Corporate estimated tax rules.

On April 16, 1993, Tax Executives Institute sent the following comments to the Department of the Treasury concerning the corporate estimated tax rules of the Internal Revenue Code. The comments, which took the form of a letter from TEl President Bob Perlman to J. Paul Whitehead of Treasury's Office of Tax Policy, were prepared in response to a request from James Fields, acting Assistant Secretary of the Treasury for Tax Policy. Copies of the two appendices referred to in the comments will be provided upon written request. The Institute's submission was prepared under the aegis of its IRS Administrative Affairs Committee, whose chair is W. Remi Taylor of Duke Power Company.

This letter responds to Acting Assistant Secretary Fields's and your request for TEI's comments on the annualization rules for corporate estimated tax payments under section 6655 of the Internal Revenue Code. It thus supplements the Institute's March 17 testimony before the House Committee on Ways and Means concerning President Clinton's Proposals for Public Investment and Deficit Reduction.

During his March 22 remarks to TEI's Midyear Conference, Mr. Fields expressed surprise at TEI's testimony on the corporate estimated tax rules, observing that "we haven't [previously] heard much about the annualization rules." In all candor, the Institute is surprised by Treasury's "surprise-" For more than a decade TEl has voiced concern about the inequitable and unrealistic interaction of the Code's estimated tax and interest provisions. The Institute has consistently supported reinstatement of a meaningful estimated tax safe harbor for so-called large corporations. Our March 17 testimony simply reaffirmed TEI's support for reinstating an elective safe harbor based on prior year's (or years') tax liability.

The reason for our supporting changes to the corporate estimated tax rules is elementary: taxpayers want and need certainty of their tax results. The annualization rules regrettably engraft on the determination of estimated tax payments an uncertainty comparable to that which exists in determining a taxpayer's annual taxable income--plus a few additional wrinkles. By contrast, an objective, almost mechanical safe harbor would eliminate the guesswork in calculating estimated tax payments by establishing a single number to aim for--one that is capable of precise and verifiable confirmation.

TEI's testimony on the President's proposals (a copy of the relevant portion of which is attached as Appendix 1) was not intended to suggest that the annualization rules needed to be clarified or amended. Taxpayers who prefer to, and can, make the required calculations and maintain the books and records to support their estimated tax payments based on annualization should be permitted to do so. What TEI proposed in its testimony is expunging the uncertainty inherent in the determination of taxable income from the process for the collection and payment of estimated taxes.(2) The annualization process for determining quarterly estimated tax payments, carried to its literal extreme, requires taxpayers to prepare five "mini" tax returns for their estimated tax payments plus their final return.(3) We believe that the estimated tax payment process for large corporations should be simplified.

By reinstating a large corporation elective safe harbor for estimated tax payments based on a percentage of the prior year's tax liability, Congress could remove the uncertainty associated with the determination of tax liability from the quarterly estimating and payment process.(4) We offer the following two variations for your consideration:

* The Administration could

propose extending the current

exception under section

6655(d)(2)(B) for the first in-

stallment payment to the sec-

ond installment; thus, large

corporations would be permit-

ted to base both the first and

second installments on the pre-

ceding year's actual tax liabili-

ty. For the third installment

(which in the normal course of

filing is due at the same time

as the extended due date of the

return for the preceding year)

and the fourth installment, the

payment amounts would be

based on 75 percent or 100 per-

cent, respectively, of 120 per-

cent of the preceding year's tax.

* Alternatively, the first install-

ment would remain 25 percent

of the amount shown on the

preceding year's return (as un-

der section 6655(d)(2)(B)). The

second, third, or fourth install-

ments would be based on 50

percent, 75 percent, or 100 per-

cent, respectively, of 120 per-

cent of the average of the pre-

ceding three years' tax liabili-

ties.

The first alternative recognizes that a taxpayer does not fully know its preceding year's tax liability until the return for that period is filed and thus extends the benefit of section 6655(d)(2)(B) to the second quarter installment. The alternative proposal restates the first proposal contained in the Institute's March 17 testimony.5 Under either proposal, taxpayers would remain free to rely on the 97 percent current year's liability rule. We recognize that either alternative may shift the timing of the receipt of revenues by the government. We are unable to say what that shift may mean in terms of revenue estimates for purposes of scoring the budget proposals; we believe, however, that the effect would be slight.

TEI appreciates this opportunity to clarify our views about the estimated tax rules and would be happy to work with you in developing the proposal to extend the benefit of a true safe harbor for estimated tax payments to large corporations. If you wish to explore this matter further, please do not hesitate to call me at (408) 7651202 or Timothy J. McCormally of the Institute's legal staff at [phone].

(1) We note, however, that determining annualized tax liability and quarterly estimated payments under the annualization rules of section 6655(e) remains far from simple. A list of issues that could be addressed through administrative guidance is attached as Appendix 2.

(2) That there is uncertainty inherent in the determination of a large corporation's tax liability is unassailable. The very existence of the IRS's coordinated examination program manifests a Treasury Department and IRS belief that the complexity of the tax law as it applies to these taxpayers requires special attention and constant review.

(3) Four estimated tax payments would have to be made (for a calendar-year taxpayer) on April 15, June 15, September 15, and December 15, and a final estimate would have to be filed on the original due date of the return (March 15) at which time most large corporations also submit their extension requests; the final return would have to be filed six months later (on September 15).

(4) Requirement of present law (which the President's proposal would make permanent) that a corporation pay at least 97 percent of its current year liability assumes a level of precision and accuracy in the determination of estimated taxable income that is simply illusory.