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Estimated tax planning by corporations with no tax.

A nonlarge corporation is generally allowed to base its estimated tax payments on the tax shown on the return for the preceding taxable year if that preceding year was a 12-month year and the corporation filed a return "showing a liability for tax." Rev. Rul. 92-54 deals with the use of this prior year tax method. While this ruling merely states the more logical interpretation of Sec. 6655(d)(1)(B)(ii), it highlights a potential planning opportunity.

In the ruling, a nonlarge C corporation's 1990 tax return reflected a loss and a $0 tax liability. The corporation had tax for 1991, but did not make any 1991 estimated tax payments, on the theory that it met the "prior year tax" exception because 1990 was a 12-month year that reflected a "tax liability" of $0. The ruling holds the corporation liable for the underpayment penalty.

In analyzing this issue, the IRS concluded that Congress clearly intended this result, noting two points. First, Sec. 6655(g)(4)(D) specifically provides that the requirement for a positive prior year tax does not apply in determining whether an S corporation is subject to an estimated tax underpayment penalty. Second, Sec. 6654(d)(1)(B)(ii), which establishes the prior year tax method for individuals, contains identical statutory language to Sec. 6655(d)(1)(B)(ii), except for the language requiring the filing of a return for the preceding year showing a liability for tax. Moreover, Sec. 6654(e)(2) expressly provides that no estimated tax penalty will be imposed on an individual who had no liability for tax for the preceding year.

Based on this analysis supporting congressional awareness of its action, together with the plain wording of the statute, the Service concluded that for corporations the prior year tax method requires a return showing a positive tax liability (i.e., a $0 liability is not a liability).

The planning opportunity: Non-large corporations that experience a loss year and thus have no "regular" tax should attempt to identify at least $1 of tax liability for the loss year. Then they can pay estimated tax for the subsequent year equal to this small amount and avoid any estimated tax underpayment penalty. "Tax liability" includes items such as investment tax credit recapture, alternative minimum tax or environmental tax (see Sec. 6655(g)(1)). Note also that a large corporation can use the prior year tax method for the first-quarter estimated tax payment, provided it meets the requirements of Sec. 6655(d)(1)(B)(ii).

Finally, a modification of the prior year tax method was included in the 1992 tax proposals but not included in the bill sent to the President on Oct. 6, 1992. This proposal would have allowed, under certain circumstances, a nonlarge corporation that does not show a tax liability on its preceding year's return to base its required installments of estimated tax on the tax liability on its second preceding year's return.

From Timothy J. Golden, CPA, Philadelphia, Penn.
COPYRIGHT 1992 American Institute of CPA's
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Golden, Timothy J.
Publication:The Tax Adviser
Date:Nov 1, 1992
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