
which the credit is computed are calculation methodology for assets As an alternative to the general rule
annualized pursuant to the provisions of subject to a convention other than the for depreciation expense, the final
§ 1.6655–2(f)(1) and the amount of the half-year convention or for intangible regulations provide two safe harbors.
credit is computed based on the assets. The commentator requested that The first safe harbor requires taxpayers
annualized items. The amount of the the final regulations provide alternative to take into account for an annualization
credit is then deducted from the computation methodologies for all period a proportionate amount of
annualized tax. For example, for an depreciable and amortizable assets and depreciation expense allowed for the
annualization period consisting of three allow taxpayers to take into account taxable year from: (1) Assets that were
months in a full 12-month taxable year, section 179 deductions. The in service on the last day of the prior
the items upon which the credit is based commentator also requested that the taxable year, are in service on the first
that are taken into account for the three- final regulations eliminate the day of the current taxable year, and have
month period are multiplied by four, the alternative rule in § 1.6655–2(f)(2)(v)(A) not been disposed of during the
credit is determined, and the credit of the proposed regulations that allows annualization period; (2) assets that
reduces the annualized tax. Reducing taxpayers to take into account a were placed in service during the
the annualized tax by a credit before proportionate amount of 50 percent of annualization period and have not been
taking into account the applicable taxpayers’ current year estimated disposed of during that period; and (3)
percentage is consistent with the depreciation expense. The commentator assets that were in service on the last
statutory definition of tax provided in requested that instead the final day of the prior taxable year and that are
section 6655(g)(1) and the annualized regulations provide a safe harbor that disposed of during the annualization
income installment method provided in allows taxpayers to claim a period. For purposes of additional first-
section 6655(e). In order to clarify this proportionate amount of 90 percent of year depreciation deductions, the final
rule, § 1.6655–2(b)(1) of the final the prior year depreciation expense for regulations provide that only a
regulations provides that tax means tax all assets placed in service in an earlier proportionate amount of the current
after taking into account credits and year. year’s additional first-year depreciation
before applying the applicable By including the alternative rule in deduction to be taken into account in
percentage. These rules generally do not § 1.6655–2(f)(2)(v)(A) of the proposed determining a taxpayer’s taxable income
apply to a credit recapture because, as regulations, the IRS and Treasury for the taxable year is taken into account
jlentini on PROD1PC65 with RULES3

discussed in heading 1A of the Department intended to illustrate the in computing taxable income for an
preamble, a credit recapture, such as a minimum amount of depreciation a annualization period. In addition, the
recapture provided by section taxpayer is entitled to take for a taxable final regulations provide that amounts
50(a)(1)(A), is not taken into account year. In response to the comments that the taxpayer deducts under section
when determining the tax for an referenced above, the final regulations 179 or any similar provision, are treated

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44342 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

the same as additional first-year 1033 may apply even if the replacement characteristics of a credit, the final
depreciation. of property required under sections regulations should treat a section 199
The second safe harbor included in 1031 or 1033 has not occurred as of the deduction as a credit. Commentators
the final regulations provides that a end of an annualization period to the also suggested that the final regulations
taxpayer may take into account a extent the taxpayer has a reasonable require taxpayers to annualize income
proportionate amount of 90 percent of belief that qualifying replacement and compute the section 199 deduction
its preceding year’s depreciation that is property will be acquired. based on the annualized amount.
taken on its Federal income tax return Another commentator requested that the
for the preceding taxable year. However, G. Items That Substantially Affect
final regulations treat a section 199
if the taxpayer’s preceding taxable year Taxable Income But Cannot Be
deduction as an item that substantially
is less than 12 months (a short taxable Determined Accurately by the
affects taxable income but cannot be
year), the amount of depreciation Installment Due Date
accurately determined by the
expense taken into account for the Section 1.6655–2(g) of the proposed installment due date. The commentator
preceding taxable year must be put on regulations provides that in determining requested that the final regulations
an annualized basis. In addition, a the applicability of the annualized allow taxpayers to make a reasonable
taxpayer must use whatever income installment method or the estimate of the section 199 deduction
depreciation safe harbor method it adjusted seasonal installment method, for purposes of determining the
selects under § 1.6655–2(f)(3)(iv)(B) of reasonable estimates may be made from proportionate amount that should be
the final regulations for all depreciation existing data for items that substantially taken into account in determining
deductions within the annualization affect income if the amount of such annualized taxable income.
period for the annualized income items cannot be determined with Although the section 199 deduction is
installment but may use a different reasonable accuracy by the installment calculated based on income and
depreciation method provided in due date. Examples of these items are expense items incurred during the
§ 1.6655–2(f)(3)(iv) for each annualized the inflation index for taxpayers using taxable year, the section 199 deduction
income installment during the taxable the dollar-value LIFO (last-in, first-out) is a deduction and not a credit.
year. inventory method, intercompany Therefore, a section 199 deduction must
adjustments for taxpayers that file be taken into account to reduce taxable
F. Events Arising After the Installment consolidated returns, and the income, not to reduce tax. Under the
Due Date liquidation of a LIFO layer at the final regulations, a section 199
One commentator requested that the installment date that the taxpayer deduction is computed prior to
final regulations include examples of reasonably believes will be replaced at annualizing the taxable income for the
events that would arise after the the end of the year. annualization period. However, in
installment due date that would be The IRS and Treasury Department recognition that qualification for the
considered reasonably unforeseeable to believe that the language in § 1.6655– section 199 deduction is restricted by
illustrate the rule provided in § 1.6655– 2(g) of the proposed regulations could various annual limitations that may not
2(h) of the proposed regulations. In be misinterpreted and broadly applied be known as of the end any specific
considering the request for more to items to which the rule was not annualization period, the final
specific guidance as to what constitutes intended. The final regulations provide regulations provide that a section 199
an unforeseeable event, the IRS and that § 1.6655–2(g) applies only to the deduction should be treated as an item
Treasury Department determined that items specifically listed. These items that substantially affects taxable income
providing relief for certain include the inflation index for taxpayers but cannot be accurately determined by
unforeseeable events would more using the dollar-value LIFO inventory the installment due date. Therefore, the
appropriately be addressed through method, adjustments required under final regulations permit taxpayers to
contemporaneous guidance. section 263A, intercompany make a reasonable estimate of the
Furthermore, the unforeseeable event adjustments for taxpayers that file section 199 deduction for purposes of
exception provided in the proposed consolidated returns, the liquidation of determining the amount to be taken into
regulations was inherently subjective a LIFO layer at the installment date that account in determining annualized
and retaining such a rule would be the taxpayer reasonably believes will be taxable income.
difficult to administer. In addition, replaced at the end of the year, section
certain provisions in the final I. Section 263A Expenses
199 computations, deferred gain under
regulations allow events that occur after sections 1031 and 1033 that the One commentator suggested that the
the end of an annualization period to be taxpayer reasonably believes will be proposed regulations do not provide
taken into account but only to the extent replaced with qualifying property, and rules on how taxpayers should account
the anticipated events actually occur. to any other item specifically designated for section 263A adjustments to
Therefore, the final regulations do not in guidance published in the Internal compute annualized taxable income.
retain the unforeseeable event exception Revenue Bulletin. The commentator requested that the
as provided in § 1.6655–2(h) of the final regulations not require taxpayers to
proposed regulations. H. Taking Into Account a Section 199 compute an actual section 263A
The final regulations do permit Deduction adjustment for an installment period
taxpayers in specific circumstances to Commentators requested clarification because this computation would create
take into account transactions that are on how taxpayers using the annualized a significant administrative burden for
properly reflected in the taxpayer’s income installment method (or the taxpayers. The commentator also
return for a particular year to be taken adjusted seasonal installment method) requested that the final regulations
into account for annualization purposes should take into account a section 199 provide simplifying rules that allow
jlentini on PROD1PC65 with RULES3

regardless of when the underlying event deduction. One commentator suggested taxpayers to compute the section 263A
giving rise to the item occurs. For that because the section 199 deduction adjustment for an installment period by
example, the final regulations permit is calculated based on income and multiplying the prior year’s absorption
taxpayers to defer income related to a expense items incurred during the ratio by the inventory on hand at the
transaction to which sections 1031 or taxable year and has some end of the annualization period or by

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44343

estimating the annual adjustment and until the advance payment is recognized of the proposed regulations because
prorating it to each annualization in the taxpayer’s applicable financial doing so would result in a distortion of
period. statements for the annualization period. annualized taxable income. The
Section 263A expenses are added to The commentator also requested that commentator requested that
the items covered by the rules provided the final regulations allow a taxpayer extraordinary items be taken into
in § 1.6655–2(g) of the final regulations using a deferral method to recognize any account after annualizing taxable
for items that substantially affect taxable portion of an advance payment on the income. The commentator requested
income but cannot be accurately last day of the taxable year in which the that the final regulations provide that
determined by the installment due date. advance payment is required to be taxpayers begin to account for
Therefore, taxpayers may use reasonable recognized under § 1.451–5(c) or Rev. extraordinary items in the annualization
estimates from existing data with Proc. 2004–34, if that portion of the period in which the extraordinary event
respect to the amount of adjustments advance payment is not recognized in occurs or, alternatively, in the
required under section 263A if that the taxpayer’s financial statements for annualization period in which it
amount cannot be determined with any of the annualization periods arising becomes reasonably foreseeable that the
reasonable accuracy by the installment within the limited time provided in extraordinary event will occur. The
due date. § 1.451–5(c) or Rev. Proc. 2004–34. See commentator also requested that the
J. LIFO § 601.601(d)(2)(ii)(b). final regulations provide an exclusive
The IRS and Treasury Department list of extraordinary items by referring to
One commentator noted that although agree with the commentator that the the list of extraordinary items in
the proposed regulations provide final regulations should specifically § 1.1502–76(b)(2)(ii)(C) with certain
simplifying rules to determine the address advance payments and that the modifications.
internal inflation index for taxpayers rule should be consistent with § 1.451– The IRS and Treasury Department
using internal dollar-value LIFO 5 and Rev. Proc. 2004–34. Pursuant to agree with the commentator that the
inventory methods, the proposed § 1.6655–2(f)(3)(i)(A) of the final annualization of extraordinary items
regulations do not provide rules for regulations, if the taxpayer uses the could result in a distortion of
taxpayers to determine an external method of accounting provided in annualized taxable income. The final
inflation index under the inventory § 1.451–5(b)(1)(ii) for an advance regulations include a list of
price index computation (IPIC) LIFO payment, the advance payment is extraordinary items similar to the items
method. The commentator requested includible in computing taxable income in § 1.1502–76(b)(2)(ii)(C). Included in
that the final regulations include a rule under that method of accounting except the list of extraordinary items in the
that allows taxpayers to determine an that, if § 1.451–5(c) applies, any amount final regulations are NOL deductions
estimated external inflation index by not included in computing taxable and section 481(a) adjustments. In
multiplying the prior year inventory income by the end of the second taxable addition, the final regulations also
mix by the applicable inflation index for year following the year in which a provide a de minimis rule wherein only
the annualization period. The substantial advance payment is extraordinary items in excess of
commentator also requested that the received, and not previously included $1,000,0000 will be required to be
final regulations include a rule that in accordance with the taxpayer’s accounted for after annualizing taxable
allows a taxpayer that elected to use accrual method of accounting, is income. However, this de minimis rule
final indices to use preliminary indices includible in computing taxable income does not apply to NOL deductions and
if the final indices for the appropriate on the last day of such second taxable section 481(a) adjustments.
month have not been published. The year. In addition, § 1.6655–2(f)(3)(i)(B)
dollar-value LIFO inventory method M. Section 481(a) Adjustments
of the final regulations provides that if
includes the use of external indexes, the taxpayer uses the deferral method The rule in § 1.6655–2(f)(2)(iv) of the
such as the IPIC LIFO method, as well provided in section 5.02 of Rev. Proc. proposed regulations provides that a
as internal indexes. Therefore, the IRS 2004–34 for an advance payment, the taxpayer takes into account a section
and Treasury Department do not believe advance payment is includible in 481(a) adjustment related to an
that a separate rule is necessary for the computing taxable income under that automatic accounting method change
use of external inflation indexes. method of accounting for annualization during an annualization period only if
purposes. But any amount not included a copy of the Form 3115, ‘‘Application
K. Advance Payment for Change in Accounting Method’’, has
in computing taxable income by the end
One commentator noted that the of the taxable year succeeding the been mailed to the IRS National Office
proposed regulations do not address taxable year of receipt is includible in on or before the last day of the
how a taxpayer who defers revenue computing taxable income on the last annualization period. One commentator
either under § 1.451–5(c) or Rev. Proc. day of such succeeding taxable year. suggested that the rule provided by
2004–34 (2004–1 CB 991) should The final regulations provide an § 1.6655–2(f)(2)(iv) of the proposed
account for an advance payment to example involving an advance payment. regulations creates administrative
determine annualized taxable income. burdens for taxpayers, is inconsistent
Section 1.451–5(c) and Rev. Proc. 2004– L. Extraordinary Items with the depreciation and amortization
34 generally allow a taxpayer to defer One commentator suggested that the rules provided in § 1.6655–2(f)(2)(v) of
recognition of a qualifying advance final regulations provide special the proposed regulations, and could
payment for a limited time but only to treatment for extraordinary items for result in the filing of incomplete Forms
the extent that financial statements also purposes of computing annualized 3115. The commentator suggested that
defer recognition of the income. The taxable income and suggested that the the rule in § 1.6655–2(f)(2)(iv)(B)(1) of
commentator requested that the final regulations consider the extraordinary the proposed regulations causes an
jlentini on PROD1PC65 with RULES3

regulations include a rule that allows a items listed in § 1.1502–76(b)(2)(ii)(C). administrative burden by requiring
taxpayer using the deferral method The commentator requested that the taxpayers to recompute taxable income
under § 1.451–5(c) or Rev. Proc. 2004– final regulations not require taxpayers to using a different method of accounting
34 to not recognize an advance payment take into account extraordinary items than would be used to calculate
as income in the annualization period under the general rules of § 1.6655–2(f) taxpayers’ tax provision for financial

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44344 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

accounting purposes, which generally N. Simplify the 52/53 Week Taxable corporations, and real estate investment
allows taxpayers to take into account Year Rules trusts (REITs), to determine annualized
section 481(a) adjustments for an One commentator suggested that the taxable income for an installment
automatic accounting method change if 52/53 week taxable year rules provided period. The commentator requested that
they anticipate that the change will be by § 1.6655–2(e) of the proposed the final regulations expand the scope of
timely filed. The commentator also regulations are too complex and § 1.6655–2(f)(2)(vi) of the proposed
suggested that if the final regulations administratively burdensome. The regulations to incorporate the statutory
adopt the rule in § 1.6655–2(f)(2)(v) of commentator suggested that the final provisions for section 936(h), section
the proposed regulations that allows regulations not include the 52/53 week 951(a), and closely held REITs, and also
taxpayers to anticipate capital taxable year rules in § 1.6655–2(e) of the provide rules to take into account the
expenditures to estimate depreciation proposed regulations and rely on the distributive share of income received
expense for an annualization period, the general concept of annualization. The from other types of passthrough entities.
final regulations should provide a commentator suggested that taxpayers Section 1.6655–2(f)(3)(v) of the final
similar rule for automatic accounting with 52/53 week taxable years under regulations expands the rule in
method changes by allowing taxpayers section 441(f) know how to annualize § 1.6655–2(f)(2)(vi) of the proposed
to take into account section 481(a) their applicable annualization period regulations to provide for the statutory
adjustments resulting from anticipated without the rules provided by § 1.6655– rules in section 6655(e)(4) and section
filings for automatic accounting method 2(e) of the proposed regulations. 6655(e)(5) for taking into account
changes. The purpose of the annualized subpart F income, income under section
The final regulations provide that, in income installment method is to give 936(h), and dividends received by
general, any section 481(a) adjustment taxpayers a method of determining closely held REITs when computing any
that results from a change in accounting annualized income based on the actual annualized income installment. In
method that is approved by the facts that occur in the annualization addition, § 1.6655–2(f)(3)(v)(D) adds a
Commissioner and properly reflected in period. Therefore, with limited rule that requires items from
the taxpayer’s return for the tax year is exceptions, the IRS and Treasury passthrough entities other than
taken into account as an extraordinary Department drafted the proposed partnerships and closely held REITs to
item deemed to occur on the first day regulations and these final regulations be taken into account in computing any
of the tax year for annualization to provide rules that only allow annualized income installment in a
purposes. The final regulations provide taxpayers to take into account items of manner similar to the manner under
that a section 481(a) adjustment may be income and expense that arise in the which partnership items are taken into
taken into account in this manner applicable annualization period. The account under § 1.6655–2(f)(3)(v)(A) of
notwithstanding (i) the annualization IRS and Treasury Department recognize the final regulations.
period in which the Form 3115 is filed that the 52/53 week taxable year rules 3. Comments Concerning § 1.6655–3
(including requests filed after year-end), provided by § 1.6655–2(e) of the (Adjusted Seasonal Installment Method)
(ii) whether the requested change in proposed regulations are complex. of the Proposed Regulations
accounting method is considered an Although the final regulations retain the
automatic or non-automatic accounting A. Adjusted Seasonal Installment
52/53 week taxable year rules provided
method change request, (iii) whether the Method and Alternative Minimum Tax
by § 1.6655–2(e) of the proposed
section 481(a) adjustment is positive or regulations, the final regulations also One commentator suggested that the
negative, and (iv) the date on which the provide a safe harbor that allows a determination of whether a corporation
taxpayer receives the approval of the taxpayer with a 52/53 week taxable year qualifies for the adjusted seasonal
Commissioner. In allowing for a section to determine its annualization period on installment method under section
481(a) adjustment to be taken into the month that ends closest to the end 6655(e)(3), and the amount of the
account in this manner, taxpayers of its applicable thirteen-week period or required installment under this method,
should be aware that they will be four-week period that ends within the is based only on the corporation’s
subject to a section 6655 addition to tax applicable annualization period. taxable income and tax on that taxable
for an underpayment of estimated tax in However, an eligible taxpayer may only income. The commentator requested
an installment period caused from use this safe harbor if it is used for that the final regulations clarify that a
taking into account a section 481(a) determining annualization periods for corporation using the adjusted seasonal
adjustment the taxpayer expected to be all required installments for the taxable installment method is only required to
incurred but for which the taxpayer year. make estimated tax payments with
does not receive the consent of the respect to taxable income and tax on
Commissioner to change its method of O. Controlled Foreign Corporations, that taxable income, and not on the
accounting for that particular tax year. Partnerships, and Other Pass-Through alternative minimum tax (AMT) or any
The final regulations also provide an Entities other tax. Any required installment
exception to the general rule. Under the One commentator suggested that the must include AMT because AMT is
exception a taxpayer may choose to treat final regulations provide rules on how included in the definition of tax in
the filing of a Form 3115 as the date on taxpayers should take into account section 6655(g)(1) and § 1.6655–1(g)(1)
which the extraordinary item is deemed distributions from a section 936 of the final regulations. Including AMT
to occur rather than the first day of the corporation or a controlled foreign in the determination of tax is consistent
tax year but only with respect to the corporation to determine annualized with the general annualization method
section 481(a) adjustment (or a portion taxable income for an installment and adjusted seasonal installment
thereof) that is recognized in the year of period. The commentator also suggested method and recognizes the overall
jlentini on PROD1PC65 with RULES3

change. Use of this exception will that the final regulations provide rules separate and parallel nature of the AMT.
impact the period in which the taxpayer on how taxpayers should take into Therefore, § 1.6655–3(d)(4) of the final
will be required to take into account the account a distributive share of income regulations provides that the amount of
new method of accounting as provided from passthrough entities other than an installment determined using the
in § 1.6655–6. partnerships, such as trusts, S adjusted seasonal installment method

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44345

must properly take into account the Generally, for a transaction to qualify regulations to allow taxpayers to take
amount of any AMT under section 55 under section 381, an acquiring into account losses of a member of a
that would apply for the period of the corporation must acquire a majority of controlled group of corporations when
computation. For this purpose, the the assets of the acquired corporation. determining whether a corporation is
amount of any AMT that would apply Section 1.6655–4(c)(2) of the proposed considered a large taxpayer because this
is determined by applying to alternative regulations provides that when is consistent with the principles for the
minimum taxable income, tentative determining if a corporation is a large computation of consolidated taxable
minimum tax, and AMT, the rules corporation for a taxable year in which income.
provided in § 1.6655–3(c) of the final a section 381 transaction occurs, an Section 6655(g)(2)(B)(ii) requires that
regulations for determining the amount acquiring corporation must include in the $1,000,000 exemption be divided
of an installment using the adjusted its income the distributor or transferor among members of a controlled group
seasonal installment method. corporation’s income for the taxable under rules similar to the rules of
year up to and including the date of section 1561. The purpose of the statute
B. Adjusted Seasonal Installment distribution or transfer. This rule is to limit members of a controlled
Method Base Period Percentage requires the acquiring corporation to group, as an aggregate, to $1,000,000 of
Section 6655(e)(3)(D)(i) provides that include 100 percent of the distributor or exemption from large corporation
the base period percentage for any transferor corporation’s taxable income treatment. The aggregation rule in
period of months is the average percent (or loss) in the acquiring corporation’s § 1.6655–4(d)(2) is intended to allow a
that the taxable income for the income even if the acquiring controlled group to quickly determine
corresponding months in each of the 3 corporation acquires less than 100 whether the controlled group must
preceding taxable years bears to the percent of the assets of the distributor or allocate the $1,000,000 limitation
taxable income for the 3 preceding transferor corporation as long as section among the members of the group. It is
taxable years. One commentator 381 applies to the transaction. The final not intended to treat the controlled
requested that the final regulations regulations do not include a rule group as a single taxpayer, in which all
clarify whether the base period providing that the adjustment for a members of the group will be treated as
percentage provided in § 1.6655–3(d)(1) section 381 transaction relates only to a large corporation, if the taxable
of the proposed regulations can be the portion of taxable income applicable income of the controlled group, as an
negative. to the transferred assets when aggregate, is over $1,000,000. Thus, for
The rule provided in section computing taxable income for a year in example, if member A of a controlled
6655(e)(3)(D)(i) requires that the base which there is a section 381 transaction group had taxable income of $900,000
period percentage be computed based to determine if a corporation is a large and member B of the group had taxable
on taxable income. The rule does not corporation. The IRS and Treasury income greater than $1,000,000, the
provide that taxpayers take into account Department believe that such a rule controlled group could choose to
a loss. Therefore, a taxpayer can never would be unnecessarily complex allocate $900,000 to member A so that
have a negative base period percentage. considering that the rule in the member A will not be treated as a large
The lowest number the base period proposed regulations is both taxpayer corporation, but member B would be
percentage can equal is zero. Section favorable (if there are losses of the treated as a large corporation no matter
1.6655–3(d)(1) of the final regulations distributor or transferor corporation) how much of the $1,000,000 limitation
provides that the base period percentage and taxpayer unfavorable (if there is is allocated to member B. This is
is computed based on taxable income, taxable income of the distributor or consistent with the rules under section
which the IRS and Treasury Department transferor corporation) and considering 1561.
believe provides a clear rule that an that in these transactions, the acquiring
overall loss for the applicable period of corporation generally acquires a 5. Comments Concerning § 1.6655–5
months used to calculate the base majority of the distributor or transferor (Short Taxable Years) of the Proposed
period percentage cannot be used to corporation’s assets. However, § 1.6655– Regulations
compute the base period percentage. If 4(c)(2)(i)(B) of the final regulations A. Taxpayer’s Initial Taxable Year
a taxpayer has an overall loss for an amends § 1.6655–4(c)(2)(i)(B) of the
proposed regulations to clarify that an One commentator noted that a
applicable period of months used in the taxpayer is not required to choose its
computation of the base period acquiring corporation takes into account
the distributor or transferor taxable year until it files a tax return on
percentage, the taxpayer must use zero its chosen basis in accordance with
in place of the loss. corporation’s taxable income or loss for
purposes of determining whether a § 1.441–1(c)(1). The commentator
4. Comments Concerning § 1.6655–4 corporation is a large corporation for a requested that the final regulations
(Large Corporations) of the Proposed taxable year in which a section 381 modify the rule in § 1.6655–5(c)(1)(ii) of
Regulations transaction occurs. the proposed regulations to provide that
a taxpayer will not be penalized if, in
A. Section 381 Transactions to B. Aggregation its initial taxable year, it makes
Determine Large Corporation Status One commentator suggested that the estimated tax payments based on a
One commentator requested that the rule provided by § 1.6655–4(d)(2) of the presumption that the taxpayer will have
final regulations modify the rules in proposed regulations, which does not a taxable year that is a calendar year
§ 1.6655–4(c)(2) of the proposed allow taxpayers to take into account a even if the taxpayer subsequently
regulations to clarify that, when taxable loss of a member of a controlled chooses a fiscal year.
computing taxable income for a year in group of corporations for a taxable year Because a taxpayer has until the date
which there is a section 381 transaction during the testing period, results in a it files its initial tax return to choose its
jlentini on PROD1PC65 with RULES3

to determine if a corporation is a large distorted view of the taxable income of taxable year, the final regulations
corporation, the adjustment for the the controlled group of corporations. modify the rule in § 1.6655–5(c)(1)(ii) of
section 381 transaction relates only to The commentator requested that the the proposed regulations to allow a
the portion of taxable income applicable final regulations modify the rule in taxpayer with an initial short taxable
to the transferred assets. § 1.6655–4(d)(2) of the proposed year to make estimated tax payments as

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44346 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

though it chose to be a calendar year the final regulations provides a rule tax on an annual basis if the preceding
taxpayer until the taxpayer files its addressing the applicable percentage for taxable year was a short taxable year
return for its initial short taxable year. an installment period in which the when using section 6655(d)(2) to
Pursuant to this modified rule, a taxpayer does not reasonably expect that determine their first installment, is not
taxpayer with an initial short taxable the taxable year will be an early authorized by section 6655. Consistent
year may make estimated tax payments termination year. In the case of any with § 1.6655–1(g)(3), the final
as though it were a calendar year required installment determined under regulations do not adopt the rule
taxpayer until it files its tax return for section 6655(e) in which the taxpayer provided in § 1.6655–5(h) of the
its initial taxable year. does not know that the taxable year will proposed regulations.
be an early termination year, the
B. Taxpayer’s Final Taxable Year
applicable percentage under section 6. Change in Method of Accounting
One commentator suggested that 6655(e)(2)(B)(ii) and § 1.6655–5(d)(3)(i)
§§ 1.6655–5(d)(1), 1.6655–5(d)(2), and of the final regulations is the applicable The rule in § 1.6655–6(b) of the
1.6655–5(d)(3) of the proposed percentage for each installment period proposed regulations provides that if a
regulations provide rules that may with the remaining balance of the taxpayer is making a change in method
require taxpayers with short taxable estimated tax payment for the year due of accounting for the current taxable
years to make installment payments with the final installment. year that is permitted to be made with
based on an applicable percentage that the automatic consent of the
is more than the standard 25 percent per C. Internal Revenue Manual Provisions
and Annualizing Taxable Income in an Commissioner, the new method is used
installment period. The commentator in determining any required installment
suggested that these rules may result in Initial or Final Taxable Year
if, and only if, a copy of the Form 3115
a section 6655 addition to tax being One commentator noted that Internal has been mailed to the IRS National
imposed on a taxpayer who makes Revenue Manual Part 20.1.3.6.3(2) Office on or before the last day of the
annualization payments based on 25 provides that a corporation filing a short
annualization period. One commentator
percent of its annualized tax and later period return that is either an initial or
suggested that the rule provided by
in the year discovers that, due to an final return is not required to annualize
unforeseen termination of its tax year, it its taxable income to compute the § 1.6655–6(b) of the proposed
should have made its annualization penalty. The commentator requested regulations creates administrative
payments based on a higher applicable that the final regulations clarify this burdens for taxpayers, is inconsistent
percentage because it will have fewer rule. with the depreciation and amortization
than four installment payments. The The rule in IRM 20.1.3.6.3(2) provides rules provided in § 1.6655–2(f)(2)(v) of
commentator also suggested that the that if a taxpayer has a short taxable the proposed regulations, and could
rule in § 1.6655–2(h) of the proposed year that is either an initial or final year, result in the filing of incomplete Forms
regulations, which addresses events the taxpayer should not annualize its 3115. The commentator suggested that
arising after an installment due date that taxable income based on a full 12 month the rule in § 1.6655–6(b) of the proposed
were not reasonably foreseeable, does period. Instead, the taxpayer should regulations causes an administrative
not appear to protect a taxpayer that annualize its taxable income based on burden by requiring taxpayers to
makes an installment payment based on the number of months in the short recompute taxable income using a
25 percent of its annualized tax and taxable year. This rule was intended to different method of accounting than
later discovers that it should have based be provided in § 1.6655–5(g)(2) of the would be used to calculate taxpayers’
its installment payment on a higher proposed regulations. However, the tax provision for financial accounting
applicable percentage because it had an computational rule in § 1.6655–5(g)(2) purposes, which generally allows
unforeseen termination of its tax year of the proposed regulations is incorrect taxpayers to take into account an
resulting in a short taxable year. The and does not result in the computation automatic accounting method change if
commentator requested that the final of the correct amount for every
they anticipate that the change will be
regulations revise the rules in installment payment during a short
timely filed.
§§ 1.6655–5(d)(1), 1.6655–5(d)(2), and taxable year. The final regulations revise
1.6655–5(d)(3) of the proposed the rule in § 1.6655–5(g)(2) of the Consistent with the rules for section
regulations so that payments made for proposed regulations to provide that a 481(a) adjustments as discussed in
an installment period in a short taxable taxpayer computes its annualized heading (2)(M) above, the final
year do not exceed 25 percent. As an income installment by determining the regulations require a taxpayer to take
alternative, the commentator requested tax on the basis of the annualized into account any change in method of
that the final regulations revise the rules income for the annualization period, accounting for which the taxpayer has
in § 1.6655–2(h) of the proposed dividing the resulting tax by 12, received the consent of the
regulations to allow a taxpayer with an multiplying that result by the number of Commissioner in the same manner the
unexpected termination of its tax year to months in the short taxable year, and taxpayer chooses to treat the section
make a payment with its final required finally multiplying that result by the 481(a) adjustment resulting from such a
installment equal to the remaining applicable percentage for the annualized change (for example, as of the first day
portion of 100 percent of its required income installment. The final of the taxable year or as of the date the
annual payment to avoid a penalty on regulations also revise an example to Form 3115 was filed). For a change in
its earlier required installments. reflect the new computational rule. accounting method that does not result
A taxpayer should not be penalized
for making payments based on the D. Preceding Taxable Year Rule for in a section 481(a) adjustment, the final
applicable percentage of 25 percent for Large Corporations When the Preceding regulations provide that in the year of
Taxable Year Is a Short Year change the taxpayer will have the
jlentini on PROD1PC65 with RULES3

each installment period when it does


not know that it will have an early One commentator suggested that the choice for annualization purposes to
termination year that will result in it rule provided in § 1.6655–5(h) of the either use the new method as of the first
making less than four installment proposed regulations, which requires day of the taxable year or as of the date
payments. Therefore, § 1.6655–5(d)(4) of taxpayers to compute the preceding year the Form 3115 was filed.

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44347

Effect on Other Documents otherwise on the basis of the facts Code, the notice of proposed rulemaking
The following publications are shown on the return of the corporation preceding this regulation was submitted
obsolete for tax years beginning after for, and the law applicable to, the to the Chief Counsel for Advocacy of the
September 6, 2007: preceding taxable year. The revenue Small Business Administration for
Revenue Ruling 67–93 (1967–1 CB ruling concludes that the corporation comment on its impact on small
366). was subject to an addition to tax for the businesses.
Revenue Ruling 76–450 (1976–2 CB underpayment of estimated tax because
it failed to pay on or before the Drafting Information
444).
Revenue Ruling 78–257 (1978–1 CB prescribed installment due dates an The principal authors of these
440). amount equal to the tax resulting from regulations are Joseph P. Dewald,
Revenue Ruling 67–93 (1967–1 CB the recomputation of the prior year’s formerly of the Office of Associate Chief
366) provides that the entire amount of investment credit. However, as Counsel (Procedure and
a net operating loss carryover should be discussed in heading (1)(A) of the Administration), and Timothy S.
deducted from income prior to preamble, based on the holding in Sheppard, Office of Associate Chief
annualization under the annualized Berkshire Hathaway, Inc. v. United Counsel (Procedure and
income installment method. The States, 802 F.2d 429 (Fed. Cir. 1986), Administration).
rational underlying the conclusion in § 1.6655–1(g)(1)(iii) of the final
List of Subjects
Rev. Rul. 67–93 was based on the regulations provides that, unless
position that each annualization period otherwise provided, for purposes of the 26 CFR Part 1
should be treated as a short taxable year. definition of tax as used in section 6655, Income taxes, Reporting and
a recapture of tax, such as a recapture recordkeeping requirements.
The final regulations specifically
provided by section 50(a)(1)(A) and any
provide that an annualization period is 26 CFR Part 301
other similar provision, is not
not treated as a short taxable year.
considered to be a tax imposed by Employment taxes, Estate taxes,
Therefore, Rev. Rul. 67–93 will be
section 11. Therefore, Rev. Rul. 78–257 Excise taxes, Gift taxes, Income taxes,
removed when the final regulations are
is no longer applicable and will be Penalties, Reporting and recordkeeping
effective.
removed when the final regulations are requirements.
Revenue Ruling 76–450 (1976–2 CB
effective. See § 601.601(d)(2)(ii)(b).
444) provides that state property tax and 26 CFR Part 602
franchise tax are deductible from the Special Analyses
income for an annualization period on Reporting and recordkeeping
It has been determined that this requirements.
the date the taxpayer accrues the taxes Treasury decision is not a significant
under the taxpayer’s method of regulatory action as defined in Adoption of Amendments to the
accounting. Revenue Ruling 76–450 was Executive Order 12866. Therefore, a Regulations
issued prior to the enactment of section regulatory assessment is not required.
461(h) and does not take into account ■ Accordingly, 26 CFR parts 1, 301, and
Except with respect to § 1.6655–5,
the application of the economic 602 are amended as follows:
which deals with the rules applicable to
performance requirements of section a short taxable year, it has been PART 1—INCOME TAXES
461(h) for purposes of computing an determined that section 553(b) of the
estimated tax payment using the Administrative Procedure Act (5 U.S.C. ■ Paragraph 1. The authority citation
annualized income installment method. chapter 5) does not apply to these for part 1 is amended by adding an entry
The final regulations provide specific regulations and, because these in numerical order to read as follows:
rules related to address the application provisions do not impose a collection of Authority: 26 U.S.C. 7805 * * *
of section 461(h) and real property taxes information on small businesses, the Section 1.6655–5 also issued under 26
for purposes of the annualized income Regulatory Flexibility Act (5 U.S.C. U.S.C. 6655(i)(2). * * *
installment method. As a result of the chapter 6) does not apply. With respect
rules provided in the final regulations, to § 1.6655–5, it is hereby certified that ■ Par. 2. In § 1.56–0, the heading for
Rev. Rul. 76–450 is no longer applicable this provision of the regulations will not paragraph (e)(5) is added to read as
and will be removed when the final have a significant economic impact on follows:
regulations are effective. See a substantial number of small entities. § 1.56–0 Table of contents to § 1.56–1,
§ 601.601(d)(2)(ii)(b). This certification is based on the fact adjustment for book income of
Revenue Ruling 78–257 (1978–1 CB that not many small businesses are corporations.
440) provides that the term tax, as going to be subject to the short taxable * * * * *
defined in section 6655, includes the year rules because: (1) Existing small (e) * * *
amount of tax resulting from the businesses generally are not targets of (5) Effective/applicability date.
recomputation of a prior year’s mergers and acquisitions, which result ■ Par. 3. Section 1.56–1(e)(4) is revised
investment credit at the applicable rate in a short taxable year; (2) start-up small and paragraph (e)(5) is added to read as
for the current year. In Rev. Rul. 78–257, businesses with a short taxable year of follows:
a corporation incurred a net operating less than four months do not have to
loss in 1975 but showed an amount of pay estimated taxes; and (3) start-up § 1.56–1 Adjustment for the book income
tax from the recomputation of the prior small businesses with a short taxable of corporations.
year’s investment credit. For 1976 the year of four months or more are not * * * * *
corporation had a liability for income likely to have taxable income that (e) * * *
tax but made no deposits of estimated would be subject to the corporate (4) Estimating the book income
jlentini on PROD1PC65 with RULES3

tax, relying on the former provision in estimated tax rules. Therefore, a adjustment for purposes of the
section 6655 that allowed a taxpayer to Regulatory Flexibility Analysis under estimated tax liability. See § 1.6655–7,
base its estimated tax payments on an the Regulatory Flexibility Act (5 U.S.C. as contained in 26 CFR part 1 revised as
amount equal to the tax computed at the chapter 6) is not required. Pursuant to of April 1, 2007, for special rules for
rates applicable to the taxable year but section 7805(f) of the Internal Revenue estimating the corporate alternative

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44348 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

minimum tax book income adjustment (2) For the effect of an excessive (3) Special rules.
under the annualization exception. adjustment under section 6425, see (i) Advance payments.
(5) Effective/applicability date. § 1.6655–7. (A) Advance payments under § 1.451–
(3) Effective/applicability date: This 5(b)(1)(ii).
Paragraph (e)(4) of this section is (B) Advance payments under Rev. Proc.
applicable for taxable years beginning paragraph (f) is applicable to 2004–34.
after September 6, 2007. applications for adjustments of (ii) Extraordinary items.
overpayments of estimated income tax (A) In general.
§§ 1.6154–1, 1.6154–2, 1.6154–3, 1.6154–4, that are filed in taxable years beginning (B) De minimis extraordinary items.
and 1.6154–5 [Removed]. after September 6, 2007. (C) Special rules for net operating loss
■ Par. 4. Sections 1.6154–1, 1.6154–2, ■ Par. 7. Section 1.6655–0 is added to deductions and section 481(a)
1.6154–3, 1.6154–4, and 1.6154–5 are read as follows: adjustments.
removed. (iii) Credits.
§ 1.6655–0 Table of contents. (A) Current year credits.
■ Par. 5. Section 1.6425–2(a) is revised (B) Credit carryovers.
and paragraph (c) is added to read as This section lists the table of contents
(iv) Depreciation and amortization.
follows: for §§ 1.6655–1 through 1.6655–7. (A) Estimated annual depreciation and
§ 1.6655–1 Addition to the tax in the case amortization.
§ 1.6425–2 Computation of adjustment of of a corporation. (B) Safe harbors.
overpayment of estimated tax. (a) In general. (1) Proportionate depreciation allowance.
(a) Income tax liability defined. For (b) Amount of underpayment. (2) 90 percent of preceding year’s
purposes of § 1.6425–1, this section, (c) Period of the underpayment. depreciation.
§§ 1.6425–3 and 1.6655–7, relating to (d) Amount of required installment. (3) Safe harbor operational rules.
(1) In general. (C) Short taxable years.
excessive adjustment, the term income (v) Distributive share of items
(2) Exception.
tax liability means the excess of— (A) Member of partnership.
(e) Large corporation required to pay 100
(1) The sum of— percent of current year tax. (B) Treatment of subpart F income and
(i) The tax imposed by section 11 or (1) In general. income under section 936(h).
1201(a), or subchapter L of chapter 1 of (2) May use last year’s tax for first (1) General rule.
the Internal Revenue Code, whichever is installment. (2) Prior year safe harbor.
applicable; plus (f) Required installment due dates. (i) General rule.
(ii) The tax imposed by section 55; (1) Number of required installments. (ii) Special rule for noncontrolling
(2) Time for payment of installments. shareholder.
over
(i) Calendar year. (C) Dividends from closely held real estate
(2) The credits against tax provided by (ii) Fiscal year. investment trust.
part IV of subchapter A of chapter 1 of (iii) Short taxable year. (1) General rule.
the Internal Revenue Code. (iv) Partial month. (2) Closely held real estate investment
* * * * * (g) Definitions. trust.
(c) Effective/applicability date. (h) Special rules for consolidated returns. (D) Other passthrough entities.
Paragraph (a) of this section is (i) Overpayments applied to subsequent (vi) Alternative minimum taxable income
taxable year’s estimated tax. exemption amount.
applicable to applications for (1) In general. (vii) Examples.
adjustments of overpayments of (2) Subsequent examinations. (g) Items that substantially affect taxable
estimated income tax that are filed in (j) Examples. income but cannot be determined
taxable years beginning after September (k) Effective/applicability date. accurately by the installment due date.
6, 2007. § 1.6655–2 Annualized income installment (1) In general.
■ Par. 6. Section 1.6425–3 is amended method. (2) Example.
by revising paragraph (f) to read as (a) In general. (h) Effective/applicability date.
(b) Determination of annualized income § 1.6655–3 Adjusted seasonal installment
follows: installment—in general. method.
§ 1.6425–3 Allowance of adjustments. (c) Special rules. (a) In general.
(1) Applicable percentage. (b) Limitation on application of section.
* * * * * (2) Partial month. (c) Determination of amount.
(f) Effect of adjustment. (1) For (3) Annualization period not a short (d) Special rules.
purposes of all sections of the Internal taxable year. (1) Base period percentage.
Revenue Code except section 6655, (d) Election of different annualization (2) Filing month.
relating to additions to tax for failure to periods. (3) Application of the rules related to the
pay estimated income tax, any (e) 52–53 week taxable year. annualized income installment method
adjustment under section 6425 is to be (f) Determination of taxable income for an to the adjusted seasonal installment
treated as a reduction of prior estimated annualization period. method.
(1) In general. (4) Alternative minimum tax.
tax payments as of the date the credit is (i) Items of income. (e) Example.
allowed or the refund is paid. For the (ii) Items of deduction. (f) Effective/applicability date.
purpose of sections 6655(a) through (g), (iii) Losses. § 1.6655–4 Large corporations.
(i), and (j), credit or refund of an (2) Certain deductions required to be (a) Large corporation defined.
adjustment is to be treated as if not allocated in a reasonably accurate (b) Testing period.
made in determining whether there has manner. (c) Computation of taxable income during
been any underpayment of estimated (i) In general. testing period.
income tax and, if there is an (ii) Application of the reasonably accurate (1) Short taxable year.
underpayment, the period during which manner requirement to certain charitable (2) Computation of taxable income in
contributions, recurring items, and 12- taxable year when there occurs a
jlentini on PROD1PC65 with RULES3

the underpayment existed. However, an month rule items. transaction to which section 381 applies.
excessive adjustment under section (iii) Reasonably accurate manner defined. (d) Members of controlled group.
6425 is taken into account in applying (iv) Special rule for certain real property (1) In general.
the addition to tax under section tax liabilities. (2) Aggregation.
6655(h). (v) Examples. (3) Allocation rule.

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44349

(4) Controlled group members. (c) Period of the underpayment. The calendar year taxpayer, the due dates of
(e) Effect on a corporation’s taxable income period of the underpayment of any the required installments are as follows:
of items that may be carried back or required installment runs from the date
carried over from any other taxable year. 1st April 15
the installment was required to be paid 2nd June 15
(f) Consolidated returns. [Reserved]
(g) Example. to the 15th day of the 3rd month 3rd September 15
(h) Effective/applicability date. following the close of the taxable year, 4th December 15
§ 1.6655–5 Short taxable year. or to the date such underpayment is (ii) Fiscal year. In the case of a
(a) In general. paid, whichever is earlier. For purposes taxpayer other than a calendar year
(b) Exception to payment of estimated tax. of determining the period of the taxpayer, the due dates of the required
(c) Installment due dates. underpayment a payment of estimated
(1) In general.
installments are as follows:
tax will be credited against unpaid
(i) Taxable year of at least four months but 1st 15th day of 4th month of the
required installments in the order in
less than twelve months. taxable year
which such installments are required to
(ii) Exceptions. 2nd 15th day of 6th month of the
(2) Early termination of taxable year. be paid.
(d) Amount of required installment— taxable year
(i) In general. 3rd 15th day of 9th month of the
(ii) Exception. (1) In general. Except as otherwise
provided in this section and §§ 1.6655– taxable year
(d) Amount due for required installment.
(1) In general. 2 through 1.6655–7, the amount of any 4th 15th day of 12th month of the
(2) Tax shown on the return for the required installment is 25 percent of the taxable year
preceding taxable year. lesser of— (iii) Short taxable year. See § 1.6655–
(3) Applicable percentage. (i) 100 percent of the tax shown on 5 for rules regarding required
(4) Applicable percentage for installment the return for the taxable year (or, if no installments for corporations with a
period in which taxpayer does not short taxable year.
reasonably expect that the taxable year
return is filed, 100 percent of the tax for
such year); or (iv) Partial month. Except as
will be an early termination year.
(e) Examples. (ii) 100 percent of the tax shown on otherwise provided, for purposes of
(f) 52 or 53 week taxable year. the return for the preceding taxable determining the due date of any
(g) Use of annualized income or seasonal year. required installment, a partial month is
installment method. (2) Exception. This paragraph treated as a full month.
(1) In general. (d)(1)(ii) does not apply if the preceding (g) Definitions. (1) The term tax as
(2) Computation of annualized income taxable year was not a taxable year of 12 used in this section and §§ 1.6655–2
installment. months or the corporation did not file through 1.6655–7 means the excess of—
(3) Annualization period for final required a return for the preceding taxable year (i) The sum of—
installment. (A) The tax imposed by section 11,
(4) Examples. showing a liability for tax.
(h) Effective/applicability date. (e) Large corporation required to pay section 1201(a), or subchapter L of
§ 1.6655–6 Methods of accounting. 100 percent of current year tax—(1) In chapter 1 of the Internal Revenue Code,
(a) In general. general. Except as provided in whichever is applicable;
(b) Accounting method changes. paragraph (e)(2) of this section, (B) The tax imposed by section 55;
(c) Examples. paragraph (d)(1)(ii) of this section does plus
(d) Effective/applicability date. not apply in the case of a large (C) The tax imposed by section 887;
§ 1.6655–7 Addition to tax on account of corporation (as defined in § 1.6655–4). over
excessive adjustment under section (2) May use last year’s tax for first (ii) The credits against tax provided
6425. by part IV of subchapter A of chapter 1
installment. Paragraph (e)(1) of this
■ Par. 8. Sections 1.6655–1 and 1.6655–
section does not apply for purposes of of the Internal Revenue Code.
2 are revised to read as follows: (2)(i) In the case of a foreign
determining the amount of the 1st
§ 1.6655–1 Addition to the tax in the case required installment for any taxable corporation subject to taxation under
of a corporation. year. Any reduction in such 1st section 11, section 1201(a), or
(a) In general. Section 6655 imposes installment by reason of the preceding subchapter L of chapter 1 of the Internal
an addition to the tax under chapter 1 sentence is recaptured by increasing the Revenue Code, the tax imposed by
of the Internal Revenue Code in the case amount of the next required installment section 881 is treated as a tax imposed
of any underpayment of estimated tax determined under paragraph (d)(1)(i) of by section 11.
by a corporation. An addition to tax due this section by the amount of such (ii) In the case of a partnership that is
to the underpayment of estimated taxes reduction and, if the next required treated, pursuant to regulations issued
is determined by applying the installment is reduced by use of the under section 1446(f)(2), as a
underpayment rate established under annualized income installment method corporation for purposes of this section,
section 6621 to the amount of the under § 1.6655–2 or the adjusted the tax imposed by section 1446 is
underpayment, for the period of the seasonal installment method under treated as a tax imposed by section 11.
underpayment. This addition to the tax § 1.6655–3, by increasing subsequent (iii) Unless otherwise provided in the
is in addition to any applicable criminal required installments determined under Internal Revenue Code or Treasury
penalties and is imposed whether or not paragraph (d)(1)(i) of this section to the regulations, for purposes of the
there was reasonable cause for the extent that the reduction has not definition of ‘‘tax’’ as used in this
underpayment. previously been recaptured. section, a recapture of tax, such as a
(b) Amount of underpayment. The (f) Required installment due dates— recapture provided by section
amount of the underpayment for (1) Number of required installments. 50(a)(1)(A), and any other similar
any required installment is the Unless otherwise provided, corporations provision, is not considered to be a tax
jlentini on PROD1PC65 with RULES3

excess of— must make 4 required installments for imposed by section 11.
(1) The required installment; over each taxable year. (iv) For the purposes of paragraph (d)
(2) The amount, if any, of the (2) Time for payment of of this section, the return for the
installment paid on or before the last installments—(i) Calendar year. Unless preceding taxable year is the Federal
date prescribed for such payment. otherwise provided, in the case of a income tax return for such taxable year

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44350 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

that is required by section 6012(a)(2). interest. Overpayment interest will not (E) Amount paid on or before the first,
However, if an amended Federal income be impacted. For further guidance, see second, and third installment dates = $0
tax return has been filed before the due Rev. Rul. 99–40 (1999–2 CB 441), (see (F) Amount paid on or before the fourth
date of an installment, then the return installment date = $63,000
§ 601.601(d)(2)(ii)(b) of this chapter).
(G) Amount of underpayment for each of
for the preceding taxable year is the (j) Examples. The method prescribed the first, second, and third installment dates
Federal income tax return as amended. in paragraphs (d) through (g) of this = $17,500
If an amended Federal income tax section is illustrated by the following (H) Amount of underpayment for the
return has been filed on or after the due examples: fourth installment date = $7,000
date for an installment, then the return Example 1. (i) X, a calendar year (ii) Addition to tax. Assuming that neither
for the preceding taxable year does not corporation, estimates its tax liability for its the annualized income installment method
include for such installment period the taxable year ending December 31, 2009, will nor the adjusted seasonal installment method
Federal income tax return as amended be $85,000. X is not a large corporation as described in §§ 1.6655–2 and 1.6655–3
subsequent to the due date for such defined in section 6655(g)(2) and § 1.6655–4. would result in a lower payment for any
X reported a liability of $74,900 on its return installment period, and the addition to tax is
installment. Paragraph (d) of this section computed under section 6621(a)(2) at the rate
will apply without regard to whether for the taxable year ended December 31,
2008, with no credits against tax. X paid four of 8 percent per annum for the applicable
the taxpayer’s Federal income tax return periods of underpayment, the addition to tax
installments of estimated tax, each in the
for the preceding taxable year is filed in amount of $18,725 (25 percent of $74,900), is determined as follows:
a timely manner. on April 15, 2009, June 15, 2009, September (A) First installment (underpayment period
(h) Special rules for consolidated 15, 2009, and December 15, 2009, 4–16–09 through 12–15–09), computed as
returns For special rules relating to the respectively. X reported a tax liability of 244/365 × $17,500 × 8% = $936
determination of the amount of the $88,900 on its return due March 15, 2010. X (B) Second installment (underpayment
underpayment in the case of a had a $5,000 credit against tax for tax year period 6–16–09 through 12–15–09),
corporation whose income is included 2009 as provided by part IV of subchapter A computed as 183/365 × $17,500 × 8% = $702
of chapter 1 of the Internal Revenue Code. X (C) Third installment (underpayment
in a consolidated return, see § 1.1502–
did not underpay its estimated tax for tax period 9–16–09 through 12–15–09),
5(b). computed as 91/365 × $17,500 × 8% = $349
(i) Overpayments applied to year 2009 for any of the four installments,
determined as follows: (D) Fourth installment (underpayment
subsequent taxable year’s estimated (A) Tax as defined in paragraph (g) of this period 12–16–09 through 3–15–10),
tax—(1) In general. If a taxpayer elects section for 2009 ($88,900-$5,000) = $83,900 computed as 90/365 × $7,000 × 8% = $138
under the provisions of sections 6402(b) (B) Tax as defined in paragraph (g) of this (E) Total of this paragraph (j), Example 2
and 6513(d) and the regulations to apply section for 2008 = $74,900 (ii)(A) through (D) = $2,125
an overpayment in year one against the (C) 100% of the lesser of this paragraph (j), (k) Effective/applicability date. This
estimated tax liability for year two, the Example 1 (i)(A) or (i)(B) = $74,900
section applies to taxable years
overpayment will be applied to the (D) Amount of estimated tax required to be
paid on or before each installment date (25% beginning after September 6, 2007.
required installment payments for year
two in the order due and to the extent of $74,900) = $18,725 § 1.6655–2 Annualized income installment
(E) Deduct amount paid on or before each method.
necessary to satisfy such installments, installment date = $18,725
similar to the manner in which an (F) Amount of underpayment for each (a) In general. In the case of any
actual overpayment of one installment installment date = $0 required installment, if the corporation
is carried forward to the next (ii) [Reserved]. establishes that the annualized income
installment. No interest is accrued or Example 2. (i) Facts. Y, a calendar year installment determined under this
paid on an overpayment if the election corporation, estimates its tax liability for its section, or the adjusted seasonal
to apply the overpayment against taxable year ending December 31, 2009, will installment determined under § 1.6655–
estimated tax is made. be $70,000. Y is not a large corporation as 3, is less than the amount determined
(2) Subsequent examinations. If a defined in section 6655(g)(2) and § 1.6655–4.
Y reported a Federal income tax liability of
under § 1.6655–1—
deficiency is determined in an (1) The amount of such required
$90,000 for its taxable year ending December
examination of a return for a taxable 31, 2008. Y paid no installment of estimated installment is the annualized income
year that originally reflected an tax on or before April 15, 2009, June 15, installment (or, if less, the adjusted
overpayment that was applied against 2009, or September 15, 2009, but made a seasonal installment); and
estimated tax for the succeeding taxable payment of $63,000 on December 15, 2009. (2) Any reduction in a required
year, interest on the deficiency will not On March 15, 2010, Y filed its income tax installment resulting from the
begin to accrue on an amount applied return showing a tax of $70,000. Y had no application of this section will be
until that amount is used to satisfy a credits against tax for tax year 2009. Of the recaptured by increasing the amount of
required estimated tax payment in such $63,000 paid by Y on December 15, 2009, the next required installment
taxable year. Regardless of whether the $17,500 is applied to each of the first three
installments due on April 15, June 15, and
determined under § 1.6655–1 by the
taxpayer anticipated the application of amount of such reduction (and, if the
September 15, 2009, and the remaining
such overpayment from the prior $10,500 is applied to the fourth installment. next required installment is similarly
taxable year in calculating and paying Y has an underpayment of estimated tax for reduced, by increasing subsequent
its required estimated tax installment each of the first three installments of $17,500 required installments to the extent that
liabilities for the current taxable year, and for the fourth installment of $7,000. The the reduction has not previously been
the subsequently determined addition to tax under section 6655(a) is recaptured).
underpayment and interest computation computed as follows: (b) Determination of annualized
thereon will not change the taxpayer’s (A) Tax as defined in paragraph (g) of this income installment—in general. In the
original election to apply the section for 2009 = $70,000 case of any required installment, the
overpayment against the estimated tax (B) Tax as defined in paragraph (g) of this
section for 2008 = $90,000
annualized income installment is the
jlentini on PROD1PC65 with RULES3

liability of the succeeding taxable year. (C) 100% of the lesser of this paragraph (j), excess (if any) of—
Any changes to the usage of the original Example 2 (i)(A) or (i)(B) = $70,000 (1) The product of the applicable
overpayment from the prior taxable year (D) Amount of estimated tax required to be percentage and the tax (after reducing
are hypothetical only and solely for the paid on or before each installment date (25% the annualized tax by the amount of any
purpose of computing deficiency of $70,000) = $17,500 allowable credits) for the taxable year

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44351

computed by annualizing the taxable (iii) Paragraph (b)(1)(iv) of this section overpayment of first required installment))
income and alternative minimum will be applied by using the language exceeds the amount required to be paid on
taxable income— ‘‘11 months’’ instead of ‘‘9 months’’. or before this date if the estimated tax were
(3) The application of the annualized 100 percent of the tax determined by placing
(i) For the first 3 months of the taxable on an annualized basis the taxable income for
year, in the case of the first required income installment method is the first 4-month period ($18,627), the
installment; illustrated by the following example: exception described in paragraphs (a) and (b)
(ii) For the first 3 months of the Example. (i) ABC, a calendar year of this section applies, and no addition to tax
taxable year, in the case of the second corporation, had a taxable year of less than will be imposed for the installment due on
required installment; twelve months for tax year 2008 and no June 15, 2009.
(iii) For the first 6 months of the credits against tax for tax year 2009. ABC (iv)(A) To determine whether the
taxable year, in the case of the third made an estimated tax payment of $15,000 installment payments made on or before
on the installment dates of April 15, 2009, September 15, 2009, equal or exceed the
required installment; and amount that would have been required to
June 15, 2009, September 15, 2009, and
(iv) For the first 9 months of the December 15, 2009, respectively. Assume have been paid if the estimated tax were
taxable year, in the case of the fourth that, under paragraph (d)(1) of this section, equal to 100 percent of the tax computed on
required installment; over ABC elected Option 1 by timely filing Form the annualized income for the 7-month
(2) The aggregate amount of any prior 8842, in accordance with section period, the following computation is
required installments for the taxable 6655(e)(2)(C)(iii), and determined that its necessary:
year. taxable income for the first 2, 4, 7 and 10 (1) Annualized income for the 7 month
months was $25,000, $64,000, $125,000, and period = $214,286
(c) Special rules—(1) Applicable
$175,000 respectively. The income for each (2) Tax on this paragraph (d)(3), Example
percentage. Except as otherwise period is annualized as follows: (iv)(A)(1) = $66,821
provided in § 1.6655–5(d) with respect $25,000 × 12/2 = $150,000 (3) 100% of this paragraph (d)(3), Example
to short taxable years— $64,000 × 12/4 = $192,000 (iv)(A)(2) = $66,821
$125,000 × 12/7 = $214,286 (4) 75% of this paragraph (d)(3), Example
In the case of the The applicable $175,000 × 12/10 = $210,000 (iv)(A)(3) less $29,065 (amount due with the
following required (ii)(A) To determine whether the first and second installment) = $21,051
percentage is
installments installment payment made on April 15, 2009, (B) Because the total amount of estimated
equals or exceeds the amount that would tax actually paid on or before the third
1st ................................... 25 have been required to have been paid if the installment date ($15,935 ($15,000 third
2nd .................................. 50 estimated tax were equal to 100 percent of required installment payment plus $935
3rd ................................... 75 the tax computed on the annualized income overpayment of second required installment))
4th ................................... 100 for the 2-month period, the following does not equal or exceed the amount required
computation is necessary: to be paid on or before this date if the
(2) Partial month. Except as otherwise (1) Annualized income for the 2 month estimated tax were 100 percent of the tax
provided, for purposes of paragraph (b) period = $150,000 determined by placing on an annualized
of this section a partial month is treated (2) Tax on this paragraph (d)(3), Example basis the taxable income for the first 7-month
as a month. (ii)(A)(1) = $41,750 period ($21,051), the exception described in
(3) Annualization period not a short (3) 100% of this paragraph (d)(3), Example paragraphs (a) and (b) of this section does not
taxable year. An annualization period is (ii)(A)(2) = $41,750 apply, and an addition to tax will be imposed
(4) 25% of this paragraph (d)(3), Example with respect to the underpayment of the
not treated as a short taxable year for
(ii)(A)(3) = $10,438 September 15, 2009, installment unless
purposes of determining the taxable (B) Because the total amount of estimated another exception applies to this installment
income of an annualization period. tax that was timely paid on or before the first payment.
(d) Election of different annualization installment date ($15,000) exceeds the (v)(A) To determine whether the
periods. (1) If the taxpayer timely files amount required to be paid on or before this installment payments made on or before
Form 8842, ‘‘Election to Use Different date if the estimated tax were 100 percent of December 15, 2009, equal or exceed the
Annualization Periods for Corporate the tax determined by placing on an amount that would have been required to
Estimated Tax,’’ in accordance with annualized basis the taxable income for the have been paid if the estimated tax were
section 6655(e)(2)(C)(iii), and elects first 2-month period ($10,438), the exception equal to 100 percent of the tax computed on
described in paragraphs (a) and (b) of this the annualized income for the 10-month
Option 1— section applies, and no addition to tax will period, the following computation is
(i) Paragraph (b)(1)(i) of this section be imposed for the installment due on April necessary:
will be applied by using the language ‘‘2 15, 2009. (1) Annualized income for the 10 month
months’’ instead of ‘‘3 months’’; (iii)(A) To determine whether the period = $210,000
(ii) Paragraph (b)(1)(ii) of this section installment payments made on or before June (2) Tax on this paragraph (d)(3), Example
will be applied by using the language ‘‘4 15, 2009, equal or exceed the amount that (v)(A)(1) = $65,150
months’’ instead of ‘‘3 months’’; would have been required to have been paid (3) 100% of this paragraph (d)(3), Example
(iii) Paragraph (b)(1)(iii) of this section if the estimated tax were equal to 100 percent (v)(A)(2) = $65,150
of the tax computed on the annualized (4) 100% of this paragraph (d)(3), Example
will be applied by using the language ‘‘7
income for the 4-month period, the following (v)(A)(3) less $50,116 (amount due with the
months’’ instead of ‘‘6 months’’; and computation is necessary: first, second and third installment) = $15,034
(iv) Paragraph (b)(1)(iv) of this section (1) Annualized income for the 4 month (B) Because the total amount of estimated
will be applied by using the language period = $192,000 tax payments made on or before the fourth
‘‘10 months’’ instead of ‘‘9 months’’. (2) Tax on this paragraph (d)(3), Example installment date that is available to be
(2) If the taxpayer timely files Form (iii)(A)(1) = $58,130 applied to the estimated tax due for the
8842, in accordance with section (3) 100% of this paragraph (d)(3), Example fourth installment ($9,884 ($15,000 fourth
6655(e)(2)(C)(iii), and elects Option 2— (iii)(A)(2) = $58,130 required installment payment less $5,116
(i) Paragraph (b)(1)(ii) of this section (4) 50% of this paragraph (d)(3), Example underpayment for the third installment of
(iii)(A)(3) less $10,438 (amount due with the estimated tax ($21,051 third installment of
jlentini on PROD1PC65 with RULES3

will be applied by using the language ‘‘5


first installment) = $18,627 estimated tax due less $15,935 payments
months’’ instead of ‘‘3 months’’; (B) Because the total amount of estimated available to be applied to the third
(ii) Paragraph (b)(1)(iii) of this section tax actually paid on or before the second installment of estimated tax))) does not equal
will be applied by using the language ‘‘8 installment date ($19,562 ($15,000 second or exceed the amount required to be paid on
months’’ instead of ‘‘6 months’’; and required installment payment plus $4,562 or before this date if the estimated tax were

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44352 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

100 percent of the tax determined by placing (C) z = The number of weeks in the 2008) divided by 24 and multiplied by 52.
on an annualized basis the taxable income for taxable year. For purposes of computing ABC’s fourth
the first 10-month period ($15,034), the (3) If a taxpayer employs four 13-week required installment, ABC’s annualized
exception described in paragraphs (a) and (b) taxable income for the first nine months will
periods and the taxpayer does not have
of this section does not apply, and an be the taxable income for the first nine four-
addition to tax will be imposed with respect at least one 13-week period within the week periods of ABC’s taxable year
to the underpayment of the December 15, applicable 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-, (December 28, 2007, through September 5,
2009, installment unless another exception 10-, or 11-month period, the taxpayer is 2008) divided by 36 and multiplied by 52.
applies to this installment payment. permitted to determine annualized Example 3. Same facts as Example 1 except
(vi) Assuming that no other exceptions taxable income for the applicable period that ABC uses the alternative method under
apply and the addition to tax is computed based upon— paragraph (e)(4) of this section for computing
under section 6621(a)(2) at the rate of 8 (i) The taxable income for the number its required installments for 2008. For
percent per annum for the applicable periods purposes of computing its first and second
of underpayment, the amount of the addition
of weeks in the applicable period; or
(ii) The taxable income for the full 13- required installments, the first three months
to tax is as follows: of ABC’s taxable year under paragraph
(A) First installment (no underpayment) = week periods that end before the due
(b)(1)(i) of this section will end on March 31,
$0 date of the required installment. 2008, the month that ends closest to the end
(B) Second installment (no underpayment) (4) As an alternative to using the 52/ of ABC’s applicable thirteen-week period for
= $0 53 week taxable year rules provided in the first and second required installments.
(C) Third installment (underpayment paragraphs (e)(1), (e)(2), and (e)(3) of For purposes of ABC’s third required
period 9–16–09 through 12–15–09), this section, a taxpayer whose taxable installment, the first six months of ABC’s
computed as 91⁄365 × $5,116 × 8% = $102
(D) Fourth installment (underpayment
year constitutes 52 or 53 weeks in taxable year will end on June 30, 2008, the
accordance with section 441(f) may base month that ends closest to the end of ABC’s
period 12–16–09 through 3–15–10),
its annualization period on the month applicable thirteen-week period for the third
computed as 90⁄365 × $5,150 × 8% = $102
(E) Total of this paragraph (d)(3), Example that ends closest to the end of its required installment. For purposes of ABC’s
fourth required installment, the first nine
(vi)(A) through (D) = $204 applicable 4-week period or 13-week
months of ABC’s taxable year will end on
(e) 52–53 week taxable year. (1) period that ends within the applicable September 30, 2008, the month that ends
Generally, except as provided in the annualization period. This alternative closest to the end of ABC’s applicable
alternative rule in paragraph (e)(4) of may only be used if it is used for thirteen-week period for the fourth required
this section, in the case of a taxpayer determining annualization periods for installment.
whose taxable year constitutes 52 or 53 all required installments for the taxable (f) Determination of taxable income
weeks in accordance with section 441(f), year. for an annualization period—(1) In
the rules prescribed by § 1.441–2 are (5) The following examples illustrate
general. This paragraph (f) applies for
applicable in determining— the rules of this paragraph (e):
purposes of determining the
(i) Whether a taxable year is a taxable Example 1. Corporation ABC, an accrual applicability of the exception described
year of 12 months; and method taxpayer, uses a 52/53 week year-end in paragraphs (a) and (b) of this section
(ii) When the 2-, 3-, 4-, 5-, 6-, 7-, 8- ending on the last Friday in December and (relating to the annualization of income)
, 9-, 10-, or 11-month period (whichever uses four thirteen-week periods. For its year
and the exception described in
is applicable) commences and ends for beginning December 28, 2007, ABC uses the
annualized income installment method § 1.6655–3 (relating to annualization of
purposes of paragraphs (b)(1), (d)(1) and income for corporations with seasonal
(d)(2) of this section. under section 6655(e)(2)(A)(i) to calculate all
of its required installments. For purposes of income). An item of income, deduction,
(2) If a taxpayer employs four 13-week
computing its first and second required gain or loss is to be taken into account
periods or thirteen 4-week accounting installments, the first 3 months of A’s taxable in determining the taxable income and
periods and the end of any accounting year under paragraph (b)(1)(i) of this section alternative minimum taxable income
period employed by the taxpayer does will end on March 28th, the thirteenth Friday (and applicable tax and alternative
not correspond to the end of the 2-, of ABC’s taxable year. For purposes of its minimum tax) for an annualization
3-, 4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-month third required installment, the first 6 months
period in the manner provided in this
period (whichever is applicable), then, of ABC’s taxable year will end on June 27th,
the twenty-sixth Friday of ABC’s taxable paragraph (f). An item may not be taken
provided the taxpayer has at least one
year. For purposes of its fourth required into account in determining taxable
full 4-week or 13-week accounting
installment, the first 9 months of ABC’s income for any annualization period
period, as appropriate, within the
taxable year will end on September 26th, the unless the item is properly taken into
applicable period, annualized taxable thirty-ninth Friday of ABC’s taxable year. account by the last day of that
income for the applicable period is— Example 2. Same facts as Example 1 except
(i) [(x/(y*13))*z], in the case of a annualization period and the item is
that ABC uses thirteen four-week periods and properly taken into account in
taxpayer using four 13-week periods, there are 52 weeks during ABC’s taxable year
if— determining the taxpayer’s taxable
beginning December 28, 2007, and ending
(A) x = Taxable income for the income and alternative minimum
December 26, 2008. For purposes of
number of full 13-week periods in the computing ABC’s first and second required taxable income (and applicable tax and
applicable period; installments, ABC’s annualized taxable alternative minimum tax) for the taxable
(B) y = The number of full 13-week income for the first three months will be the year that includes the annualization
periods in the applicable period; and taxable income for the first three four-week period.
(C) z = The number of weeks in the periods of ABC’s taxable year (December 28, (i) Items of income. An item of income
taxable year; or 2007, through March 21, 2008) divided by 12 is taken into account in the
(ii) [(x/(y*4))*z], in the case of a (number of full four-week periods in the first annualization period in which the item
three months (3) multiplied by 4) and is properly includible under the method
taxpayer using thirteen 4-week periods, multiplied by 52 (the number of weeks in the
if— of accounting employed by the taxpayer
taxable year). For purposes of computing
jlentini on PROD1PC65 with RULES3

(A) x = Taxable income for the ABC’s third required installment, ABC’s
with respect to the item and in
number of full 4-week periods in the annualized taxable income for the first six accordance with the appropriate
applicable period; months will be the taxable income for the provision of the Internal Revenue Code
(B) y = The number of full 4-week first six four-week periods of ABC’s taxable (for example, section 451 for accrual
periods in the applicable period; and year (December 28, 2007, through June 13, method taxpayers, section 453 for

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44353

installment sales or section 460 for long- items, and 12-month rule items. For must be allocated ratably throughout the
term contracts). purposes of paragraph (f)(2)(i)(D) of this taxable year for purposes of this section.
(ii) Items of deduction. An item of section, the total amount of the item (v) Examples. Unless otherwise
deduction is taken into account in the deducted in the computation of taxable stated, the following examples assume
annualization period in which the item income for the taxable year must be that the taxpayer uses the 3–3–6–9
is properly deductible under the method allocated in a reasonably accurate annualization period:
of accounting employed by the taxpayer manner, notwithstanding the fact that Example 1. (i) Corporation ABC, a calendar
with respect to the item and in section 170(a)(2) and § 1.170A–11(b), year taxpayer, uses an accrual method of
accordance with the appropriate § 1.461–5, or § 1.263(a)–4(f) applies to accounting and the annualized income
provision of the Internal Revenue Code only a portion of the total amount of the installment method under section
(for example, under the cash receipts item deducted for the taxable year. For 6655(e)(2)(A)(i) to calculate all of its required
and disbursements method of example, if a portion of a taxpayer’s installment payments for its 2008 taxable
accounting, the deduction must be paid rebate liabilities are deducted in the year. ABC has adopted a plan under which
under § 1.461–1(a)(1) and be otherwise ABC pays an annual bonus to its employees.
computation of taxable income under
As of March 31, 2008, ABC estimates that it
deductible in computing taxable the recurring item exception, all rebate will pay a year-end bonus of $500,000 to its
income; under an accrual method of liabilities deducted in the computation employees if earnings remain constant
accounting, the deduction must be of taxable income for the taxable year throughout the tax year. ABC does not pay
incurred under § 1.461–1(a)(2) and be must be allocated in a reasonably any of the estimated bonus liability as of
otherwise deductible in computing accurate manner. March 31, 2008. On October 31, 2008, ABC
taxable income). Section 170(a)(2) and (iii) Reasonably accurate manner declares a $600,000 bonus to its employees
§ 1.170A–11(b) (charitable contributions defined. (A) An item is allocated which is paid out on November 15, 2008, and
by accrual method corporations) and throughout the taxable year in a properly deducted in ABC’s December 31,
reasonably accurate manner if the item 2008, tax year. No other bonus liabilities are
§ 1.461–5 (recurring item exception) incurred by ABC during the tax year.
may not be taken into consideration by is allocated ratably throughout the (ii) Under the general rule provided in
an accrual method taxpayer in any taxable year or if the allocation provides paragraph (f)(2)(i) of this section, ABC is
annualization period in determining a reasonably accurate estimate of taxable required to allocate its employee bonus
whether an item of deduction has been income for the taxable year based upon liability in a reasonably accurate manner for
incurred under § 1.461–1(a)(2) during the facts known as of the end of the annualization purposes. Under paragraph
that annualization period. annualization period. In determining (f)(2)(iii) of this section, ABC’s employee
(iii) Losses. An item of loss is to be that an allocation of an item provides a bonus liability will be deemed to be allocated
taken into account during the reasonably accurate estimate of taxable in a reasonably accurate manner if the item
income for the taxable year, relevant is allocated ratably throughout the taxable
annualization period in which events year. Therefore, ABC is permitted to
have occurred that permit the loss to be considerations include—
recognize a $150,000 bonus deduction (one
taken into account under the (1) The extent to which the allocation
quarter of the $600,000 bonus liability
appropriate provision of the Internal is consistent with the taxpayer’s properly recognized by ABC in the tax year
Revenue Code. accounting for the item on its non-tax ending December 31, 2008) in the first
(2) Certain deductions required to be books and records; annualization period ending March 31, 2008.
allocated in a reasonably accurate (2) The extent to which the allocable Example 2. (i) Corporation ABC, a calendar
manner—(i) In general. The following portion of the item becomes fixed and year taxpayer, uses an accrual method of
deductions allowed for a taxable year determinable (under § 1.461–1(a)(2)) accounting and the annualized income
must be allocated throughout the during the applicable annualization installment method under section
period; and 6655(e)(2)(A)(i) to calculate all of its required
taxable year in a reasonably accurate installment payments for its 2008 taxable
manner (as defined in paragraph (3) The extent to which the allocation,
if compared to the ratable allocation of year. ABC has adopted a plan under which
(f)(2)(iii) of this section), regardless of ABC pays an annual bonus to its employees.
the annualization period in which the the item, results in a better matching of ABC’s employee bonus plan generally calls
item is paid or incurred: the item of deduction to revenue, for an annual bonus equal to 2% of earnings.
(A) Real property tax deductions. earnings, the use of property or the A bonus reserve for this amount is reported
(B) Employee and independent provision of services occurring during each quarter in ABC’s non-tax books and
contractor bonus compensation the annualization period. records. ABC’s quarterly revenues throughout
deductions (including the employer’s (B) None of the relevant the year are $10,000,000; $6,000,000;
share of employment taxes related to considerations above override the $7,000,000; and $7,000,000 respectively. As
general requirement that the allocation of March 31, 2008, ABC estimates that it will
such compensation).
must be done in a reasonably accurate pay a year-end bonus of $800,000
(C) Deductions under sections 404
manner based upon the facts known as ($10,000,000 × 4 × 2%) to its employees if
(deferred compensation) and 419 earnings remain constant throughout the
(welfare benefit funds). of the end of the annualization period. year. ABC does not pay any of the estimated
(D) Items allowed as a deduction for For example, the fact that a liability for bonus payment as of March 31, 2008. On
the taxable year by reason of section an annual expense becomes fixed and December 31, 2008, ABC declares a $600,000
170(a)(2) and § 1.170A–11(b) (certain determinable during an annualization bonus to its employees which is paid out on
charitable contributions by accrual period will not establish that allocating January 15, 2009, and properly deducted in
method corporations), § 1.461–5 all of the expense to that annualization ABC’s December 31, 2008, tax year.
(recurring item exception) or § 1.263(a)- period has been done in a reasonably (ii) Under the general rule provided in
4(f) (12-month rule). accurate manner if the facts known as of paragraph (f)(2)(i) of this section, ABC must
(E) Items of deduction designated by the end of the annualization period allocate its employee bonus liability in a
reasonably accurate manner for annualization
the Secretary by publication in the indicate otherwise. purposes. Under paragraph (f)(2)(iii) of this
jlentini on PROD1PC65 with RULES3

Internal Revenue Bulletin (see (iv) Special rule for certain real section, ABC’s employee bonus liability will
§ 601.601(d)(2)(ii)(b) of this chapter). property tax liabilities. Notwithstanding be deemed to be allocated in a reasonably
(ii) Application of the reasonably paragraph (f)(2)(iii) of this section, real accurate manner if the allocation provides a
accurate manner requirement to certain property tax liabilities for which an reasonable estimate of taxable income based
charitable contributions, recurring election under section 461(c) is in effect upon the facts known as of the end of the

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44354 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

annualization period. Based upon its represents a better matching of ABC’s bonus (ii) Extraordinary items—(A) In
earnings activities and other information expense to earnings in the quarter as general. In general, extraordinary items
available as of March 31, 2008, ABC compared to a ratable accrual. Accordingly, must be taken into account after
estimated that its total deduction for allocating ABC’s bonus liability based upon
annualizing the taxable income for the
employee bonuses for the taxable year ending earnings will be considered a reasonably
December 31, 2008, would be $800,000 accurate manner for estimated tax purposes. annualization period. For purposes of
($10,000,000 first quarter earnings × 4 × 2%). Example 4. (i) Corporation ABC, a calendar the preceding sentence an extraordinary
Allocating $200,000 ($10,000,000 × 2%) of year taxpayer, uses an accrual method of item is any item identified in § 1.1502–
ABC’s annual bonus liability of $600,000 to accounting with the recurring item exception 76(b)(2)(ii)(C)(1), (2), (3), (4), (7), and (8),
ABC’s first quarter based upon earnings and the annualized income installment a net operating loss carryover, a section
during the quarter represents a better method under section 6655(e)(2)(A)(i) to 481(a) adjustment, net gain or loss from
matching of ABC’s bonus expense to earnings calculate all of its required installment the disposition of 25 percent or more of
in the quarter as compared to allocating payments for its 2009 taxable year. ABC
the fair market value of a taxpayer’s
$150,000 to ABC’s first quarter under a regularly incurs rebate obligations related to
ratable accrual method and is consistent with the sale of its products. Rebate coupons that business assets during a taxable year,
the allocation provided in ABC’s non-tax are received and validated by ABC are and any other item designated by the
books and records. Accordingly, allocating generally paid in the following month. Secretary by publication in the Internal
ABC’s employee bonus deductions based During the tax year ending December 31, Revenue Bulletin (see
upon ABC’s earnings will be considered 2009, ABC received, validated and paid § 601.601(d)(2)(ii)(b) of this chapter).
allocated in a reasonably accurate manner. $400,000 in rebates. In addition, as of the end (B) De minimis extraordinary items. A
Example 3. (i) Corporation ABC, a calendar of December 31, 2009, ABC had received and taxpayer may treat any de minimis
year taxpayer, uses an accrual method of validated $100,000 in rebate claims that were
accounting and the annualized income paid in January of 2010 and deducted in
extraordinary item, other than a net
installment method under section ABC’s December 31, 2009, tax year under the operating loss carryover or section
6655(e)(2)(A)(i) to calculate all of its required recurring item exception. Therefore, ABC 481(a) adjustment, as an item under the
installment payments for its 2008 taxable properly recognized a $500,000 rebate general rule of paragraph (f)(1) of this
year. ABC has adopted a plan under which liability deduction on ABC’s December 31, section rather than an extraordinary
ABC pays a bonus to its employees each 2009, tax return. item as provided for in paragraph
quarter based upon earnings for that quarter. (ii) Under the rule provided in paragraph (f)(3)(ii) of this section. A de minimis
On March 31, 2008, ABC pays out $2,000,000 (f)(2)(ii) of this section, an item must be extraordinary item is any item identified
to its employees as a quarterly bonus based allocated in a reasonably accurate manner if
any portion of the item is deducted under the
in paragraph (f)(3)(ii)(A) of this section
upon the earnings of ABC for the period
January 1, 2008, through March 31, 2008. The recurring item exception. Therefore, ABC resulting from a transaction in which
$2,000,000 bonus is recognized as an expense will be required to allocate its entire the total extraordinary items resulting
on ABC’s audited financial statements in the $500,000 rebate liability deduction in a from such transaction is less than
quarter ending March 31, 2008. As of March reasonably accurate manner as defined in $1,000,000.
31, 2008, ABC anticipates that its earnings paragraph (f)(2)(iii) of this section. (C) Special rule for net operating loss
will continue throughout the year resulting (3) Special rules—(i) Advance deductions and section 481(a)
in future quarterly bonus payments in 2008 payments—(A) Advance payments adjustments. For purposes of paragraph
similar to the $2,000,000 first quarter (f)(3)(ii) of this section, a taxpayer must
payment.
under § 1.451–5(b)(1)(ii). An advance
payment for which the taxpayer uses the treat a net operating loss deduction and
(ii) Under the general rule provided in
paragraph (f)(2)(i) of this section, ABC is method of accounting provided in section 481(a) adjustment as
required to allocate its employee bonus § 1.451–5(b)(1)(ii) is includible in extraordinary items arising on the first
liability in a reasonably accurate manner for computing taxable income for an day of the tax year in which the item is
annualization purposes. Under paragraph annualization period in accordance with taken into account in determining
(f)(2)(iii) of this section , ABC’s employee that method of accounting except that, taxable income. Notwithstanding the
bonus liability will be deemed to be allocated if § 1.451–5(c) applies, any amount not preceding sentence, a taxpayer may
in a reasonably accurate manner if the item included in computing taxable income choose to treat the portion of a section
is allocated ratably throughout the taxable 481(a) adjustment recognized during the
year. Therefore, ABC may recognize a
by the end of the second taxable year
following the year in which substantial tax year of the accounting method
$500,000 bonus deduction (one quarter of the
$2,000,000 bonus liability properly advance payments are received, and not change as an extraordinary item arising
recognized by ABC in the tax year ending previously included in accordance with on the date the Form 3115, ‘‘Application
December 31, 2008) in the first annualization the taxpayer’s accrual method of for Change in Accounting Method,’’
period ending March 31, 2008 (as well as one accounting, is includible in computing requesting the change was filed with the
quarter of any additional bonus liability taxable income on the last day of such national office of the Internal Revenue
properly recognized by ABC in the tax year second taxable year. Service.
ending December 31, 2008). (B) Advance payments under Rev. (iii) Credits—(A) Current year credits.
(iii) In addition, paragraph (f)(2)(iii) of this Proc. 2004–34. An advance payment for With respect to a current year credit, the
section provides that an allocation will be
considered reasonable if the allocation
which the taxpayer uses the Deferral items upon which the credit is
provides an accurate estimate of taxable Method provided in section 5.02 of Rev. computed are annualized, the amount of
income for the taxable year based upon the Proc. 2004–34 (2004–1 CB 991), (see the credit is computed based on the
facts known as of the end of the § 601.601(d)(2)(ii)(b) of this chapter) is annualized items, and the amount of the
annualization period. Based upon its includible in computing taxable income credit is deducted from the annualized
earnings activities and other information for an annualization period in tax. For example, for an annualization
available as of March 31, 2008, ABC accordance with that method of period consisting of three months in a
estimates that its total deduction for accounting, except that any amount not full 12-month taxable year, the items
employee bonuses for the taxable year ending included in computing taxable income upon which the credit is based that are
December 31, 2008, would be $8,000,000. In
jlentini on PROD1PC65 with RULES3

addition, the $2,000,000 bonus liability


by the end of the taxable year taken into account for the three month
became fixed and determinable during the succeeding the taxable year of receipt is period are multiplied by four, the credit
first quarter. Allocating $2,000,000 to ABC’s includible in computing taxable income is determined based on the annualized
first quarter earnings is also consistent with on the last day of such succeeding amount of the items, and the credit
ABC’s non-tax books and records and taxable year. reduces the annualized tax.

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44355

(B) Credit carryovers. Any credit lieu of the general rule provided in a partner’s distributive share of
carryover to the current taxable year is paragraph (f)(3)(iv)(A) of this section, a partnership items that must be taken
taken into account in computing an proportionate amount of 90 percent of into account during an annualization
annualized income installment only the amount of depreciation and period, the rules set forth in § 1.6654–
after annualizing the taxable income for amortization (depreciation) expense 2(d)(2) are applicable.
the annualization period and computing taken on the taxpayer’s Federal income (B) Treatment of subpart F income
the applicable tax, and before applying tax return for the preceding taxable year and income under section 936(h)—(1)
the applicable percentage. may be taken into account. If the General rule. Any amounts required to
(iv) Depreciation and amortization— taxpayer’s preceding taxable year is less be included in gross income under
(A) Estimated annual depreciation and than 12 months (a short taxable year), section 936(h) or section 951(a), and
amortization. In general, in determining the amount of depreciation expense credits properly allocable thereto, are
taxable income for any annualization taken into account is annualized by taken into account in computing any
period, a proportionate amount of the multiplying the depreciation and annualized income installment in a
taxpayer’s estimated annual amortization for the short taxable year manner similar to the manner under
depreciation and amortization by 12, and dividing the result by the which partnership inclusions, and
(depreciation) expense may be taken number of months in the short taxable credits properly allocable thereto, are
into account. For purposes of the year. taken into account in accordance with
preceding sentence, estimated annual (3) Safe harbor operational rules. If a paragraph (f)(3)(v)(A) of this section.
depreciation expense is the estimated taxpayer selects one of the two safe (2) Prior year safe harbor—(i) General
depreciation expense to be properly harbors provided in paragraph rule. If a taxpayer elects to have the safe
taken into account in determining the (f)(3)(iv)(B)(1) or paragraph harbor in this paragraph (f)(3)(v)(B)(2)
taxpayer’s taxable income for the (f)(3)(iv)(B)(2) of this section, the apply for any taxable year, then
taxable year. In determining the taxpayer must use that safe harbor for paragraph (f)(3)(v)(B)(1) of this section
estimated annual depreciation expense, all depreciation expenses within the does not apply; and, for purposes of
a taxpayer may take into account annualization period for the annualized computing any annualized income
purchases, sales or other dispositions, income installment. However, a installment for the taxable year, the
changes in use, additional first-year taxpayer may use either the method taxpayer is treated as having received
depreciation and expense deductions provided for in paragraph (f)(3)(iv)(A) of ratably during the taxable year items of
and section 179 or any similar this section or a method provided for in income and credit described in
provision, and other events that, based this paragraph (f)(3)(iv)(B) of this paragraph (f)(3)(v)(B)(1) of this section
on all the relevant information available section for each annualized income in an amount equal to 115 percent of the
as of the last day of the annualization installment during the taxable year. For amount of such items shown on the
period (such as capital spending example, a taxpayer may use the safe return of the taxpayer for the preceding
budgets, financial statement data and harbor provided in paragraph taxable year (the second preceding
projections, or similar reports that (f)(3)(iv)(B)(1) of this section for its first taxable year in the case of the first and
provide evidence of the taxpayer’s annualized income installment and may second required installments for such
capital spending plans for the current use the general rule provided in taxable year).
taxable year), are reasonably expected to paragraph (f)(3)(iv)(A) of this section for (ii) Special rule for noncontrolling
occur or apply during the taxable year. its second annualized income shareholder. If a taxpayer making the
(B) Safe harbors—(1) Proportionate installment. election under paragraph
depreciation allowance. In determining (C) Short taxable years. If the taxable (f)(3)(v)(B)(2)(i) of this section is a
taxable income for any annualization year is, or will be, a short taxable year noncontrolling shareholder of a
period, in lieu of the rule provided in (based on all relevant information corporation, paragraph (f)(3)(v)(B)(2)(i)
paragraph (f)(3)(iv)(A) of this section a available as of the last day of the of this section is applied with respect to
taxpayer may take into account a annualization period), annual items of such corporation by
proportionate amount of the depreciation expense is computed using substituting ‘‘100 percent’’ for ‘‘115
depreciation and amortization the rules applicable for computing percent’’. For purposes of paragraph
(depreciation) expense, including depreciation during a short taxable year (f)(3)(v)(B)(2)(ii) of this section, the term
special depreciation and expense for purposes of determining the annual noncontrolling shareholder means, with
deductions such as those provided for depreciation expense to be allocated to respect to any corporation, a
in section 168(k) and section 179 or any an annualization period. For this shareholder that, as of the beginning of
similar provision, allowed for the purpose, the rules applicable for the taxable year for which the
taxable year from— computing depreciation during a short installment is being made, does not own
(i) Assets that were in service on the taxable year are applied on the basis of within the meaning of section 958(a),
last day of the prior taxable year, are in the date the taxable year is expected to and is not treated as owning within the
service on the first day of the current end based on all relevant information meaning of section 958(b), more than 50
taxable year, and that have not been available as of the last day of the percent by vote or value of the stock in
disposed of during the annualization annualization period. See Rev. Proc. 89– the corporation.
period; 15 (1989–1 CB 816) for computing (C) Dividends from closely held real
(ii) Assets placed in service during the depreciation expense under section 168 estate investment trust—(1) General
annualization period and have not been (see § 601.601(d)(2)(ii)(b) of this rule. Any dividend received from a
disposed of during that period; and chapter). An annualization period is not closely held real estate investment trust
(iii) Assets that were in service on the treated as a short taxable year for by any person that owns, after the
last day of the prior taxable year and purposes of determining the application of section 856(d)(5), 10
jlentini on PROD1PC65 with RULES3

that are disposed of during the depreciation expense for an percent or more by vote or value of the
annualization period. annualization period. See paragraph stock or beneficial interests in the trust
(2) 90 percent of preceding year’s (c)(3) of this section. is taken into account in computing
depreciation. In determining taxable (v) Distributive share of items—(A) annualized income installments in a
income for any annualization period, in Member of partnership. In determining manner similar to the manner under

VerDate Aug<31>2005 17:18 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44356 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

which partnership income inclusions Example 3. Bad debt expense. Corporation exception provided for in § 1.263(a)–4(f).
are taken into account. ABC, a calendar year taxpayer, uses an ABC uses the annualized income installment
accrual method of accounting and the method under section 6655(e)(2)(A)(i) to
(2) Closely held real estate investment
annualized income installment method calculate all of its required installment
trust. For purposes of paragraph under section 6655(e)(2)(A)(i) to calculate all payments for its 2008 taxable year. On July
(f)(3)(v)(C)(1) of this section, the term of its required installment payments for its 1, 2008, ABC purchases an annual business
closely held real estate investment trust 2008 taxable year. As of December 31, 2007, license from State X which permits ABC to
means a real estate investment trust ABC had a $100,000 account receivable due operate its business in State X from July 1,
with respect to which 5 or fewer from XYZ related to the sale of goods from 2008, through June 30, 2009. An annual
persons own, after the application of ABC to XYZ during 2007. On March 30, payment of $12,000 is due on July 1, 2008,
section 856(d)(5), 50 percent or more by 2008, ABC determined that its receivable and ABC pays the fee on this date. ABC has
vote or value of the stock or beneficial from XYZ was worthless under section 166 not elected out of the 12-month rule provided
and the regulations. No other receivables by § 1.263(a)–4(f) and therefore ABC is not
interests in the trust. were determined to be worthless between required to capitalize any amount paid for
(D) Other passthrough entities. A January 1, 2008, and March 31, 2008. In the license and will recognize a $12,000
taxpayer’s distributive share of items accordance with paragraph (f)(1) of this deduction for the tax year ending December
from a passthrough entity, other than section, a $100,000 bad debt write-off is 31, 2008, with respect to this license.
those described in paragraphs taken into account for purposes of (ii) Under the rule provided in paragraph
(f)(3)(v)(A) and (f)(3)(v)(C) of this determining the taxable income to be (f)(2)(ii) of this section, ABC’s $12,000
section, is taken into account in annualized in computing ABC’s first business license expense must be allocated in
annualized income installment. a reasonably accurate manner because ABC
computing any annualized income Example 4. Bad debt expense. Same facts utilizes the 12-month rule exception
installment in a manner similar to the as Example 3 except that ABC determines provided for in the § 1.263(a)–4(f). Under
manner under which partnership items that the receivable from XYZ was worthless paragraph (f)(2)(iii) of this section, ABC’s
are taken into account under paragraph under section 166 and the regulations on deduction will be deemed to be allocated in
(f)(3)(v)(A) of this section. April 10, 2008. As of March 31, 2008, ABC a reasonably accurate manner if the item is
(vi) Alternative minimum taxable had not determined that any receivables were allocated ratably throughout the taxable year.
income exemption amount. The worthless under section 166 and the Therefore, ABC will be permitted to allocate
alternative minimum taxable income regulations. In accordance with paragraph $3,000 of its business license deduction in its
(f)(1) of this section, the $100,000 bad debt first installment period.
exemption amount provided by section
expense attributable to the receivable from Example 7. Real property tax liability. (i)
55(d)(2) is applied after the alternative XYZ is not taken into account for purposes Corporation ABC, a calendar year taxpayer,
minimum taxable income for the of determining the taxable income to be uses an accrual method of accounting and the
annualization period is annualized. annualized in computing ABC’s first annualized income installment method
(vii) Examples. The provisions of this annualized income installment, which is under section 6655(e)(2)(A)(i) to calculate all
paragraph (f) are illustrated by the based on the income and deductions from the of its required installment payments for its
following examples. Unless otherwise first three months of the taxable year, because 2008 taxable year. ABC owns real property in
stated, the following examples assume the receivable from XYZ became worthless State Y and uses the real property in its trade
that the taxpayer uses the 3–3–6–9 after the last day of the annualization period. or business. ABC incurs a $400,000
Example 5. Employer deductions under deduction for State Y real estate taxes during
annualization period. section 404 and 419. (i) Corporation ABC, a ABC’s December 31, 2008, taxable year. ABC
Example 1. Expense paid or incurred in the calendar year taxpayer, uses an accrual has elected to recognize its real property
installment period. Corporation ABC, a method of accounting and uses the taxes ratably under section 461(c).
calendar year taxpayer, uses an accrual annualized income installment method (ii) Under the rule provided in paragraph
method of accounting and the annualized under section 6655(e)(2)(A)(i) to calculate all (f)(2)(i) of this section, ABC’s $400,000 real
income installment method under section of its required installment payments for its property tax liabilities must be allocated in
6655(e)(2)(A)(i) to calculate all of its required 2008 taxable year. On March 1, 2008, the a reasonably accurate manner. However,
installment payments for its 2008 taxable board of directors of ABC makes a binding, paragraph (f)(2)(iv) of this section provides
year. ABC has licensed technology from irrevocable commitment to fund a minimum that with respect to real property taxes for
Corporation XYZ. Pursuant to the license contribution of $10,000,000 to ABC’s which an election has been made under
agreement, ABC pays a license fee to XYZ qualified retirement plan by March 14, 2009. section 461(c), ratable accrual is the only
equal to $.01 for every dollar of gross receipts ABC remits a $1,000,000 payment to the method which will be considered a
earned by ABC. For 2008, ABC projects gross retirement plan on March 1, 2008, and a reasonably accurate method. Therefore, ABC
receipts of $200,000,000, of which $9,000,000 payment on March 3, 2009. ABC will be required to allocate its $400,000 real
$100,000,000 is earned by March 31, 2008. does not incur any other related retirement property taxes ratably for estimated tax
Pursuant to paragraph (f)(1) of this section, a plan deductions during its 2008 taxable year. purposes and thus $100,000 will be allocated
license fee expense of $1,000,000 (ii) Under the rule provided in paragraph to the ABC’s first annualized income
($100,000,000 × $.01) is incurred by March (f)(2)(i) of this section, ABC’s employer installment.
31, 2008, and may be taken into account for deduction for payment made to the qualified Example 8. NOL (Net Operating Loss)
purposes of determining the taxable income plan must be allocated throughout the tax deduction. Corporation ABC, a calendar year
to be annualized in computing ABC’s first year for estimated tax purposes in a taxpayer, uses an accrual method of
annualized income installment. reasonably accurate manner. Therefore, ABC accounting and the annualized income
Example 2. Expense not paid or incurred will not be permitted to allocate the installment method under section
in the installment period. Same facts as $10,000,000 deduction to its first installment 6655(e)(2)(A)(i) to calculate all of its required
Example 1 except that ABC does not earn any period. Under paragraph (f)(2)(iii) of this installment payments for its 2008 taxable
gross receipts by March 31, 2008. In section, ABC’s qualified plan deduction will year. ABC has a net operating loss carryover
accordance with paragraph (f)(1) of this be deemed to be allocated in a reasonably to 2008 of $2,000,000. ABC’s taxable income
section, because the license fee expense was accurate manner if the item is allocated from January 1, 2008, through March 31,
not incurred under § 1.461–1(a)(2) by the last ratably throughout the taxable year. 2008, without regard to any net operating
day of the annualization period, no license Therefore, ABC will be permitted to allocate loss deduction, is $1,500,000 (pre-NOL
fee expense is taken into account for $2,500,000 of its qualified plan deduction in taxable income). Under the special rule for
jlentini on PROD1PC65 with RULES3

purposes of determining the taxable income its first installment period. net operating loss deductions provided in
to be annualized in computing ABC’s first Example 6. Prepaid expense. (i) paragraph (f)(3)(ii) of this section, the NOL
annualized income installment, which is Corporation ABC, a calendar year taxpayer, deduction is treated as an extraordinary item
based on the income and deductions from the uses an accrual method of accounting and incurred on the first day of ABC’s December
first three months of the taxable year. does not capitalize qualifying costs under the 31, 2008, tax year. Therefore, the NOL

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44357

deduction is taken into account after 481(a) adjustment as an extraordinary item June 15, 2006, that is recognized as income
annualization for purposes of determining occurring in January 1, 2008. Accordingly, by ABC. The settlement of a tort action is an
ABC’s first annualized income installment. $80,000 of the negative section 481(a) extraordinary item defined in paragraph
Example 9. Advance payment. (i) adjustment is taken into account after (f)(3)(ii)(A) of this section. Accordingly, the
Corporation ABC, a calendar year taxpayer, annualization for purposes of determining $10,000,000 of income will be taken into
uses an accrual method of accounting and the ABC’s first annualized income installment. In account by ABC on May 10, 2008, for
annualized income installment method addition, under § 1.6655–6(b), ABC is purposes of computing ABC’s annualized
under section 6655(e)(2)(A)(i) to calculate all required to use its new method of accounting income installments for 2008. Therefore, the
of its required installment payments for its as of January 1, 2008 for estimated tax $10,000,000 settlement will only be taken
2008 and 2009 taxable years. ABC is in the purposes, consistent with the recognition of into account in computing ABC’s third and
business of giving dancing lessons and the section 481(a) adjustment for estimated fourth annualized income installments
receives advance payments. For Federal tax purposes. Therefore, ABC will be (which are based upon annualization periods
income tax purposes, ABC uses the Deferral required to use the new method of that include May 10, 2008). In addition, the
Method provided in section 5.02 of Rev. accounting in determining taxable income to $10,000,000 settlement income will be taken
Proc. 2004–34 for the advance payments it be annualized in computing ABC’s first into account as an extraordinary item of
receives for dance lessons. On November 1, annualized income installment. income after annualization for purposes of
2008, ABC receives an advance payment of Example 11. Section 481(a) adjustment. determining ABC’s third and fourth
$2,400 for a 2-year contract commencing on Corporation ABC, a calendar year taxpayer, annualized installment payments.
November 1, 2008, and providing for up to uses an accrual method of accounting and Example 13. Credit carryover. Corporation
24 individual, 1-hour lessons. ABC provides uses the annualized income installment ABC, a calendar year taxpayer, uses an
2 lessons in 2008, 12 lessons in 2009, and 10 method under section 6655(e)(2)(A)(i) to accrual method of accounting and the
lessons in 2010. ABC recognizes $200 in calculate all of its required installment annualized income installment method
revenues in its financial statements for the payments for its 2008 taxable year. On June under section 6655(e)(2)(A)(i) to calculate all
last quarter of 2008. ABC recognizes $300 in 15, 2008, ABC files a Form 3115 requesting of its required installment payments for its
revenues in its financial statements for each permission to change its method of 2008 taxable year. ABC projects its
quarter of 2009 for a total of $1,200 in 2009. accounting. The requested change results in annualized tax for its 2008 taxable year,
ABC recognizes the remaining $1,000 in a positive section 481(a) adjustment of based on annualizing ABC’s taxable income
revenues in its financial statements during $240,000. ABC subsequently receives the for its first annualization period from January
2010. For tax purposes, ABC recognizes $200 consent of the Commissioner to make the 1, 2008, through March 31, 2008, to be
into revenue in 2008 and $2,200 into revenue change and therefore, $60,000 of the section $1,500,000 before reduction for any credits.
in 2009 under Rev. Proc. 2004–34. See 481(a) adjustment (one quarter of the positive ABC has an unused section 38 credit from
§ 601.601(d)(2)(ii)(b). $240,000 section 481(a) adjustment) is 2007 for increasing research activities from
(ii) Pursuant to paragraph (f)(3)(i)(B) of this properly recognized in ABC’s tax return for 2007 of $500,000 that is carried over to 2008.
section, ABC is not required to take into the year ending December 31, 2008. Under For purposes of determining ABC’s first
account any of the advance payment for paragraph (f)(3)(ii) of this section, ABC is annualized income installment, ABC’s
purposes of computing any required permitted to recognize the positive $60,000 annualized tax for 2008 is $1,000,000,
installment payment for ABC’s 2008 taxable section 481(a) adjustment as an extraordinary determined as the tax for the taxable year
year because no part of the $2,400 advance item occurring on January 1, 2008 (the first computed by placing on an annualized basis
payment was recognized as income in ABC’s day of ABC’s December 31, 2008, tax year), ABC’s taxable income from its first
financial statements during the first nine or June 15, 2008 (the date ABC filed the Form annualization period from January 1, 2008,
months of ABC’s 2008 taxable year. In 2009, 3115). ABC chooses to recognize the positive through March 31, 2008 ($1,500,000) reduced
ABC must take into account $300 of revenue $60,000 section 481(a) adjustment as an by the $500,000 credit carryover from 2007.
for purposes of computing its first and extraordinary item occurring on June 15, Therefore, ABC’s first required installment
second required installment payments, $600 2008. Accordingly, the $60,000 positive payment for 2008 is $250,000 ($1,000,000 ×
of revenue for purposes of computing its section 481(a) adjustment is not taken into 25%).
third required installment payment and $900 account for purposes of determining ABC’s Example 14. Current year credit.
for purposes of computing its fourth required first annualized income installment. Corporation ABC, a calendar year taxpayer,
installment payment. Pursuant to paragraph However, in all futures years any portion of uses an accrual method of accounting and the
(f)(3)(i)(B) of this section, the remaining the section 481(a) adjustment related to this annualized income installment method
deferred revenue is recognized on December change in method of accounting will be under section 6655(e)(2)(A)(i) to calculate all
31, 2009, for purposes of computing ABC’s treated as an extraordinary item occurring on of its required installment payments for its
annualized income installments for 2009. the first day of the tax year under paragraph 2008 taxable year. ABC projects its
Example 10. Section 481(a) adjustment. (f)(3)(ii) of this section. In addition, under annualized tax for its 2008 taxable year,
Corporation ABC, a calendar year taxpayer, § 1.6655–6(b), ABC is required to use its new based on annualizing ABC’s taxable income
uses an accrual method of accounting and the method of accounting as of June 15, 2008 for for its first annualization period from January
annualized income installment method estimated tax purposes, consistent with the 1, 2008, through March 31, 2008, to be
under section 6655(e)(2)(A)(i) to calculate all recognition of the section 481(a) adjustment $2,000,000 before reduction for any credits.
of its required installment payments for its for estimated tax purposes. Therefore, ABC ABC has historically earned a section 41
2008 taxable year. On December 20, 2008, will be required to use the new method of credit for increasing research activities and,
ABC files a Form 3115 requesting permission accounting (as of the beginning of the tax for 2008, ABC estimates that it will earn a
to change its method of accounting. The year) for purposes of determining taxable credit for increasing research activities under
requested change results in a negative section income to be annualized in computing ABC’s section 41 of $1,200,000. However, pursuant
481(a) adjustment of $80,000. ABC third and fourth annualized income to paragraph (f)(3)(iii) of this section, if ABC
subsequently receives the consent of the installments (which are based upon were to annualize all components involved
Commissioner to make the change and annualization periods that include June 15, in computing the current year credit based on
therefore, the negative $80,000 section 481(a) 2008.) ABC’s activity from January 1, 2008, through
adjustment is properly recognized in ABC’s Example 12. Extraordinary item. March 31, 2008, ABC would generate a credit
tax return for the year ending December 31, Corporation ABC, a calendar year taxpayer, of $1,600,000 for 2008. For purposes of
2008. Under paragraph (f)(3)(ii) of this uses an accrual method of accounting and the determining ABC’s first annualized income
section ABC is permitted to recognize the annualized income installment method installment, ABC’s annualized tax for 2008 is
negative $80,000 section 481(a) adjustment as under section 6655(e)(2)(A)(i) to calculate all $400,000, determined as the tax for the 2008
jlentini on PROD1PC65 with RULES3

an extraordinary item occurring on January 1, of its required installment payments for its taxable year ($2,000,000) computed by
2008 (the first day of ABC’s December 31, 2008 taxable year. On May 10, 2008, ABC placing on an annualized basis ABC’s taxable
2008, tax year), or December 20, 2008 (the reaches a settlement agreement with XYZ income from its first annualization period
date ABC filed the Form 3115). ABC chooses over a tort action filed by ABC. As a result, January 1, 2008, through March 31, 2008,
to recognize the negative $80,000 section ABC receives a payment of $10,000,000 on reduced by a $1,600,000 current year section

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44358 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

41 credit from increasing research activities. first annualized income installment for its section 199 deduction, intercompany
Therefore, ABC’s first required installment 2008 taxable year are determined as follows: adjustments for taxpayers that file
payment for 2008 is $100,000 ($400,000 × (i) General rule—Estimated annual consolidated returns, the liquidation of
25%). depreciation. In accordance with the general
a LIFO layer at the installment date that
Example 15. Current year credit. Same rule provided in paragraph (f)(3)(iv)(A) of
facts as Example 14 except that ABC does not this section, ABC may take a depreciation the taxpayer reasonably believes will be
begin any research activities until April 3, expense of $8,500 ($34,000 × 3⁄12 = $8,500) replaced at the end of the year, deferred
2008, and will not incur any research into account in computing ABC’s January 1, gain on a qualifying conversion or
expenses described in paragraph (f)(1)(ii) of 2008, through March 31, 2008, taxable exchange of property under sections
this section. As a result, if ABC were to income. ABC’s estimated annual depreciation 1031 and 1033 that the taxpayer
annualize all components involved in expense for 2008 of $34,000 is computed as reasonably believes will be replaced
computing the current year credit based on follows: $15,000 for the 50% additional first with qualifying replacement property,
ABC’s activity from January 1, 2008, through year depreciation deduction under section
and any other item designated by the
March 31, 2008, ABC would generate no 1400N(d) ($30,000 × 50% = $15,000) plus
section 41 research credit for purposes of annual depreciation of $16,000 ($40,000 × Secretary by publication in the Internal
determining its first annualized income 40% = $16,000) and $3,000 ($15,000 × 20% Revenue Bulletin (see
installment. Pursuant to paragraph (f)(3)(iii) = $3,000). Under paragraphs (c)(3) and § 601.601(d)(2)(ii)(b) of this chapter).
of this section, ABC cannot take into account (f)(3)(iv)(C) of this section, ABC may not (2) Example. The following example
any credit for its first annualization period consider its first annualization period to be illustrates the rules of this paragraph (g):
because ABC did not incur any qualified a short taxable year for purposes of Example. Section 199 deduction.
research expenses by the last day of the first determining the depreciation allowance for Corporation ABC, a calendar year taxpayer,
annualization period. Accordingly, for such annualization period. uses an accrual method of accounting and the
purposes of determining ABC’s first (ii) Safe Harbor—Proportionate annualized income installment method
annualized income installment, ABC’s depreciation allowance. In accordance with under section 6655(e)(2)(A)(i) to calculate all
annualized tax for its first annualization the safe harbor provided in paragraph of its required installment payments for its
period January 1, 2008, through March 31, (f)(3)(iv)(B)(1) of this section, ABC may take 2008 taxable year. ABC engages in
2008, is $2,000,000. Therefore, ABC’s first a depreciation expense of $8,500 ($34,000 × production activities that generate qualified
3⁄12 = $8,500) into account in computing
required installment payment for 2008 is production activities income (QPAI), as
$500,000 ($2,000,000 × 25%). ABC’s January 1, 2008, through March 31,
defined in § 1.199–1(c), and projects taxable
Example 16. Depreciation and 2008, taxable income based on annual
income of $50,000 for its first annualization
amortization expense. Corporation ABC, a depreciation expense for 2008 of $34,000,
period from January 1, 2008, through March
calendar year taxpayer that began business computed as follows: $15,000 for the 50%
31, 2008, without taking into account the
on January 2, 2007, adopted an accrual additional first year depreciation deduction
section 199 deduction. During its first
method of accounting and will use the under section 1400N(d) ($30,000 × 50% =
annualization period from January 1, 2008,
annualized income installment method $15,000) plus annual depreciation of $16,000
through March 31, 2008, ABC incurs W–2
under section 6655(e)(2)(A)(i) to calculate all ($40,000 × 40% = $16,000) and $3,000
wages allocable to domestic production gross
of its required installment payments for its ($15,000 × 20% = $3,000). Under paragraphs
receipts pursuant to section 199(b)(2) of
2008 taxable year. On January 2, 2007, ABC (c)(3) and (f)(3)(iv)(C) of this section, ABC
$10,000. Pursuant to paragraph (g)(1) of this
purchased and placed in service a tangible may not consider its first annualization
section, ABC is permitted to take into
depreciable asset that costs $50,000 and is period to be a short taxable year for purposes
account its estimated section 199 deduction
5-year property under section 168(e). ABC of determining the depreciation allowance
before annualizing taxable income based on
depreciates its 5-year property placed in for such annualization period.
the lesser of its estimated QPAI or taxable
service in 2007 under the general (iii) Safe Harbor—90 percent of preceding
income and W–2 wages for its first
depreciation system using the 200-percent year’s depreciation. In accordance with the
installment period for 2008. For the first
declining balance method, a 5-year recovery safe harbor in paragraph (f)(3)(iv)(B)(2) of this
installment period in 2008, ABC’s is
period, and the half year convention. On section, ABC may take a depreciation
permitted to recognize a deduction under
expense of $2,250 ($10,000 prior year’s
January 2, 2008, ABC purchased and placed section 199 of $3,000 ($50,000 × .06 = $3,000)
in service qualified Gulf Opportunity Zone depreciation × 90% = $9,000 × 3⁄12 = $2,250)
subject to the wage limitation of $5,000 (50
property (GO Zone property) that costs into account in computing ABC’s January 1,
percent of $10,000 of W–2 wages incurred
$30,000 and is 5-year property under section 2008, through March 31, 2008, taxable
during the first installment period).
168(e). ABC will depreciate its 5-year income. Under paragraphs (c)(3) and
Accordingly, ABC’s annualized income for
property placed in service in 2008 under the (f)(3)(iv)(C) of this section, ABC may not
the first installment for 2008 is $188,000
consider its first annualization period to be
general depreciation system using the 200- (($50,000–$3,000) × 12⁄3 = $188,000). The tax
percent declining balance method, a 5-year a short taxable year for purposes of
on $188,000 is $56,570 and ABC’s first
recovery period, and the half-year determining the depreciation allowance for
required installment for 2008 is $14,143
such annualization period.
convention. ABC will deduct the 50% ($56,570 × .25 = $14,143).
additional first year depreciation deduction (g) Items that substantially affect
under section 1400N(d) with respect to the (h) Effective/applicability date. This
taxable income but cannot be section applies to taxable years
GO Zone property. For tax year 2007, ABC determined accurately by the
takes a depreciation deduction under section beginning after September 6, 2007.
installment due date—(1) In general. In
168 of $10,000 ($50,000 × 20% = $10,000). ■ Par. 8A. Section 1.6655–3 is revised
ABC does not anticipate being subject to the
determining the applicability of the
to read as follows:
mid-quarter convention for the 2008 taxable annualization exceptions described in
year, does not anticipate making any paragraphs (a) and (b) of this section § 1.6655–3 Adjusted seasonal installment
depreciation elections for any class of and § 1.6655–3, reasonable estimates method.
property, does not anticipate making a may be made from existing data for (a) In general. In the case of any
section 179 election, does not anticipate any items that substantially affect income if required installment, the amount of the
sales or other dispositions of depreciable the amount of such items cannot be adjusted seasonal installment is the
property, and no events have occurred, nor determined accurately by the
does ABC know, based on all relevant
excess (if any) of—
installment due date. This paragraph (g) (1) 100 percent of the amount
information available as of the due date of
jlentini on PROD1PC65 with RULES3

ABC’s first required installment for 2008, of


applies only to the inflation index for determined under paragraph (c) of this
any event that will occur to cause ABC’s taxpayers using the dollar-value LIFO section; over
2008 taxable year to be a short taxable year. (last-in, first-out) inventory method, (2) The aggregate amount of all prior
The optional amounts of depreciation adjustments required under section required installments for the taxable
expense ABC may take into account for its 263A, the computation of a taxpayer’s year.

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44359

(b) Limitation on application of annualized income installment method (D) Deduction of amount timely paid on or
section. This section applies only if the under § 1.6655–2 apply to the before the first installment due date under
base period percentage (as defined in computation of taxable income (and the general rule of section 6655(b) = $250,000
section 6655(e)(3)(D)(i) and paragraph resulting tax) for purposes of (E) Amount of overpaid estimated tax for
the first installment date = $86,800
(d)(1) of this section) for any six determining any required installment
(F) Amount of estimated tax required to be
consecutive months of the taxable year payment of estimated tax under the paid on or before the second installment
equals or exceeds seventy percent. adjusted seasonal installment method. (25% of $1,152,600 plus the recapture
(c) Determination of amount. The (4) Alternative minimum tax. The amount under section 6655(d)(2)(B) of
amount determined under this amount determined under paragraph (c) $124,950 (25% of $1,152,600 less $163,200))
paragraph (c) for any installment will be of this section must properly take into = $413,100
determined in the following manner— account the amount of any alternative (G) Deduction of amount paid on or before
(1) Take the taxable income for all minimum tax under section 55 that the due date of the second installment less
months during the taxable year would apply for the period of the amount applied towards the first installment
preceding the filing month; computation. The amount of any under the general rule of section 6655(b)
(2) Divide such amount by the base ($250,000 paid in each of the first and second
alternative minimum tax that would installments less this paragraph (e), Example
period percentage for all months during apply is determined by applying to (i)(C)) = $336,800
the taxable year preceding the filing alternative minimum taxable income, (H) Amount of underpayment for the
month; tentative minimum tax, and alternative second installment date = $76,300
(3) Determine the tax on the amount minimum tax, the rules described in (I) Amount of estimated tax required to be
determined under paragraph (c)(2) of paragraph (c) of this section for taxable paid on or before the third installment (25%
this section; and income and tax. of $1,152,600) = $288,150
(4) Multiply the tax computed under (e) Example. The provisions of this (J) Deduction of amount paid on or before
paragraph (c)(3) of this section by the section may be illustrated by the the due date of the third installment less
base period percentage for the filing amount applied towards the first and second
following example: installments under the general rule of section
month and all months during the Example. (i) X, a corporation that reports 6655(b) ($250,000 paid in each of the first,
taxable year preceding the filing month. on a calendar year basis, expects to have an second, and third installments less this
(d) Special rules—(1) Base period estimated tax liability of $1,200,000 for its paragraph (e), Example (i)(C) less this
percentage. The base period percentage taxable year ending December 31, 2009. On paragraph (e), Example (i)(F)) = $173,700
for any period of months is the average its 2008 tax return, X reports a tax liability (K) Amount of underpayment for the third
percent that the taxable income for the of $652,800. X pays four installments of installment date = $114,450
corresponding months in each of the estimated tax, each in the amount of (L) Amount of estimated tax required to be
three preceding taxable years bears to $250,000, $250,000, $250,000, and $450,000 paid on or before the fourth installment (25%
the taxable income for the three on April 15, 2009, June 15, 2009, September of $1,152,600) = $288,150
15, 2009, and December 15, 2009, (M) Deduction of amount paid on or before
preceding taxable years. If there is no
respectively. X reports a tax liability of the due date of the fourth installment less
taxable income for the corresponding $1,152,600 on its return due March 15, 2010, amount applied towards the first, second,
months, taxable income for this purpose with no credits against tax. Under the general and third installments under the general rule
is zero. provision of section 6655(b) and section of section 6655(b) ($250,000 paid in each of
(2) Filing month. The term filing 6655(d), there was an underpayment in the the first, second, and third installments plus
month means the month in which the amount of $76,300 for the second installment $450,000 paid in the fourth installment less
installment is required to be paid. through September 15, 2009, and $114,450 this paragraph (e), Example (i)(C) less this
(3) Application of the rules related to for the third installment through December paragraph (e), Example (i)(F) less this
the annualized income installment 15, 2009, determined as follows: paragraph (e), Example (i)(I)) = $335,550
method to the adjusted seasonal (A) Tax as defined in section 6655(g) = (N) Amount of overpaid estimated tax for
$1,152,600 the fourth installment date = $47,400
installment method. The rules (B) 100% of this paragraph (e), Example (ii) X wants to determine if it qualifies for
governing the computation of taxable (i)(A) = $1,152,600 the adjusted seasonal installment method. X
income (and resulting tax) for purposes (C) Amount of estimated tax required to be determines that its monthly taxable income
of determining any required installment paid on or before the first installment (25% for the preceding three taxable years and for
payment of estimated tax under the of $652,800) = $163,200 the current taxable year 2009 is as follows:

January February March April May June July August September October November December

2006:
$100,000 $90,000 $80,000 $70,000 $60,000 $20,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000
2007:
200,000 170,000 170,000 130,000 125,000 45,000 21,000 19,000 20,000 20,000 20,000 20,000
2008:
410,000 350,000 330,000 270,000 240,000 80,000 40,000 40,000 40,000 40,000 40,000 40,000
2009:
600,000 680,000 650,000 560,000 460,000 170,000 70,000 60,000 50,000 40,000 30,000 20,000

(iii) X must initially determine if its base percentage is 87.5 percent (which exceeds 70 (D) Taxable income for first 6 months of
period percentage for the same 6 consecutive percent) computed as follows: 2007 = $840,000
months of the 3 preceding taxable years (A) Taxable income for first 6 months of (E) Total taxable income for 2007 =
equals or exceeds 70 percent (see section 2006 = $420,000 $960,000
6655(e)(3) and paragraphs (b) and (c) of this (B) Total taxable income for 2006 = (F) Divide this paragraph (e), Example
jlentini on PROD1PC65 with RULES3

section). By using its taxable income for the $480,000 (iii)(D) by this paragraph (e), Example (iii)(E)
first 6 months of 2006, 2007, and 2008, X (C) Divide this paragraph (e), Example = .875
qualifies for the adjusted seasonal (iii)(A) by this paragraph (e), Example (iii)(B) (G) Taxable income for first 6 months of
installment method because its base period = .875 2008 = $1,680,000

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44360 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

(H) Total taxable income for 2008 = (H) Taxable income for first 6 months of (C) Taxable income for first 11 months of
$1,920,000 2006 ($420,000) divided by total taxable 2007 ($940,000) divided by total taxable
(I) Divide this paragraph (e), Example income for 2006 ($480,000) = .875 income for 2007 ($960,000) = .9792
(iii)(G) by this paragraph (e), Example (iii)(H) (I) Taxable income for first 6 months of (D) Taxable income for first 11 months of
= .875 2007 ($840,000) divided by total taxable 2008 ($1,880,000) divided by total taxable
(J) Add this paragraph (e), Example (iii)(C), income for 2007 ($960,000) = .875 income for 2008 ($1,920,000) = .9792
(F), and (I) = $2.625 (J) Taxable income for first 6 months of (E) Add this paragraph (e), Example
(K) Divide this paragraph (e), Example 2008 ($1,680,000) divided by total taxable (vii)(B), (C), and (D) and divide by 3 = .9792
(iii)(J) by 3 = .875 income for 2008 ($1,920,000) = .875 (F) Divide this paragraph (e), Example
(iv) To determine the amount of the first (K) Add this paragraph (e), Example (v)(H), (vii)(A) by this paragraph (e), Example
installment under the rules of section (I), and (J) and divide by 3 = .875 (vii)(E) = $3,441,585
6655(e)(3) and paragraph (a) of this section, (L) Multiply this paragraph (e), Example (G) Determine the tax on this paragraph (e),
the following computation is necessary: (v)(G) by this paragraph (e), Example (v)(K) Example (vii)(F) = $1,170,139
(A) Taxable income for first 3 months of = $1,055,345 (H) Taxable income for first 12 months of
2009 = $1,930,000 (M) 100% of this paragraph (e), Example 2006 ($480,000) divided by total taxable
(B) Taxable income for first 3 months of (v)(L) = $1,055,345 income for 2006 ($480,000) = 1.0000
2006 ($270,000) divided by total taxable (N) Amount of all prior required (I) Taxable income for first 12 months of
income for 2006 ($480,000) = .5625 installments for 2009 = $163,200 2007 ($960,000) divided by total taxable
(C) Taxable income for first 3 months of (O) Amount of adjusted seasonal income for 2007 ($960,000) = 1.0000
2007 ($540,000) divided by total taxable installment for the second installment (J) Taxable income for first 12 months of
income for 2007 ($960,000) = .5625 payment (this paragraph (e), Example (v)(M) 2008 ($1,920,000) divided by total taxable
less this paragraph (e), Example (v)(N)) = income for 2008 ($1,920,000) = 1.0000
(D) Taxable income for first 3 months of
$892,145 (K) Add this paragraph (e), Example
2008 ($1,090,000) divided by total taxable
(vi) To determine the amount of the third (vii)(H), (I), and (J) and divide by 3 = 1.0000
income for 2008 ($1,920,000) = .5677
installment under the rules of section (L) Multiply this paragraph (e), Example
(E) Add this paragraph (e), Example (iv)(B),
6655(e)(3) and paragraph (a) of this section, (vii)(G) by this paragraph (e), Example (vi)(K)
(C), and (D) and divide by 3 = .5642
the following computation is necessary: = $1,170,139
(F) Divide this paragraph (e), Example
(A) Taxable income for first 8 months of (M) 100% of this paragraph (e), Example
(iv)(A) by this paragraph (e), Example (iv)(E)
2009 = $3,250,000 (vii)(L) = $1,170,139
= $3,420,773
(B) Taxable income for first 8 months of (N) Amount of all prior required
(G) Determine the tax on this paragraph (e),
2006 ($440,000) divided by total taxable installments for 2009 = $864,450
Example (iv)(F) = $1,163,049
income for 2006 ($480,000) = .9167 (O) Amount of adjusted seasonal
(H) Taxable income for first 4 months of (C) Taxable income for first 8 months of
2006 ($340,000) divided by total taxable installment for the fourth installment
2007 ($880,000) divided by total taxable payment (this paragraph (e), Example
income for 2006 ($480,000) = .7083 income for 2007 ($960,000) = .9167
(I) Taxable income for first 4 months of (vii)(M) less this paragraph (e), Example
(D) Taxable income for first 8 months of (vii)(N)) = $305,689
2007 ($670,000) divided by total taxable 2008 ($1,760,000) divided by total taxable
income for 2007 ($960,000) = .6979 (viii) Because the total amount of each
income for 2008 ($1,920,000) = .9167 required estimated tax payment determined
(J) Taxable income for first 4 months of (E) Add this paragraph (e), Example (vi)(B),
2008 ($1,360,000) divided by total taxable under section 6655(e)(3) and paragraph (a) of
(C), and (D) and divide by 3 = .9167 this section exceeds the amount of each
income for 2008 (1,920,000) = .7083 (F) Divide this paragraph (e), Example
(K) Add this paragraph (e), Example required estimated tax payment determined
(vi)(A) by this paragraph (e), Example (vi)(E) under section 6655(d) and § 1.6655–1(d) and
(iv)(H), (I), and (J) and divide by 3 = .7048 = $3,545,326 (e), the exception described in section
(L) Multiply this paragraph (e), Example (G) Determine the tax on this paragraph (e), 6655(e) and this section does not apply and
(iv)(G) by this paragraph (e), Example (iv)(K) Example (vi)(F) = $1,205,411 the addition to the tax with respect to the
= $819,717 (H) Taxable income for first 9 months of underpayment for the June 15, 2009, and
(M) 100% of this paragraph (e), Example 2006 ($450,000) divided by total taxable September 15, 2009, installments will be
(iv)(L) = $819,717 income for 2006 ($480,000) = .9375 imposed unless another exception (for
(N) Amount of all prior required (I) Taxable income for first 9 months of example, see section 6655(e)(2)) applies with
installments for 2009 = $0 2007 ($900,000) divided by total taxable respect to these installments.
(O) Amount of adjusted seasonal income for 2007 ($960,000) = .9375
installment for the first installment payment (J) Taxable income for first 9 months of (f) Effective/applicability date. This
(this paragraph (e), Example (iv)(M) less this 2008 ($1,800,000) divided by total taxable section applies to taxable years
paragraph (e), Example (iv)(N)) = $819,717 income for 2008 ($1,920,000) = .9375 beginning after September 6, 2007.
(v) To determine the amount of the second (K) Add this paragraph (e), Example ■ Par. 9. Section 1.6655–4 is added to
installment under the rules of section (vi)(H), (I), and (J) and divide by 3 = .9375 read as follows:
6655(e)(3) and paragraph (a) of this section, (L) Multiply this paragraph (e), Example
the following computation is necessary: (vi)(G) by this paragraph (e), Example (vi)(K) § 1.6655–4 Large corporations.
(A) Taxable income for first 5 months of = $1,130,073 (a) Large corporation defined. The
2009 = $2,950,000 (M) 100% of this paragraph (e), Example
(B) Taxable income for first 5 months of term large corporation means any
(vi)(L) = $1,130,073
2006 ($400,000) divided by total taxable (N) Amount of all prior required
corporation (or a predecessor
income for 2006 ($480,000) = .8333 installments for 2009 = $576,300 corporation) that had taxable income of
(C) Taxable income for first 5 months of (O) Amount of adjusted seasonal at least $1,000,000 for any taxable year
2007 ($795,000) divided by total taxable installment for the third installment payment during the testing period. For purposes
income for 2007 ($960,000) = .8281 (this paragraph (e), Example (vi)(M) less this of this section, a predecessor
(D) Taxable income for first 5 months of paragraph (e), Example (vi)(N)) = $553,773 corporation is the distributor or
2008 ($1,600,000) divided by total taxable (vii) To determine the amount of the fourth transferor corporation in a transaction to
income for 2008 ($1,920,000) = .8333 installment under the rules of section which section 381 (relating to
(E) Add this paragraph (e), Example (v)(B), 6655(e)(3) and paragraph (a) of this section, carryovers in certain corporate
(C), and (D) and divide by 3 = .8316 the following computation is necessary:
jlentini on PROD1PC65 with RULES3

(F) Divide this paragraph (e), Example (A) Taxable income for first 11 months of
acquisitions) applies.
(v)(A) by this paragraph (e), Example (v)(E) 2009 = $3,370,000 (b) Testing period. For purposes of
= $3,547,379 (B) Taxable income for first 11 months of paragraph (a) of this section, the term
(G) Determine the tax on this paragraph (e), 2006 ($470,000) divided by total taxable testing period means the 3 taxable years
Example (v)(F) = $1,206,109 income for 2006 ($480,000) = .9792 immediately preceding the taxable year

VerDate Aug<31>2005 17:18 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44361

for which estimated tax is being controlled group for a taxable year (g) Example. The provisions of this
determined (the current taxable year) or, during the testing period is not taken section may be illustrated by the
if less, the number of taxable years the into account. following example:
taxpayer has been in existence. (3) Allocation rule. If the aggregate Example. Y Corporation and Z Corporation
(c) Computation of taxable income taxable income of members of a are calendar year taxpayers. In 2008, Z
during testing period—(1) Short taxable controlled group computed pursuant to acquires all of the assets of Y in a transaction
year. In the case of a corporation (or paragraph (d)(1) of this section exceeds to which section 381 applies. Z’s taxable
predecessor corporation) that had a $1,000,000 during the testing period, the income for both 2006 and 2007 was less than
short taxable year during the testing $1,000,000 amount that is relevant for $1,000,000. Y’s taxable income for 2008 is
period, for purposes of determining purposes of determining, under determined under paragraph (c)(2) of this
whether the $1,000,000 amount referred section to be $300,000 for that portion of Y’s
paragraph (a)(1) of this section, whether
to in paragraph (a) of this section is taxable year corresponding to Z’s taxable year
a corporation is a large corporation is up to and including the date of transfer. Z’s
equaled or exceeded, the taxable income divided equally among the component taxable income for 2008 is $800,000. Under
for the short taxable year is computed members of such group (including the provisions of paragraph (c)(2) of this
by— component members excluded pursuant section, Z’s 2008 taxable income for purposes
(i) Multiplying the taxable income for to paragraph (d)(2) of this section) of determining whether it is a large
the short taxable year by 12; and unless all of such component members corporation for taxable year 2009 is
(ii) Dividing the resulting amount by consent to an apportionment plan $1,100,000 ($800,000 + $300,000). Thus, Z is
the number of months in the short providing for an alternative allocation of a large corporation for the 2009 taxable year.
taxable year. In addition, if Z’s 2008 taxable income, as
such amount. The procedure for making
(2) Computation of taxable income in determined under paragraph (c)(2) of this
and filing this plan will be the same as section, had been less than $1,000,000 but
taxable year when there occurs a the procedure used for making and
transaction to which section 381 Y’s taxable income in 2006 or 2007 had been
filing an apportionment plan under $1,000,000 or more, Z would be a large
applies. (i) For purposes of determining section 1561. See section 1561 and the corporation for taxable year 2009 because Y
whether an acquiring corporation had regulations. is a predecessor corporation.
taxable income of $1,000,000 or more
(4) Controlled group members. (i) In (h) Effective/applicability date. This
for a taxable year in which a section 381
the case of any corporation that was a section applies to taxable years
transaction occurs, the acquiring
member of a controlled group of beginning after September 6, 2007.
corporation’s taxable income will be the
corporations at any time during the
sum of— § 1.6655–7 [Removed].
(A) The taxable income of the testing period but is not a member of
acquiring corporation for its taxable such group during the taxable year ■ Par. 10. Section 1.6655–7 is removed.
year; plus involved, the taxable income of the
former member for the testing period is § 1.6655–5 [Redesignated as § 1.6655–7].
(B) The taxable income (or loss) of the
distributor or transferor corporation for determined as if such corporation were ■ Par. 11. Section 1.6655–5 is
that portion of its taxable year not a member of a group at any time redesignated as § 1.6655–7.
corresponding to the acquiring during that period. With respect to the ■ Par. 12. Sections 1.6655–5 and
corporation’s taxable year up to and controlled group, the taxable income of 1.6655–6 are added to read as follows:
including the date of distribution or its former member will not be taken into
transfer (as defined in § 1.381(b)–1(b)). account in determining such group’s § 1.6655–5 Short taxable year.
(ii) For purposes of determining taxable income for any taxable year (a) In general. Except as otherwise
whether a transferor or distributor during the testing period for purposes of provided in this section, the provisions
corporation had taxable income of applying paragraph (a)(1) of this section. of section 6655 and these regulations are
$1,000,000 or more for a taxable year in (ii) For purposes of paragraph (d)(4)(i) applicable in the case of a short taxable
which a section 381 transaction occurs, of this section, the determination of year (including an initial taxable year)
the distributor or transferor whether a corporation is a member of a for which a payment of estimated tax is
corporation’s taxable income (or loss) is controlled group during the testing required to be made.
reduced by the amount of taxable period is based on whether the (b) Exception to payment of estimated
income (or loss) that is included in the corporation was a member of the tax. In the case of a short taxable year,
acquiring corporation’s taxable income controlled group on the last day of the no payment of estimated tax is required
for the taxable year in which the month preceding the due date of the if—
distribution or transfer (as defined in required installment. (1) The short taxable year is a period
§ 1.381(b)–1(b)) occurs, as described in (e) Effect on a corporation’s taxable of less than 4 full calendar months; or
paragraph (c)(2)(i)(B) of this section. income of items that may be carried (2) The tax shown on the return for
(d) Members of controlled group—(1) back or carried over from any other such taxable year (or, if no return is
In general. For purposes of applying taxable year. In determining whether a filed, the tax) is less than $500.
paragraph (a) of this section, the taxable corporation (or predecessor corporation) (c) Installment due dates—(1) In
income of members of a controlled is a large corporation for its current general—(i) Taxable year of at least four
group of corporations (as defined in taxable year, items that could offset months but less than twelve months.
section 1563(a)) must be aggregated for taxable income during a taxable year Except as otherwise provided, in the
each year of the testing period. The included in the testing period (for case of a short taxable year, if such year
provisions of this section do not apply example, those described in sections results in a taxable year of four or more
to a controlled group for any taxable 172 and 1212) are not to be taken into full calendar months but less than
year in which the aggregate taxable account and the taxable income of a twelve full calendar months, the due
jlentini on PROD1PC65 with RULES3

income of the members of the controlled corporation for any taxable year during dates prescribed in § 1.6655–1(f)(2)
group is less than $1,000,000. the testing period is determined without apply.
(2) Aggregation. For purposes of regard to items carried back or carried (ii) Exceptions. (A) If the date
paragraph (d)(1) of this section, a over from any other taxable year. determined under paragraph (c)(1)(i) of
taxable loss of any member of the (f) Consolidated returns. [Reserved]. this section for the first required

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44362 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

installment due during the taxpayer’s (iii) Divide the amount determined are April 15, 2009, June 15, 2009, September
short taxable year is earlier than the under paragraph (d)(2)(ii) of this section 15, 2009, and December 15, 2009. Pursuant
15th day of the fourth month of the by the number of required installments to paragraph (d)(1) of this section, the
amount due with each required installment
taxpayer’s short taxable year, the due (as determined under this section)
is 25% of the required annual payment for
taxpayer’s first required installment is for the current short taxable year. B’s first required installment, 50% of the
due on the first due date otherwise (3) Applicable percentage. In the case required annual payment for B’s second
determined under paragraph (c)(1)(i) of of any required installment determined required installment, 75% of the required
this section that is on or after the 15th under section 6655(e), the applicable annual payment for B’s third required
day of the fourth month of the short percentage under section installment, and 100% of the required annual
taxable year. 6655(e)(2)(B)(ii) is— payment for B’s fourth required installment.
(B) A taxpayer with an initial short (i) 25%, 50%, 75%, and 100% for the Example 3. Initial short year with three
first, second, third, and fourth (last) required installments. Corporation C began
taxable year may make estimated tax business on February 12, 2009, and adopted
payments as though it were a calendar required installments, respectively, if a calendar year as its taxable year. C
year taxpayer until it files its tax return the taxpayer will have four required computes its required installments based on
for its initial taxable year and will not installments due for the short taxable 100 percent of the tax shown on the return
be subject to an addition to tax under year; for the taxable year in accordance with
section 6655 for making estimated tax (ii) 33.33%, 66.67%, and 100% for the section 6655(d)(1)(B)(i). Pursuant to
payments as though it were a calendar first, second, and third (last) required § 1.6655–1(f)(2)(i), the due dates of C’s
year taxpayer for the period beginning installments, respectively, if the required installments for C’s initial taxable
taxpayer will have three required year from February 12, 2009, through
with its initial short taxable year to the
December 31, 2009, are April 15, 2009, June
time it files its tax return for its initial installments due for the short taxable
15, 2009, September 15, 2009, and December
short taxable year if, when filing its tax year; 15, 2009. However, in accordance with
return for its initial short taxable year, (iii) 50% and 100% for the first and paragraph (c)(1)(ii)(A) of this section, C’s first
the taxpayer chooses to be a fiscal year second (last) required installments, required installment is due June 15, 2009,
taxpayer. respectively, if the taxpayer will have because April 15, 2009, is earlier than the
(2) Early termination of taxable year— two required installments due for the fifteenth day of the fourth month of C’s
(i) In general. Except as provided in short taxable year; or taxable year. As a result, C’s second required
paragraph (c)(2)(ii) of this section, if a (iv) 100% for the first (and last) installment is due September 15, 2009, and
required installment if the taxpayer will C’s third (and last) installment is due
taxable year ends early (for example, as December 15, 2009. Pursuant to paragraph
a result of an acquisition or a change in have one required installment for the
(d)(1) of this section, the amount due with
taxable year), the due date for the final short taxable year. each required installment is 33.33% of the
required installment is the date that (4) Applicable percentage for required annual payment for C’s first
would have been the due date of the installment period in which taxpayer required installment, 66.67% of the required
next required installment if the event does not reasonably expect that the annual payment for C’s second required
that gave rise to the short taxable year taxable year will be an early termination installment, and 100% of the required annual
had not occurred. year. In the case of any required payment for C’s third (and last) required
(ii) Exception. If the date determined installment determined under section installment.
6655(e) in which the taxpayer does not Example 4. Initial short year with two
under paragraph (c)(2)(i) of this section required installments. Same facts as Example
is within thirty days of the last day of reasonably expect that the taxable year
3 except C began business on April 10, 2009.
the short taxable year, the due date for will be an early termination year, the In accordance with paragraph (c)(1)(ii)(A) of
the final required installment is the applicable percentage under section this section, C’s first required installment is
fifteenth day of the second month 6655(e)(2)(B)(ii) is the applicable due September 15, 2009, because April 15,
following the month that includes the percentage provided by paragraph 2009, and June 15, 2009, are earlier than the
last day of the short taxable year. (d)(3)(i) of this section with the fifteenth day of the fourth month of C’s
(d) Amount due for required remaining balance of the estimated tax taxable year. As a result, C’s second (and last)
payment for the year due with the final required installment is due December 15,
installment—(1) In general. The amount
installment. 2009. Pursuant to paragraph (d)(1) of this
due for any required installment section, the amount due with each required
determined under section (e) Examples. The following examples
installment is 50% of the required annual
6655(d)(1)(B)(i) for a short taxable year illustrate the rules of this section: payment for C’s first required installment,
is 100% of the required annual payment Example 1. Short year of less than 4 and 100% of the required annual payment for
for the short taxable year divided by the months. Corporation A is a calendar year C’s second (and last) required installment.
number of required installments due (as taxpayer that was acquired by corporation B, Example 5. Initial short year for fiscal year
determined under this section) for the a member of a consolidated group (as defined taxpayer with two required installments.
short taxable year. in § 1.1502–1(h)) on April 16, 2009, resulting Corporation D began business on February
in A having a short taxable year from January 12, 2009, and adopted a fiscal year ending
(2) Tax shown on the return for the
1, 2009, through April 16, 2009. Because A October 31 as its taxable year. D computes its
preceding taxable year. If the current has a taxable year of less than four full required installments based on 100 percent of
taxable year is a short taxable year, the calendar months, no estimated tax payments the tax shown on the return for the taxable
amount due for any required installment are required by A for the short taxable year. year in accordance with section
determined under section Example 2. Initial short year with four 6655(d)(1)(B)(i). Pursuant to § 1.6655–
6655(d)(1)(B)(ii) is determined in the required installments. Corporation B began 1(f)(2)(ii), the due dates of D’s required
following manner— business on January 9, 2009, and adopted a installments for D’s initial taxable year from
(i) Take 100% of the tax shown on the calendar year as its taxable year. B computes February 12, 2009, through October 31, 2009,
return of the corporation for the its required installments based on 100 are February 15, 2009, April 15, 2009, July
percent of the tax shown on the return for the 15, 2009, and October 15, 2009. However, in
jlentini on PROD1PC65 with RULES3

preceding taxable year; taxable year in accordance with section accordance with paragraph (c)(1)(ii)(A) of
(ii) Multiply such amount by the 6655(d)(1)(B)(i). Pursuant to § 1.6655– this section, D’s first required installment is
number of full calendar months in the 1(f)(2)(i), the due dates of B’s required due July 15, 2009, because February 15, 2009,
current short taxable year and divide by installments for B’s initial taxable year from and April 15, 2009, are earlier than the
12; and January 9, 2009, through December 31, 2009, fifteenth day of the fourth month of D’s

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44363

taxable year. As a result, D’s second (and last) installment are 25%, 50%, and 100% for the number of months in the current taxable
installment is due October 15, 2009. Pursuant first, second, and third (last) required year. Accordingly, G must pay $43,750
to paragraph (d)(1) of this section, the installments, respectively, pursuant to ($75,000 × 7⁄12) through payments of
amount due with each required installment paragraph (d)(4) of this section. estimated tax payments in 2009, with
is 50% of the required annual payment for Example 9. Short termination year ending $14,583 due on April 15, 2009, June 15, 2009,
D’s first required installment, and 100% of within 30 days of the regular final and September 15, 2009.
the required annual payment for D’s second installment due date. Same facts as Example Example 12. Short termination year using
(and last) required installment. 7 except that E is acquired by F on August the tax shown on the return for the preceding
Example 6. Initial short year for fiscal year 31, 2009. Pursuant to paragraph (c)(2)(ii) of taxable year. Same facts as Example 11
taxpayer with one required installment. Same this section, E’s third (and last) required except that G makes a final distribution of its
facts as Example 5 except D corporation installment of estimated tax is due on assets, in connection with a plan of complete
began business on May 11, 2009. In October 15, 2009, because September 15, liquidation, on October 1, 2009, resulting in
accordance with paragraph (c)(1)(ii)(A) of 2009, the date that would have been the due a short taxable year from January 1, 2009,
this section, D’s first (and last) installment is date of E’s next required installment if F’s through October 1, 2009. To satisfy the
due October 15, 2009, because July 15, 2009, acquisition of E had not occurred, is within requirements of the exception described in
is earlier than the fifteenth day of the fourth thirty days of the last day of E’s short taxable section 6655(d)(1)(B)(ii), G must pay $56,250
month of D’s taxable year. Pursuant to year, and 100% of the required annual ($75,000 × 9⁄12) through payments of
paragraph (d)(1) of this section, the amount payment is due with such installment. estimated tax in 2009, with $14,063 due on
due with D’s required installment is 100% of Example 10. Short termination year ending April 15, 2009, June 15, 2009, September 15,
the required annual payment, computed as within 30 days of the regular final 2009, and December 15, 2009, respectively.
100% divided by the number of required installment due date. Corporation F is a Example 13. Short initial year with three
installments due for the short taxable year. calendar year taxpayer that computes its required installments resulting in an
Example 7. Short termination year with required installments based on 100 percent of underpayment. (i) Corporation H began
three required installments. Corporation E is the tax shown on the return for the taxable business on February 17, 2009, and adopted
a calendar year taxpayer that computes its year in accordance with section a calendar year. H computes its required
required installments based on 100 percent of 6655(d)(1)(B)(i). F computes its 2009 installments based on 100 percent of the tax
the tax shown on the return for the taxable estimated tax payments based on a projected shown on the return for the taxable year in
year in accordance with section 2009 total tax liability of $900,000. On accordance with section 6655(d)(1)(B)(i). H
6655(d)(1)(B)(i). E computes its 2009 required December 3, 2009, F is acquired by estimated at the beginning of its short taxable
installments based on a projected 2009 total corporation G, a member of a consolidated year that its estimated tax liability for short
taxable year February 17, 2009, through
tax liability of $600,000. On July 31, 2009, E group (as defined in § 1.1502–2(h)), resulting
December 31, 2009, would be $180,000. H
is acquired by corporation F, a member of a in F having a short taxable year from January
paid its first required installment of
consolidated group (as defined in § 1.1502– 1, 2009, through December 3, 2009. F
estimated tax of $60,000 on June 15, 2009, its
1(h)), resulting in E having a short taxable determined its total tax liability for the short
second required installment of estimated tax
year from January 1, 2009, through July 31, period to be $800,000. The due dates for F’s
of $60,000 on September 15, 2009, and its
2009. E determines that its total tax liability first, second, and third required installments third (and last) required installment of
for the short period is $350,000. The due are April 15, 2009, June 15, 2009, and estimated tax of $60,000 on December 15,
dates for E’s first and second required September 15, 2009, respectively. Pursuant to 2009 ($180,000 total estimated tax liability
installments are April 15, 2009, and June 15, section 6655(d)(1)(A), F paid $225,000 with for the short taxable year less prior
2009, respectively. Pursuant to section each required installment. Pursuant to installment payments of $120,000). H
6655(d)(1)(A), E paid $150,000 with each paragraph (c)(2)(ii) of this section, F’s fourth reported a tax liability of $240,000 on its
required installment. Pursuant to paragraph (and last) required installment of estimated return for the short period February 17, 2009,
(c)(2) of this section, E’s third (and last) tax is due on February 15, 2010, and the through December 31, 2009, with no credits
required installment of estimated tax is due percentage of the required annual payment against tax. There was an underpayment in
on September 15, 2009, and the percentage due with such installment is 100% pursuant the amount of $20,000 on the first
of the required annual payment due with to paragraph (d)(1) of this section. However, installment date through September 15, 2009,
such installment is 100% pursuant to because the due date for the fourth required $40,000 on the second installment date
paragraph (d)(1) of this section. Accordingly, installment falls on a legal holiday, F’s through December 15, 2009, and $60,000 on
E is required to pay $50,000 with its final required installment payment will be timely the third (and last) installment date through
required installment on September 15, 2009 if paid on or before the first business day March 15, 2010, determined as follows:
($350,000 total tax liability for the short following the actual due date of the fourth (A) Tax as defined in section
taxable year less prior installment payments required installment, that is, February 16, 6655(d)(1)(B)(i) = $240,000
of $300,000). 2010. Accordingly, F is required to pay (B) 100% of this paragraph (e), Example 13
Example 8. Unexpected short termination $125,000 with its final required installment (A) = $240,000
year with three required installments using on February 16, 2010 ($800,000 total tax (C) Amount of estimated tax required to be
the annualization method. Same facts as liability for the short taxable year less prior paid by the first installment date (33.33% of
Example 7 except that E uses the annualized installment payments of $675,000). $240,000) = $80,000
income installment method under section Example 11. Short termination year using (D) Amount of estimated tax required to be
6655(e)(2)(A)(i) to calculate all of its required the tax shown on the return for the preceding paid by the second installment date (66.67%
installment payments for its 2009 taxable taxable year. Corporation G, a calendar year of $240,000 less $80,000 (amount due with
year. In addition, E does not reasonably taxpayer, reported a tax liability of $75,000 first installment)) = $80,000
expect until July 28, 2009, that it will have on its return for the taxable year ending (E) Amount of estimated tax required to be
a short termination year caused by E being December 31, 2008, and is not a large paid by the third installment date (100% of
acquired by F on July 31, 2009. Had E known corporation as defined in section 6655(g). On $240,000 less $160,000 (amount due with
about its acquisition by F in the first quarter July 31, 2009, G makes a final distribution of first and second installment)) = $80,000
of 2009, E’s applicable percentages for its assets, in connection with a plan of (F) Deduction of amount paid on or before
computing the amount of its three required complete liquidation, resulting in a short the first installment date = $60,000
installments would be 33.33%, 66.67%, and taxable year from January 1, 2009, through (G) Amount of underpayment for the first
100% for the first, second, and third (last) July 31, 2009. To satisfy the requirements of installment date (this paragraph (e), Example
required installments, respectively, pursuant the exception described in section 13 (i)(C) minus this paragraph (e), Example
to paragraph (d)(3)(ii) of this section. 6655(d)(1)(B)(ii) for payments determined by 13 (i)(F)) = $20,000
jlentini on PROD1PC65 with RULES3

However, because E had an unexpected short reference to the tax shown on the return of (H) Deduction of amount available for the
termination year that E was not aware of the corporation for the preceding taxable second installment date ($60,000 second
until after its second required installment year, pursuant to paragraph (d)(2) of this installment payment less this paragraph (e),
payment, E’s applicable percentages for section, G must pay in a proportionate Example 13 (i)(G) applied towards the first
computing the amount of its three required amount of its 2008 tax liability based on the installment underpayment) = $40,000

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44364 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

(I) Amount of underpayment for the second 2009, are April 15, 2009, June 15, 2009, year, the exception described in § 1.6655–2(a)
installment date (this paragraph (e), Example September 15, 2009, and December 15, 2009. applies and no addition to tax will be
13 (i)(D) minus this paragraph (e), Example However, in accordance with paragraph imposed for the installment due on April 15,
13 (i)(H)) = $40,000 (c)(1)(ii)(A) of this section, X’s first required 2009.
(J) Deduction of amount available for the installment is due June 15, 2009. As a result, (iii)(A) To determine whether the required
third installment date ($60,000 third X’s second required installment is due installments made on or before June 15, 2009,
installment payment less this paragraph (e), September 15, 2009, and X’s third (and last) equal or exceed the amount that would have
Example 13 (i)(I) applied towards the second required installment is due December 15, been required to have been paid if the
installment underpayment) = $20,000 2009. The amount of X’s first and second estimated tax were equal to one hundred
(K) Amount of underpayment for the third required installments are each based on percent of the tax computed on the
installment date (this paragraph (e), Example annualizing X’s taxable income from annualized income for the 4-month period
1 (i)(E) minus this paragraph (e), Example 13 February 12, 2009, through April 30, 2009, taking into account the number of months in
(i)(J)) = $60,000 (the first three months of X’s taxable year) the short taxable year, the following
(ii) [Reserved]. and X’s third (and last) required installment computation is necessary:
is based on annualizing X’s taxable income (1) Annualized income for the 4 month
(f) 52 or 53 week taxable year. For from February 12, 2009, through July 31, period = $150,000
purposes of this section a taxable year 2009 (the first six months of X’s taxable year). (2) Tax on this paragraph (g)(4), Example
of 52 or 53 weeks is deemed a period Because X will have three required 2 (iii)(A)(1) = $41,750
of 12 months in the case of a installments due for its short taxable year, (3) Tax determined under this paragraph
corporation that computes its taxable pursuant to paragraph (d)(3)(ii) of this (g)(4), Example 2 (iii)(A)(2) divided by 12
income in accordance with the election section, the applicable percentage is 33.33% multiplied by 7 (the number of months in the
permitted by section 441(f). for X’s first required installment, 66.67% for short taxable year) = $24,354
X’s second required installment, and 100% (4) 100% of this paragraph (g)(4), Example
(g) Use of annualized income or for X’s third (and last) required installment. 2 (iii)(A)(3) = $24,354
seasonal installment method—(1) In Example 2. (i) Y, a calendar year (5) 66.67% of this paragraph (g)(4),
general. Regardless of the annual corporation, made a final distribution of its Example 2 (iii)(A)(4) less $8,117 (amount due
accounting period used by a corporation assets, in connection with a plan of complete with first installment) = $8,120
(for example, calendar year, fiscal year) liquidation, on August 3, 2009. Y filed a (B) Because the total amount of estimated
the taxpayer may use the method timely election to use the alternative tax available to apply towards the amount
described in § 1.6655–2 (annualized annualization periods described under due for the second installment ($11,883
income installment method) or section 6655(e)(2)(C)(i) and determined that ($10,000 paid on the second installment date
§ 1.6655–3 (adjusted seasonal its taxable income for the first 2, 4 and 7 plus $1,883 overpayment of the first
months of the taxable year was $25,000, installment)) exceeds the amount required to
installment method) to compute its $50,000 and $140,000. The due dates for Y’s be paid on or before this date if the estimated
required installments of estimated tax required installments for its short taxable tax were one hundred percent of the tax
when the current taxable year is a short year January 1, 2009, through August 3, 2009, determined by placing on an annualized
taxable year. are April 15, 2009, June 15, 2009, and basis the taxable income for the first 4-month
(2) Computation of annualized September 15, 2009. Y made installment period for the taxable year taking into
income installment. To the extent a payments of $10,000, $10,000, and $20,000, account the number of months in the short
short taxable year includes an respectively, on April 15, 2009, June 15, taxable year, the exception described in
annualization period elected by the 2009, and September 15, 2009. The taxable § 1.6655–2(a) applies and no addition to tax
taxpayer, the taxpayer computes its income for each period is annualized as will be imposed for the installment due on
follows: June 15, 2009.
annualized income installment by
$25,000 × 12/2 = $150,000 (iv)(A) Pursuant to paragraph (c) and (d) of
determining the tax on the basis of such $50,000 × 12/4 = $150,000 this section, the final required installment is
annualized income for the annualization $140,000 × 12/7 = $240,000 due by September 15, 2009, and the
period, divided by 12, multiplied by the (ii)(A) To determine whether the first applicable percentage due for the final
number of months in the short taxable required installment equals or exceeds the required installment is 100%. To determine
year, and multiplied by the applicable amount that would have been required to whether the installment payments made on
percentage for the required installment. have been paid if the estimated tax were or before September 15, 2009, equal or
(3) Annualization period for final equal to one hundred percent of the tax exceed the amount that would have been
required installment. For purposes of computed on the annualized income for the required to have been paid if the estimated
2-month period taking into account the tax were equal to one hundred percent of the
determining the final required
number of months in the short taxable year, tax computed on the annualized income for
installment (as described in paragraph the following computation is necessary: the 7-month period taking into account the
(c)(2) of this section) for a short taxable (1) Annualized income for the 2 month number of months in the short taxable year,
year, annualized taxable income is period = $150,000 the following computation is necessary:
determined by placing on an annualized (2) Tax on this paragraph (g)(4), Example (1) Annualized income for the 7 month
basis the taxable income for the last 2 (ii)(A)(1) = $41,750 period = $240,000
complete annualization period that (3) Tax determined under this paragraph (2) Tax on this paragraph (g)(4), Example
occurs within the short taxable year. (g)(4), Example 2 (ii)(A)(2) divided by 12 2 (iv)(A)(1) = $76,850
(4) Examples. The provisions of multiplied by 7 (the number of months in the (3) Tax determined under this paragraph
paragraph (g) of this section may be short taxable year) = $24,354 (g)(4), Example 2 (iv)(A)(2) divided by 12
(4) 100% of this paragraph (g)(4), Example multiplied by 7 (the number of months in the
illustrated by the following examples: 2 (ii)(A)(3) = $24,354 short taxable year) = $44,829
Example 1. Corporation X began business (5) 33.33% of this paragraph (g)(4), (4) 100% of this paragraph (g)(4), Example
on February 12, 2009, and adopted a calendar Example 2 (ii)(A)(4) = $ 8,117 2 (iv)(A)(3) = $44,829
year as its taxable year. X adopts an accrual (B) Because the total amount of estimated (5) 100% of this paragraph (g)(4), Example
method of accounting and uses the tax that is timely paid on or before the first 2 (iv)(A)(4) less $16,237 (amount due with
annualized income installment method installment date ($10,000) exceeds the first and second installment) = $28,592
under section 6655(e)(2)(A)(i) to calculate all amount required to be paid on or before this (B) Because the total amount of estimated
jlentini on PROD1PC65 with RULES3

of its required installment payments for its date if the estimated tax were one hundred tax available to apply towards the amount
2009 taxable year. Pursuant to § 1.6655– percent of the tax determined by placing on due for the final installment ($23,763
1(f)(2)(i), the due dates of X’s required an annualized basis the taxable income for ($20,000 that is timely paid on the third
installments for X’s initial taxable year from the first 2-month period taking into account installment date plus $3,763 overpayment of
February 12, 2009, through December 31, the number of months in the short taxable the second installment)) does not exceed the

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations 44365

amount required to be paid on or before this under section 6655(e)(2)(A)(i) to calculate all following the close of the taxable year.
date if the estimated tax were one hundred of its 2008 required installments. ABC A refund is paid on the date it is
percent of the tax determined by placing on receives advance payments each taxable year allowed under section 6407.
an annualized basis the taxable income for with respect to agreements for the sale of
(c) The excessive amount is equal to
the first 7-month period for the taxable year goods properly includible in ABC’s
taking into account the number of months in inventory. The advance payments received the lesser of the amount of the
the short taxable year, the exception by ABC qualify for deferral under § 1.451– adjustment or the amount by which—
described in § 1.6655–2(a) does not apply 5(c). Although ABC is eligible to defer the (1) The income tax liability (as
and an addition to tax will be imposed for advance payments in accordance with defined in section 6425(c)) for the
the final installment due on September 15, § 1.451–5(c), ABC’s method of accounting taxable year, as shown on the return for
2009, unless another exception (for example, with respect to the advance payments is to the taxable year; exceeds
see section 6655(e)(3)) applies with respect to include the advance payments in income (2) The estimated income tax paid
these installments. when received and ABC does not change its during the taxable year, reduced by the
(h) Effective/applicability date. This accounting method for advance payments for
the 2008 taxable year. ABC must use its
amount of the adjustment.
section applies to taxable years current method of recognizing advance (d) The computation of the addition to
beginning after September 6, 2007. payments as income in the year received for the tax imposed by section 6425 is made
purposes of computing its 2008 required independent of, and does not affect the
§ 1.6655–6 Methods of accounting.
installments. computation of, any addition to the tax
(a) In general. In computing any Example 2. Change of accounting method. that a corporation may otherwise owe
required installment, a corporation must Corporation ABC, a calendar year taxpayer, for an underpayment of an installment
use the methods of accounting used in uses an accrual method of accounting and the of estimated tax.
computing taxable income for the annualization method under section (e) The following example illustrates
taxable year for which estimated tax is 6655(e)(2)(A)(i) to calculate all of its 2008
required installments. On June 15, 2008, ABC
the rules of this section:
being determined (the current taxable
files a Form 3115 requesting permission to Example. (i) Corporation X, a calendar year
year).
change its method of accounting for future taxpayer, had an underpayment as defined in
(b) Accounting method changes. A
litigation reserves for the tax year ending section 6655(b), for its fourth installment of
taxpayer that changes its method of December 31, 2008. On February 15, 2009, estimated tax that was due on December 15,
accounting with the consent of the ABC receives consent from the Commissioner 2009, in the amount of $10,000. On January
Commissioner for the current taxable to make the change for the tax year ending 4, 2010, X filed an application for adjustment
year must use the new method of December 31, 2008. The change results in a of overpayment of estimated income tax for
accounting (as of the beginning of the positive section 481(a) adjustment of 2009 in the amount of $20,000.
taxable year) in the determination of $100,000. Under the provisions of § 1.6655– (ii) On February 16, 2010, the Internal
taxable income for annualization 2(f)(3)(ii) ABC chooses to treat the section Revenue Service, in response to the
481(a) adjustment as arising on the date the application, refunded $20,000 to X. On
periods ending on or after the date the
Form 3115 is filed with the national office of March 15, 2010, X filed its 2009 tax return
related section 481(a) adjustment is the Internal Revenue Service. Therefore, ABC and made a payment in settlement of its total
treated as arising. See § 1.6655– is required to use the new method of tax liability. Assuming that the addition to
2(f)(3)(ii)(C) for the date a section 481(a) accounting (as of the beginning of the year) tax is computed under section 6621(a)(2) at
adjustment is treated as arising. If the in the determination of taxable income for a rate of 8% per annum for the applicable
change in method of accounting does annualization periods ending on or after June periods of underpayment, under section
not result in a section 481(a) 15, 2008. 6655(a), X is subject to an addition to tax in
adjustment, the taxpayer may choose to (d) Effective/applicability date. This the amount of $197 (90/365 X $10,000 X 8%)
use the new method of accounting (as of section applies to taxable years on account of X’s December 15, 2009,
the beginning of the taxable year) in the underpayment. Under section 6655(h), X is
beginning after September 6, 2007.
subject to an addition to tax in the amount
determination of taxable income for all ■ Par. 13. Newly-designated § 1.6655–7 of $118 (27/365 X $20,000 X 8%) on account
annualization periods during the year of is revised to read as follows: of X’s excessive adjustment under section
change or only those annualization 6425. In determining the amount of the
periods ending on or after the date the § 1.6655–7 Addition to tax on account of addition to tax under section 6655(a) for
Form 3115 ‘‘Application for Change in excessive adjustment under section 6425. failure to pay estimated income tax, the
Accounting Method’’ was filed with the (a) Section 6655(h) imposes an excessive adjustment under section 6425 is
national office of the Internal Revenue addition to the tax under chapter 1 of not taken into account.
Service. This paragraph (b) only applies the Internal Revenue Code in the case of (f) An adjustment is generally to be
to the extent a taxpayer changes a any excessive amount (as defined in treated as a reduction of estimated
method of accounting for the taxable paragraph (c) of this section) of an income tax paid as of the date of the
year with the consent of the adjustment under section 6425 that is adjustment. However, for purposes of
Commissioner. Therefore, a taxpayer made before the 15th day of the third §§ 1.6655–1 through 1.6655–6, the
may be subject to a section 6655 month following the close of a taxable adjustment is to be treated as if not
addition to tax for an underpayment of year beginning after December 31, 1967. made in determining whether there has
estimated tax if an underpayment This addition to tax is imposed whether been any underpayment of estimated
results from a change in a method of or not there was reasonable cause for an income tax and, if there is an
accounting the taxpayer anticipates excessive adjustment. underpayment, the period during which
making for the taxable year but for (b) If the amount of an adjustment
the underpayment existed.
which the consent of the Commissioner under section 6425 is excessive, there (g) Effective/applicability date: This
is not subsequently received. shall be added to the tax under chapter section applies to taxable years
(c) Examples. The following examples 1 of the Internal Revenue Code for the beginning after September 6, 2007.
illustrate the rules of this section: taxable year an amount determined at
jlentini on PROD1PC65 with RULES3

Example 1. Accounting method used in


the annual rate referred to in the PART 301—PROCEDURE AND
computing taxable income for the taxable regulations under section 6621 upon the ADMINISTRATION
year. Corporation ABC, a calendar year excessive amount from the date on
taxpayer, uses an accrual method of which the credit is allowed or refund ■ Par. 14. The authority citation for part
accounting and the annualization method paid to the 15th day of the third month 301 continues to read in part as follows:

VerDate Aug<31>2005 16:34 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3
44366 Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules and Regulations

Authority: 26 U.S.C. 7805 * * * (b) Effective/applicability date: This for §§ 1.6154–2, 1.6154–3, 1.6154–5,
section applies to taxable years 1.6655–1, 1.6655–2, 1.6655–3 and
§ 301.6154–1 [Removed]. beginning after September 6, 2007. 1.6655–7.
■ Par. 15. Section 301.6154–1 is Kevin M. Brown,
PART 602—OMB CONTROL NUMBERS
removed. UNDER THE PAPERWORK Deputy Commissioner for Services and
■ Par. 16. Section 301.6655–1 is revised REDUCTION ACT Enforcement.
to read as follows: Approved: July 17, 2007.
■ Par. 17. The authority citation for part
§ 301.6655–1 Failure by corporation to pay 602 continues to read as follows: Eric Solomon,
estimated income tax. Assistant Secretary of the Treasury (Tax
Authority: 26 U.S.C. 7805.
Policy).
(a) For regulations under section
§ 602.101 [Amended]. [FR Doc. E7–14946 Filed 8–6–07; 8:45 am]
6655, see §§ 1.6655–1 through 1.6655–7
of this chapter. ■ Par. 18. Section 602.101, paragraph BILLING CODE 4830–01–P
(b) is amended by removing the entries
jlentini on PROD1PC65 with RULES3

VerDate Aug<31>2005 17:18 Aug 06, 2007 Jkt 211001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR3.SGM 07AUR3