Estimated tax planning by corporations with no tax.

• Author: Golden, Timothy J.

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...