Category: Miscellaneous; Tax Returns, Examinations
& IRS Procedures Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer is a private foundation which normally earns approximately $2 million in investment income annually. During 1997, the taxpayer recognized a gain from disposition of investment property in the amount of $8 million. A private foundation is required to pay estimated tax payments and is treated as if it were a corporation. IRC Sections 6655(g)(3)(A). For purposes of making estimate payments, taxes imposed by Sections 1, 511, and 4940 are treated as income taxes imposed by Section 11. IRC Section 6655(g)(3)(B). References to the term "taxable income" are deemed to include unrelated business income and investment income. IRC Section 6655(g)(3)(C). A private foundation is not per se treated as a large corporation for purposes of estimated taxes; rather, the ordinary test under Section 6655(g)(2) for large corporation status is simply applied to a private foundation as if it were a corporation. Section 6655(g)(2) defines the term "large corporation" as any corporation having taxable income of at least $1,000,000 at any time during the three preceding taxable years. Since the foundation routinely earns approximately $2 million of investment income annually, the taxpayer is a large corporation for estimated tax purposes. A large corporation generally cannot use the preceding year's tax liability as a basis for making estimated tax payments. This limitation does not apply to the first quarter's estimate; however, any shortfall for the first quarter must be made up in the second quarter's payment. IRC Sections 6655(d)(2)(A) and (B). A large corporation is still entitled to use the annualization exception of Section 6655(e). Proposed Regulation 1.6655-4(a). It is clear that the only difference in the required payment schedule for a large corporation is the unavailability of the so-called "prior year's tax exception". See Section 6655(d)(2). If the investment gain was realized after the first three months of the taxable year, the annualization exception could create a significant savings in estimated tax penalties. The annualization rule requires minimum estimates as follows.
Two other annualization options are possible based on different sub-periods: A) two months, four months, seven months, and ten months; or B) three months, five months, eight months, and eleven months. Use of these alternative sub-periods requires an affirmative election on or before the due date of the first required installment for the tax year in question. I presume no such election was made. Often, civil tax penalties can be mitigated by showing that the taxpayer's act or omission to which the penalty relates was due to reasonable cause and not willful neglect. This is not the case for estimated tax penalties. The IRS does not have the authority to waive the penalty for underpayment of estimated taxes. The penalty rate for underpayment of estimated tax is not increased for large corporations. Section 6655(a)(1) defines the penalty rate for underpayments of estimated tax as the rate established under Section 6621. Section 6621(a)(2) defines that rate by reference to the Federal Short-Term rate as prescribed on a monthly basis by the Secretary of the Treasury. Section 6621(c) increases by two percentage points the rate of interest charged on corporate underpayments of tax in excess of $100,000. This increased rate, however, is explicitly applicable only to the determination of interest under Section 6601. |
