[Federal Register Volume 70, Number 237 (Monday, December 12, 2005)]
[Proposed Rules]
[Pages 73393-73413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23872]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-107722-00]
RIN 1545-AY22


Corporate Estimated Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Partial withdrawal of previous proposed rules, notice of 
proposed rulemaking, and notice of public hearing.

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SUMMARY: This document withdraws proposed regulations relating to 
corporate estimated taxes. This document also contains new proposed 
regulations that provide guidance to corporations with respect to 
estimated tax requirements. These proposed regulations generally affect 
corporate taxpayers who are required to make estimated tax payments. 
These proposed amendments reflect changes to the law since 1984. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by February 22, 
2006. Outlines of topics to be discussed at the public hearing 
scheduled for March 15, 2006, must be received by February 22, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-107722-00), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
107722-00), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent

[[Page 73394]]

electronically, via the IRS Internet site at http://www.irs.gov/regs or 
via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-
REG-107722-00). The public hearing will be held in the Auditorium, 
Internal Revenue Service Building, 1111 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Joseph P. Dewald, (202) 622-4910; concerning the submissions of 
comments, the hearing, and/or to be placed on the building access list 
to attend the hearing, Robin Jones at (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    This document withdraws Sec. Sec.  1.6152-1(a)(1), 1.6654-
2(d)(1)(i), 1.6655-1, 1.6655-2, 1.6655-3, 1.6655-4, 1.6655-5, 1.6655-6, 
and 301.6655-1 in the notice of proposed rulemaking (LR-228-82) 
relating to corporate estimated taxes under section 6655 that was 
published in the Federal Register (49 FR 11186) on March 26, 1984 
(referred to as the 1984 proposed regulations). This document also 
contains new proposed amendments to the Income Tax Regulations (26 CFR 
Part 1) and the Procedure and Administration Regulations (26 CFR Part 
301) relating to corporate estimated taxes under section 6425 and 
section 6655 of the Internal Revenue Code. The IRS is withdrawing the 
1984 proposed regulations because significant changes to the law since 
1984 have caused them to become outdated.
    These proposed regulations reflect changes to the law made by the 
Deficit Reduction Act of 1984, Public Law 98-369 (98 Stat. 494), the 
Superfund Amendments and Reauthorization Act of 1986, Public Law 99-499 
(100 Stat. 1613), the Tax Reform Act of 1986, Public Law 99-514 (100 
Stat. 2085), the Omnibus Budget Reconciliation Act of 1987, Public Law 
100-203 (101 Stat. 1330), the Revenue Act of 1987, Public Law 100-203 
(101 Stat. 1330-382), the Omnibus Trade and Competitiveness Act of 
1988, Public Law 100-418 (102 Stat. 1107), the Technical and 
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342), 
the Omnibus Budget Reconciliation Act of 1989, Public Law 101-239 (103 
Stat. 2106), the Omnibus Budget Reconciliation Act of 1990, Public Law 
101-508 (104 Stat. 1388), the Tax Extension Act of 1991, Public Law 
102-227 (105 Stat. 1686), the Act of Feb. 7, 1992, Public Law 102-244 
(106 Stat. 3), the Unemployment Compensation Amendments of 1992, Public 
Law 102-318 (106 Stat. 290), the Omnibus Budget Reconciliation Act of 
1993, Public Law 103-66 (107 Stat. 312), the Uruguay Round Agreements 
Act of 1994, Public Law 103-465 (108 Stat. 4809), the Small Business 
Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1755), the 
Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788), the 
Ticket to Work and Work Incentives Improvement Act of 1999, Public Law 
106-170 (113 Stat. 1860), the Community Renewal Tax Relief Act of 2000, 
Public Law 106-554 (114 Stat. 2763), the Economic Growth and Tax Relief 
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38), the Jobs 
and Growth Tax Relief Reconciliation Act of 2003, Public Law 108-27 
(117 Stat. 752), and the American Jobs Creation Act of 2004, Public Law 
108-357 (118 Stat. 1418).
    The existing regulations under section 6655 do not reflect 
significant changes to the tax law since 1984, most notably the 
enactment of the economic performance rules under section 461(h). Since 
the enactment of section 461(h), the determination of when economic 
performance must occur for taxpayers to take a deduction into account 
for purposes of computing a quarterly estimated tax payment has been 
unclear, particularly for taxpayers that compute their quarterly 
estimated tax payments using an annualization method.
    In addition, the IRS and Treasury Department have become aware of 
techniques employed by taxpayers, particularly those taxpayers 
computing their estimated tax payments using an annualization method, 
that reduce, if not eliminate, estimated tax payments for one or more 
installments for a taxable year. The proposed regulations provide rules 
that the IRS and Treasury Department believe result in a more accurate 
reflection of annualized income than methods that taxpayers may 
currently be employing. For example, the proposed regulations make it 
clear that taxpayers may not, for any purpose, determine taxable income 
for an annualization period or an adjusted seasonal installment period 
as though the period is a short taxable year. The proposed regulations 
provide specific rules for determining taxable income for any 
annualization period, including how section 461(h) is to be applied in 
computing taxable income for any annualization period. For example, 
with respect to an item of income or gain, the proposed regulations 
provide that the item must be taken into account in computing 
annualized taxable income for a particular annualization period if the 
item is includible in computing taxable income in accordance with 
section 451 on or before the last day of the annualization period. With 
respect to an item of deduction, the proposed regulations generally 
provide that an accrual method taxpayer may take into account a 
deduction in computing annualized taxable income for a particular 
annualization period only to the extent the item is incurred under 
Sec.  1.461-1(a)(2) on or before the last day of the annualization 
period. For purposes of determining whether a deduction may be taken 
into account by an accrual method taxpayer in determining annualized 
taxable income for a particular annualization period, the provisions of 
section 170(a)(2) and Sec.  1.170A-11(b) (charitable contributions by 
accrual method corporations), Sec.  1.461-4(d)(6)(ii) (provision of 
services or property to a taxpayer), Sec.  1.461-5 (recurring item 
exception), and any other provision that has a similar effect are not 
taken into account in determining whether the item of deduction has 
been incurred under Sec.  1.461-1(a)(2) and is deductible in computing 
annualized taxable income for an annualization period.
    Revenue Ruling 76-450 (1976-2 C.B. 444), provides that state 
property tax and franchise tax are deductible from the income for an 
annualization period on the date the taxpayer accrues the taxes under 
the taxpayer's method of accounting. Revenue Ruling 76-450 was issued 
prior to the enactment of section 461(h) and does not take into account 
the application of the economic performance requirements of section 
461(h) for purposes of computing an estimated tax payment using the 
annualized income installment method. The proposed regulations address 
the application of section 461(h) for purposes of the annualized income 
installment method and provide that a taxpayer using an accrual method 
of accounting cannot take a deduction into account unless the deduction 
has been incurred under Sec.  1.461-1(a)(2) and is otherwise deductible 
in computing taxable income for the applicable annualization period. As 
a result of the rules provided in the proposed regulations regarding 
the application of section 461(h) to the annualized income installment 
method, Rev. Rul. 76-450 is no longer applicable and will be obsolete 
when these regulations are effective.
    For purposes of section 404 and the regulations, regardless of the 
overall method of accounting employed by the taxpayer, the applicable 
2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-, 10- or 11-month annualization period 
shall not be treated

[[Page 73395]]

as a short taxable year and the rules of section 404 and the 
regulations shall be applied on the basis of the taxpayer's taxable 
year for which estimated tax is being determined. Thus, the 
determination of whether a payment to an employee is deferred 
compensation under Sec.  1.404(b)-1T shall be made by reference to 
whether the payment is received by the employee more than a brief 
period of time after the last day of the taxable year for which 
estimated tax is being determined, and not the last day of the 
annualization period. With respect to contributions to qualified plans 
governed by section 404 and the regulations, in determining whether an 
item is paid or incurred by the end of an annualization period, 
economic performance is satisfied only to the extent such item is paid 
by the last day of the annualization period (without regard to section 
404(a)(6)) and does not, in combination with other such items paid 
during the annualization period, exceed the applicable deduction limit 
of section 404(a) for the taxable year. For purposes of sections 419 
and 419A and the regulations, regardless of the overall method of 
accounting employed by the taxpayer, the applicable 2-, 3-, 4-, 5-, 6-, 
7-, 8-, 9-, 10-, or 11-month annualization period shall not be treated 
as a short taxable year and the rules of sections 419 and 419A and the 
regulations shall be applied on the basis of the taxpayer's taxable 
year for which estimated tax is being determined. With respect to 
contributions to a welfare benefit fund governed by sections 419 and 
419A and the regulations, in determining whether an item is paid or 
incurred by the end of an annualization period, economic performance is 
satisfied only to the extent such item is paid by the last day of the 
applicable annualization period and does not, in combination with other 
such items paid during the annualization period, exceed the applicable 
deduction limit of section 419 for the taxable year.
    The proposed regulations provide guidance for annual expenses paid 
or incurred at the end of the taxable year, or after the end of the 
taxable year that are deemed paid or incurred during the taxable year. 
Section 1.6655-2(f)(2)(i) of the proposed regulations provides that if 
an accrual method taxpayer has a history of incurring a specific item 
of expense (or paying a specific item of expense, in the case of a cash 
method taxpayer) that, while attributable to income earned throughout 
the current taxable year, is not incurred (or paid, in the case of a 
cash method taxpayer) until the end of the taxable year or after the 
end of the current taxable year and is deemed incurred (or paid, in the 
case of a cash method taxpayer) during the current taxable year (taking 
into account, as applicable, section 170(a)(2) and Sec.  1.170A-11(b), 
section 404(a)(6), Sec.  1.461-4(d)(6)(ii), Sec.  1.461-5, and any 
other provision that has a similar effect), then the taxpayer may take 
into account a proportionate part of the specific item of expense for 
each annualization period. In such case the taxpayer may take into 
account a proportionate part of the specific item of expense for each 
annualization period only if the portion of the annual expense taken 
into account is determined with reasonable accuracy and the expense is 
properly deducted by the taxpayer for the current taxable year under 
the taxpayer's method of accounting. For purposes of Sec.  1.6655-
2(f)(2)(i), a taxpayer has a history of incurring or paying a specific 
item of expense at the end of the taxable year, or after the end of the 
taxable year that is deemed incurred or paid during the taxable year, 
if, in each of the two taxable years immediately preceding the current 
taxable year (or the immediately preceding taxable year if the taxpayer 
was not in existence for the two preceding taxable years), the taxpayer 
incurred or paid the specific item of expense at the end of each 
taxable year, or after the end of each taxable year that was deemed 
incurred or paid during such taxable year. For purposes of Sec.  
1.6655-2(f)(2)(i), the term ``the end of the taxable year'' means the 
period between and including the 15th and last day of the last month of 
the taxable year.
    The proposed regulations also provide guidance regarding the 
treatment of specific items for purposes of computing annualized 
taxable income for an annualization period. For example, net operating 
loss carryovers must be taken into account in computing an annualized 
income installment after placing the taxable income for the 
annualization period on an annualized basis, and section 481(a) 
adjustments must be recognized ratably over the applicable adjustment 
period.
    Revenue Ruling 67-93 (1967-1 C.B. 366), provides that a taxpayer 
should deduct a net operating loss (NOL) carryover from the income for 
an annualization period before annualizing the income for that period. 
As previously stated, the IRS and Treasury Department believe that it 
is not appropriate for taxpayers to determine taxable income for an 
annualization period or an adjusted seasonal installment period as 
though the period is a short taxable year. As a result, the IRS and 
Treasury Department now believe that it is a more appropriate 
reflection of annualized taxable income if a NOL carryover is deducted 
after annualizing the taxable income for an applicable annualization 
period or adjusted seasonal installment period. Accordingly, the 
proposed regulations provide that a taxpayer must annualize taxable 
income before taking into account a NOL carryover and reduce the 
annualized amount by the NOL carryover. As a result, Rev. Rul. 67-93 
will be obsolete when these regulations are effective.
    In addition, the proposed regulations provide guidance on the 
amount of depreciation and amortization (depreciation) expense that a 
taxpayer may take into account for an annualization period. The 
proposed regulations generally provide that a proportionate amount of a 
taxpayer's estimated annual depreciation expense shall be taken into 
account when determining any annualized income installment for the 
taxable year. In determining the estimated annual depreciation expense, 
a taxpayer may take into account purchases, sales or other 
dispositions, changes in use, depreciation permitted by sections 168(k) 
and 1400L, and other similar events that, based on all of the relevant 
information available as of the last day of the annualization period 
(such as capital spending budgets, financial statement data and 
projections, or similar reports that provide evidence of the taxpayer's 
capital spending plans for the current taxable year), the taxpayer 
reasonably expects to occur during the taxable year. As an alternative 
to estimating annual depreciation expense based on events that are 
reasonably expected to occur, the proposed regulations provide that, in 
general, a taxpayer may claim for an annualization period at least a 
proportionate amount of 50 percent of the taxpayer's estimated 
depreciation expense for the current taxable year attributable to 
assets that the taxpayer had in service on the last day of the 
preceding taxable year, that remain in service on the first day of the 
current taxable year, and that are subject to the half-year convention. 
The proposed regulations also provide that an annualization period 
cannot be treated as a short taxable year, including for purposes of 
determining the depreciation allowance for such annualization period.
    The proposed regulations also provide guidance regarding short 
taxable years, including the due dates for required installments for a 
short taxable year (including a taxpayer's initial taxable year), the 
computation of such installments, and the applicable

[[Page 73396]]

percentage of the annual tax due with each installment.

Proposed Effective Date

    These regulations are proposed to apply to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register. Until the final regulations become 
effective, taxpayers may rely on these proposed rules for taxable years 
beginning on or after the date this notice of proposed rulemaking is 
published in the Federal Register, provided, however, that the taxpayer 
applies all of these proposed rules in determining its required 
installments.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. Except with 
respect to Sec.  1.6655-5, which deals with the rules applicable to a 
short taxable year, it has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because these provisions do not impose a 
collection of information on small businesses, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. With respect to 
Sec.  1.6655-5, it is hereby certified that this provision of the 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that not many small businesses are going to be subject to the 
short taxable year rules because: (1) Existing small businesses 
generally are not targets of mergers and acquisitions, which result in 
a short taxable year; (2) start-up small businesses with a short 
taxable year of less than four months do not have to pay estimated 
taxes; and (3) start-up small businesses with a short taxable year of 
four months or more are not likely to have taxable income that would be 
subject to the corporate estimated tax rules. Therefore, a Regulatory 
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) is not required. Pursuant to section 7805(f) of the Internal 
Revenue Code, this notice of proposed rulemaking will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small businesses.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. In 
particular, the IRS and Treasury Department request comments on whether 
the 52-53 week taxable year rules under Sec.  1.6655-2(e) should be 
simplified. The IRS and Treasury Department also request comments on 
whether the final regulations should include an additional exception, 
similar to the exception provided in Sec.  1.6655-2(f)(2)(i), that 
would permit a taxpayer to take into account for an annualization 
period a proportionate amount of a specific item of expense that is 
attributable to income earned throughout the current taxable year and 
is paid or incurred during the taxable year but after the applicable 
annualization period. If such an exception is appropriate, the IRS and 
Treasury Department request comments on what specific types of expenses 
would meet the requirements of the rule, and whether the exception 
should provide for any additional limitations, such as a requirement 
that a minimum percentage of the annual amount of the expense be paid 
or incurred on a particular day during the taxable year. All comments 
will be available for public inspection and copying.
    A public hearing has been scheduled for February 22, 2006, 
beginning at 10 a.m. in the Auditorium of the Internal Revenue Service 
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to 
building security procedures, visitors must enter at the Constitution 
Avenue entrance. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit electronic or written 
comments and an outline of the topics to be discussed and time to be 
devoted to each topic (a signed original and eight (8) copies) by 
February 22, 2006. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal authors of these regulations are Robert A. Desilets, 
Jr., formerly of the Office of Associate Chief Counsel (Procedure and 
Administration), Administrative Provisions and Judicial Practice 
Division, and Joseph P. Dewald, Office of Associate Chief Counsel 
(Procedure and Administration), Administrative Provisions and Judicial 
Practice Division.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Partial Withdrawal of a Previous Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, Sec. Sec.  
1.6152-1(a)(1), 1.6654-2(d)(1)(i), 1.6655-1, 1.6655-2, 1.6655-3, 
1.6655-4, 1.6655-5, 1.6655-6, and 301.6655-1 in the notice of proposed 
rulemaking published in the Federal Register on March 26, 1984, (LR-
228-82) (49 FR 11186) are withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.6655-5 also issued under 26 U.S.C. 6655(i)(2). * * *

    Par. 2. In Sec.  1.56-0, the heading for paragraph (e)(5) is added 
to read as follows:


Sec.  1.56-0  Table of contents to Sec.  1.56-1, adjustment for book 
income of corporations.

* * * * *
    (e) * * *
    (5) Effective date.
    Par. 3. In Sec.  1.56-1, paragraph (e)(4) is revised and paragraph 
(e)(5) is added to read as follows:


Sec.  1.56-1  Adjustment for the book income of corporations.

* * * * *
    (e) * * *
    (4) Estimating the book income adjustment for purposes of the

[[Page 73397]]

estimated tax liability. See Sec.  1.6655-7, as issued by TD 8307 (55 
FR 33671), for special rules for estimating the corporate alternative 
minimum tax book income adjustment under the annualization exception.
    (5) Effective date. Paragraph (e)(4) of this section is applicable 
for taxable years beginning after the date that is 30 days after the 
date the final regulations are published in the Federal Register.
    Par. 4. In Sec.  1.6425-2, paragraph (a) is revised and paragraph 
(c) is added to read as follows:


Sec.  1.6425-2  Computation of adjustment of overpayment of estimated 
tax.

    (a) Income tax liability defined. For purposes of Sec. Sec.  
1.6425-1 through 1.6425-3 and 1.6655-7, relating to excessive 
adjustment, the term income tax liability means the excess of--
    (1) The sum of--
    (i) The tax imposed by section 11 or 1201(a), or subchapter L of 
chapter 1 of the Internal Revenue Code, whichever is applicable; plus
    (ii) The tax imposed by section 55; over
    (2) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the Internal Revenue Code.
* * * * *
    (c) Effective date. Paragraph (a) of this section is applicable to 
applications for adjustments of overpayments of estimated income tax 
that are filed in taxable years beginning after the date that is 30 
days after the date the final regulations are published in the Federal 
Register.
    Par. 5. Section 1.6425-3 is amended by:
    1. Revising paragraphs (f)(1) and (f)(2).
    2. Adding paragraph (f)(3).
    The revisions and addition read as follows:


Sec.  1.6425-3  Allowance of adjustments.

* * * * *
    (f) Effect of adjustment. (1) For purposes of all sections of the 
Internal Revenue Code except section 6655, relating to additions to tax 
for failure to pay estimated income tax, any adjustment under section 
6425 is to be treated as a reduction of prior estimated tax payments as 
of the date the credit is allowed or the refund is paid. For the 
purpose of sections 6655(a) through (g), (i), and (j), credit or refund 
of an adjustment is to be treated as if not made in determining whether 
there has been any underpayment of estimated income tax and, if there 
is an underpayment, the period during which the underpayment existed. 
However, an excessive adjustment under section 6425 shall be taken into 
account in applying the addition to tax under section 6655(h).
    (2) For the effect of an excessive adjustment under section 6425, 
see Sec.  1.6655-7.
    (3) This paragraph (f) is applicable to applications for 
adjustments of overpayments of estimated income tax that are filed in 
taxable years beginning after the date that is 30 days after the date 
the final regulations are published in the Federal Register.
    Par. 6. Section 1.6655-0 is added to read as follows:


Sec.  1.6655-0  Table of contents.

    This section lists the table of contents for Sec. Sec.  1.6655-1 
through 1.6655-7.


Sec.  1.6655-1  Addition to the tax in the case of a corporation.

    (a) In general.
    (b) Amount of underpayment.
    (c) Period of the underpayment.
    (d) Amount of required installment.
    (e) Large corporation required to pay 100 percent of current 
year tax.
    (1) In general.
    (2) May use last year's tax for 1st installment.
    (f) Required installment due dates.
    (1) Number of required installments.
    (2) Time for payment of installments.
    (i) Calendar year.
    (ii) Fiscal year.
    (iii) Short taxable year.
    (iv) Partial month.
    (g) Definitions.
    (h) Special rules for consolidated returns.
    (i) Overpayments applied to subsequent taxable year's estimated 
tax.
    (1) In general.
    (2) Subsequent examinations.
    (j) Examples.
    (k) Effective date.

Sec.  1.6655-2  Annualized income installment method.

    (a) In general.
    (b) Determination of annualized income installment--In general.
    (c) Special rules.
    (1) Applicable percentage.
    (2) Partial month.
    (d) Election of different annualization periods.
    (e) 52-53 week taxable year.
    (f) Determination of taxable income for an annualization period.
    (1) In general.
    (2) Exceptions.
    (i) Annual expenses paid or incurred at or after the end of the 
taxable year.
    (ii) Net operating loss carryover.
    (iii) Credit carryover.
    (iv) Section 481(a) adjustment.
    (v) Depreciation and amortization.
    (A) General rule.
    (B) Short taxable years.
    (vi) Member of partnership.
    (3) Examples.
    (g) Items that substantially affect taxable income but cannot be 
determined accurately by the installment due date.
    (1) In general.
    (2) Example.
    (h) Events arising after installment due date that were not 
reasonably foreseeable.
    (1) In general.
    (2) Example.
    (i) Effective date.

Sec.  1.6655-3  Adjusted seasonal installment method.

    (a) In general.
    (b) Limitation on application of section.
    (c) Determination of amount.
    (d) Special rules.
    (1) Base period percentage.
    (2) Filing month.
    (3) Application of the rules related to the annualized income 
installment method to the adjusted seasonal installment method.
    (e) Example.
    (f) Effective date.

Sec.  1.6655-4  Large corporations.

    (a) Large corporation defined.
    (b) Testing period.
    (c) Computation of taxable income during testing period.
    (1) Short taxable year.
    (2) Computation of taxable income in taxable year when there 
occurs a transaction to which section 381 applies.
    (d) Members of controlled group.
    (1) In general.
    (2) Aggregation.
    (3) Allocation rule.
    (4) Controlled group members.
    (e) Effect on a corporation's taxable income of items that may 
be carried back or carried over from any other taxable year.
    (f) Consolidated returns. [Reserved]
    (g) Example.
    (h) Effective date.

Sec.  1.6655-5  Short taxable year.

    (a) In general.
    (b) Exception to payment of estimated tax.
    (c) Installment due dates.
    (1) In general.
    (i) Taxable year of four months but less than twelve months.
    (ii) Exception.
    (2) Early termination of taxable year.
    (i) In general.
    (ii) Exception.
    (d) Amount due for required installment.
    (1) In general.
    (2) Tax shown on the return for the preceding taxable year.
    (3) Applicable percentage.
    (e) Examples.
    (f) 52 or 53 week taxable year.
    (g) Use of annualized income or seasonal installment method.
    (1) In general.
    (2) Computation of annualized income installment.
    (3) Annualization period for final required installment.
    (4) Examples.
    (h) Preceding taxable year a short taxable year.
    (i) Effective date.

Sec.  1.6655-6  Methods of accounting.

    (a) In general.

[[Page 73398]]

    (b) Exceptions.
    (1) Automatic accounting method changes.
    (2) Non-automatic accounting method changes.
    (c) Examples.
    (d) Effective date.

Sec.  1.6655-7  Addition to tax on account of excessive adjustment 
under section 6425.

    Par. 7. Sections 1.6655-1, 1.6655-2, and 1.6655-3 are revised to 
read as follows:


Sec.  1.6655-1  Addition to the tax in the case of a corporation.

    (a) In general. Section 6655 imposes an addition to the tax under 
chapter 1 of the Internal Revenue Code in the case of any underpayment 
of estimated tax by a corporation. An addition to tax due to the 
underpayment of estimated taxes is determined by applying the 
underpayment rate established under section 6621 to the amount of the 
underpayment, for the period of the underpayment. This addition to the 
tax is in addition to any applicable criminal penalties and is imposed 
whether or not there was reasonable cause for the underpayment.
    (b) Amount of underpayment. The amount of the underpayment for any 
required installment is the excess of--
    (1) The required installment; over
    (2) The amount, if any, of the installment paid on or before the 
last date prescribed for such payment.
    (c) Period of the underpayment. The period of the underpayment of 
any required installment runs from the date the installment was 
required to be paid to the 15th day of the 3rd month following the 
close of the taxable year, or to the date such underpayment is paid, 
whichever is earlier. For purposes of determining the period of the 
underpayment--
    (1) The date prescribed for payment of any installment of estimated 
tax shall be determined without regard to any extension of time; and
    (2) A payment of estimated tax will be credited against unpaid 
required installments in the order in which such installments are 
required to be paid.
    (d) Amount of required installment. Except as otherwise provided in 
this section and Sec. Sec.  1.6655-2 through 1.6655-7, the amount of 
any required installment is 25 percent of the lesser of--
    (1) 100 percent of the tax shown on the return for the taxable year 
(or, if no return is filed, 100 percent of the tax for such year); or
    (2) 100 percent of the tax shown on the return of the corporation 
for the preceding taxable year.
    (3) Paragraph (d)(2) of this section shall not apply if the 
preceding taxable year was not a taxable year of 12 months or the 
corporation did not file a return for such preceding taxable year 
showing a liability for tax.
    (e) Large corporation required to pay 100 percent of current year 
tax--(1) In general. Except as provided in paragraph (e)(2) of this 
section, paragraph (d)(2) of this section shall not apply in the case 
of a large corporation (as defined in Sec.  1.6655-4).
    (2) May use last year's tax for first installment. Paragraph (e)(1) 
of this section shall not apply for purposes of determining the amount 
of the first required installment for any taxable year. Any reduction 
in such first installment by reason of the preceding sentence shall be 
recaptured by increasing the amount of the next required installment 
determined under paragraph (d)(1) of this section by the amount of such 
reduction and, if the next required installment is reduced by use of 
the annualized income installment method under Sec.  1.6655-2 or the 
adjusted seasonal installment method under Sec.  1.6655-3, by 
increasing subsequent required installments determined under paragraph 
(d)(1) of this section to the extent that the reduction has not 
previously been recaptured.
    (f) Required installment due dates--(1) Number of required 
installments. Unless otherwise provided, corporations must make 4 
required installments for each taxable year.
    (2) Time for payment of installments--(i) Calendar year. In the 
case of a calendar year taxpayer, the due dates of the required 
installments are as follows:

    1st--April 15
    2nd--June 15
    3rd--September 15
    4th--December 15

    (ii) Fiscal year. In the case of a taxpayer other than a calendar 
year taxpayer, the due dates of the required installments are as 
follows:

    1st--15th day of 4th month of the taxable year
    2nd--15th day of 6th month of the taxable year
    3rd--15th day of 9th month of the taxable year
    4th--15th day of 12th month of the taxable year

    (iii) Short taxable year. See Sec.  1.6655-5 for rules regarding 
required installments for corporations with a short taxable year.
    (iv) Partial month. Except as otherwise provided, for purposes of 
determining the due date of any required installment a partial month 
shall be treated as a full month.
    (g) Definitions. (1) The term tax as used in this section and 
Sec. Sec.  1.6655-2 through 1.6655-7 means the excess of--
    (i) The sum of--
    (A) The tax imposed by section 11, section 1201(a), or subchapter L 
of chapter 1 of the Internal Revenue Code, whichever is applicable;
    (B) The tax imposed by section 55; plus
    (C) The tax imposed by section 887; over
    (D) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the Internal Revenue Code.
    (ii) In the case of a foreign corporation subject to taxation under 
section 11, section 1201(a), or subchapter L of chapter 1 of the 
Internal Revenue Code, the tax imposed by section 881 shall be treated 
as a tax imposed by section 11.
    (iii) In the case of a partnership that is treated, pursuant to 
regulations issued under section 1446(f)(2), as a corporation for 
purposes of this section, the tax imposed by section 1446 shall be 
treated as a tax imposed by section 11.
    (2) For the purposes of paragraph (d)(2) of this section, the term 
return for the preceding taxable year means the Federal income tax 
return for such taxable year that is required by section 6012(a)(2). 
However, if an amended Federal income tax return has been filed before 
the due date for an installment, then the term return for the preceding 
taxable year means the Federal income tax return as amended. Paragraph 
(d)(2) of this section will apply without regard to whether the 
taxpayer's Federal income tax return for the preceding taxable year is 
filed in a timely manner.
    (3) If the tax rates for the current taxable year for which 
estimated tax is being determined differ from the rates applicable to 
the preceding taxable year, the tax determined for the preceding 
taxable year shall be recomputed using the rates applicable to the 
current taxable year.
    (h) Special rules for consolidated returns. For special rules 
relating to the determination of the amount of the underpayment in the 
case of a corporation whose income is included in a consolidated 
return, see Sec.  1.1502-5(b).
    (i) Overpayments applied to subsequent taxable year's estimated 
tax--(1) In general. If a taxpayer elects under the provisions of 
sections 6402(b) and 6513(d) and the regulations to apply an 
overpayment in year one against the estimated tax liability for year 
two, the overpayment will be applied to the required installment 
payments for year two in the order due and to the extent necessary to 
satisfy such installments, similar to the manner in which an

[[Page 73399]]

actual overpayment of one installment is carried forward to the next 
installment. No interest is accrued or paid on an overpayment if the 
election to apply the overpayment against estimated tax is made.
    (2) Subsequent examinations. If a deficiency is determined in an 
examination of a return for a taxable year that originally reflected an 
overpayment that was applied against estimated tax for the succeeding 
taxable year, interest on the deficiency will not begin to accrue on an 
amount applied until that amount is used to satisfy a required 
estimated tax payment in such taxable year. Regardless of whether the 
taxpayer anticipated the application of such overpayment from the prior 
taxable year in calculating and paying its required estimated tax 
installment liabilities for the current taxable year, the subsequently 
determined underpayment and interest computation thereon will not 
change the taxpayer's original election to apply the overpayment 
against the estimated tax liability of the succeeding taxable year. Any 
changes to the usage of the original overpayment from the prior taxable 
year are hypothetical only and solely for the purpose of computing 
deficiency interest. Overpayment interest will not be impacted. For 
further guidance, see Rev. Rul. 99-40 (1999-2 C.B. 441), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    (j) Examples. The method prescribed in paragraphs (d) through (g) 
of this section may be illustrated by the following examples:

    Example 1. X, a calendar year corporation, estimates its tax 
liability for its taxable year ending December 31, 2006, will be 
$85,000. X is not a large corporation as defined in section 
6655(g)(2) and Sec.  1.6655-4. X reported a liability of $74,900 on 
its return for the taxable year ended December 31, 2005, with no 
credits against tax. X paid four installments of estimated tax, each 
in the amount of $18,725 (25 percent of $74,900), on April 17, 2006, 
June 15, 2006, September 15, 2006, and December 15, 2006, 
respectively. X reported a tax liability of $88,900 on its return 
due March 15, 2007. X had a $5,000 credit against tax for tax year 
2006 as provided by part IV of subchapter A of chapter 1 of the 
Internal Revenue Code. X did not underpay its estimated tax for tax 
year 2006 for any of the four installments, determined as follows:
    (i) Tax as defined in paragraph (g) of this section for 2006 
($88,900-$5,000)--$83,900
    (ii) Tax as defined in paragraph (g) of this section for 2005--
74,900
    (iii) 100% of the lesser of this paragraph (j), Example 1 (i) or 
(ii)--74,900
    (iv) Amount of estimated tax required to be paid on or before 
each installment date (25% of $74,900)--18,725
    (v) Deduct amount paid on or before each installment date--
18,725
    (vi) Amount of underpayment for each installment date--0
    Example 2. (i) Facts. Y, a calendar year corporation, estimates 
its tax liability for its taxable year ending December 31, 2006, 
will be $70,000. Y is not a large corporation as defined in section 
6655(g)(2) and Sec.  1.6655-4. Y reported a Federal income tax 
liability of $90,000 for its taxable year ending December 31, 2005. 
Y paid no installment of estimated tax on or before April 17, 2006, 
June 15, 2006, or September 15, 2006, but made a payment of $63,000 
on December 15, 2006. On March 15, 2007, Y filed its income tax 
return showing a tax of $70,000. Y had no credits against tax for 
tax year 2006. Of the $63,000 paid by Y on December 15, 2006, 
$17,500 is applied to each of the first three installments due on 
April 15, June 15, and September 15, 2006, and the remaining $10,500 
is applied to the fourth installment. Y has an underpayment of 
estimated tax for each of the first three installments of $17,500 
and for the fourth installment of $7,000. The addition to tax under 
section 6655(a) is computed as follows:
    (A) Tax as defined in paragraph (g) of this section for 2006--
$70,000
    (B) Tax as defined in paragraph (g) of this section for 2005--
90,000
    (C) 100% of the lesser of this paragraph (j), Example 2 (i)(A) 
or (i)(B)--70,000
    (D) Amount of estimated tax required to be paid on or before 
each installment date (25% of $70,000)--17,500
    (E) Amount paid on or before the first, second, and third 
installment dates--0
    (F) Amount paid on or before the fourth installment date--63,000
    (G) Amount of underpayment for the first, second, and third 
installment dates--17,500
    (H) Amount of underpayment for the fourth installment date--
7,000
    (ii) Addition to tax. Assuming that neither the annualized 
income installment method nor the adjusted seasonal installment 
method described in Sec. Sec.  1.6655-2 and 1.6655-3 would result in 
a lower payment for any installment period, and the addition to tax 
is computed under section 6621(a)(2) at the rate of 8 percent per 
annum for the applicable periods of underpayment, the addition to 
tax is determined as follows:
    (A) First installment (underpayment period 4-16-06 through 12-
15-06), computed as 244/365 x $17,500 x 8%--$936
    (B) Second installment (underpayment period 6-16-06 through 12-
15-06), computed as 183/365 x $17,500 x 8%--702
    (C) Third installment (underpayment period 9-16-06 through 12-
15-06), computed as 91/365 x $17,500 x 8%--349
    (D) Fourth installment (underpayment period 12-16-06 through 3-
15-07), computed as 90/365 x $7,000 x 8%--138
    (E) Total of this paragraph (j), Example 2 (ii)(A) through (D)--
2,125

    (k) Effective date. This section applies to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register.


Sec.  1.6655-2  Annualized income installment method.

    (a) In general. In the case of any required installment, if the 
corporation establishes that the annualized income installment 
determined under this section, or the adjusted seasonal installment 
determined under Sec.  1.6655-3, is less than the amount determined 
under Sec.  1.6655-1--
    (1) The amount of such required installment shall be the annualized 
income installment (or, if less, the adjusted seasonal installment); 
and
    (2) Any reduction in a required installment resulting from the 
application of this section will be recaptured by increasing the amount 
of the next required installment determined under Sec.  1.6655-1 by the 
amount of such reduction (and, if the next required installment is 
similarly reduced, by increasing subsequent required installments to 
the extent that the reduction has not previously been recaptured).
    (b) Determination of annualized income installment--In general. In 
the case of any required installment, the annualized income installment 
is the excess (if any) of--
    (1) The product of the applicable percentage and the tax for the 
taxable year computed by annualizing the taxable income and alternative 
minimum taxable income--
    (i) For the first 3 months of the taxable year, in the case of the 
first required installment;
    (ii) For the first 3 months of the taxable year, in the case of the 
second required installment;
    (iii) For the first 6 months of the taxable year in the case of the 
third required installment; and
    (iv) For the first 9 months of the taxable year, in the case of the 
fourth required installment; over
    (2) The aggregate amount of any prior required installments for the 
taxable year.
    (c) Special rules--(1) Applicable percentage. Except as otherwise 
provided in Sec.  1.6655-5(d) with respect to short taxable years--

------------------------------------------------------------------------
                                                         The applicable
 In the case of the following required installments:     percentage is:
------------------------------------------------------------------------
1st..................................................                 25
2nd..................................................                 50
3rd..................................................                 75
4th..................................................                100
------------------------------------------------------------------------

    (2) Partial month. Except as otherwise provided, for purposes of 
paragraph (b) of this section a partial month shall be treated as a 
month.

[[Page 73400]]

    (d) Election of different annualization periods. (1) If the 
taxpayer timely files Form 8842, ``Election to Use Different 
Annualization Periods for Corporate Estimated Tax,'' in accordance with 
section 6655(e)(2)(C)(iii), and elects Option 1--
    (i) Paragraph (b)(1)(i) of this section will be applied by using 
the language ``2 months'' instead of ``3 months'';
    (ii) Paragraph (b)(1)(ii) of this section will be applied by using 
the language ``4 months'' instead of ``3 months'';
    (iii) Paragraph (b)(1)(iii) of this section will be applied by 
using the language ``7 months'' instead of ``6 months''; and
    (iv) Paragraph (b)(1)(iv) of this section will be applied by using 
the language ``10 months'' instead of ``9 months''.
    (2) If the taxpayer timely files Form 8842, in accordance with 
section 6655(e)(2)(C)(iii), and elects Option 2--
    (i) Paragraph (b)(1)(ii) of this section will be applied by using 
the language ``5 months'' instead of ``3 months'';
    (ii) Paragraph (b)(1)(iii) of this section will be applied by using 
the language ``8 months'' instead of ``6 months''; and
    (iii) Paragraph (b)(1)(iv) of this section will be applied by using 
the language ``11 months'' instead of ``9 months''.
    (e) 52-53 week taxable year. (1) Generally, in the case of a 
taxpayer whose taxable year constitutes 52 or 53 weeks in accordance 
with section 441(f), the rules prescribed by Sec.  1.441-2 shall be 
applicable in determining--
    (i) Whether a taxable year is a taxable year of 12 months; and
    (ii) When the 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-month 
period (whichever is applicable) commences and ends for purposes of 
paragraphs (b)(1), (d)(1) and (d)(2) of this section.
    (2) If a taxpayer employs four 13-week periods or thirteen 4-week 
accounting periods and the end of any accounting period employed by the 
taxpayer does not correspond to the end of the 2-, 3-, 4-, 5-, 6-, 7-, 
8-, 9-, 10-, or 11-month period (whichever is applicable), then, 
provided the taxpayer has at least one full 4-week or 13-week 
accounting period, as appropriate, within the applicable period, 
annualized taxable income for the applicable period shall be--
    (i) [(x/(y*13))*z], in the case of a taxpayer using four 13-week 
periods, if--
    (A) x = Taxable income for the number of full 13-week periods in 
the applicable period;
    (B) y = The number of full 13-week periods in the applicable 
period; and
    (C) z = The number of weeks in the taxable year; or
    (ii) [(x/(y*4))*z], in the case of a taxpayer using thirteen 4-week 
periods, if--
    (A) x = Taxable income for the full 4-week periods in the 
applicable period;
    (B) y = The number of full 4-week periods in the applicable period; 
and
    (C) z = The number of weeks in the taxable year.
    (3) If a taxpayer employs four 13-week periods and the taxpayer 
does not have at least one 13-week period within the applicable 2-, 3-, 
4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-month period, the taxpayer shall be 
permitted to determine annualized taxable income for the applicable 
period based upon--
    (i) The taxable income for the number of weeks in the applicable 
period; or
    (ii) The taxable income for the full 13-week periods that end 
before the due date of the required installment.
    (4) The following examples illustrate the rules of this paragraph 
(e):

    Example 1. Taxpayer A, an accrual method taxpayer, uses a 52/53 
week year-end ending on the last Friday in December and uses four 
thirteen-week periods. For its year beginning December 30, 2006, A 
uses the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate all of its required installments. For 
purposes of computing its first and second required installments, 
the first 3 months of A's taxable year under paragraph (b)(1)(i) of 
this section will end on March 30th, the thirteenth Friday of A's 
taxable year. For purposes of its third required installment, the 
first 6 months of A's taxable year will end on June 29th, the 
twenty-sixth Friday of A's taxable year. For purposes of its fourth 
required installment, the first 9 months of A's taxable year will 
end on September 28th, the thirty-ninth Friday of A's taxable year.
    Example 2. Same facts as Example 1 except that A uses thirteen 
four-week periods and there are 52 weeks during A's taxable year 
beginning December 30, 2006, and ending December 28, 2007. For 
purposes of computing A's first and second required installments, 
A's annualized taxable income for the first three months will be the 
taxable income for the first three four-week periods of A's taxable 
year (December 30, 2006, through March 23, 2007) divided by 12 
(number of full four-week periods in the first three months (3) 
multiplied by 4) and multiplied by 52 (the number of weeks in the 
taxable year). For purposes of computing A's third required 
installment, A's annualized taxable income for the first six months 
will be the taxable income for the first six four-week periods of 
A's taxable year (December 30, 2006, through June 15, 2007) divided 
by 24 and multiplied by 52. For purposes of computing A's fourth 
required installment, A's annualized taxable income for the first 
nine months will be the taxable income for the first nine four-week 
periods of A's taxable year (December 30, 2006, through September 7, 
2007) divided by 36 and multiplied by 52.

    (5) The application of the annualized income installment method is 
illustrated by the following example:

    Example. (i) X, a calendar year corporation, had a taxable year 
of less than twelve months for tax year 2005 and no credits against 
tax for tax year 2006. X made an estimated tax payment of $15,000 on 
the installment dates of April 17, 2006, June 15, 2006, September 
15, 2006, and December 15, 2006, respectively. Assume that, under 
paragraph (d)(1) of this section, X elected Option 1 by timely 
filing Form 8842, in accordance with section 6655(e)(2)(C)(iii), and 
determined that its taxable income for the first 2, 4, 7 and 10 
months was $25,000, $64,000, $125,000, and $175,000 respectively. 
The income for each period is annualized as follows:

$25,000 x 12/2 = $150,000
$64,000 x 12/4 = $192,000
$125,000 x 12/7 = $214,286
$175,000 x 12/10 = $210,000

    (ii)(A) To determine whether the installment payment made on April 
17, 2006, equals or exceeds the amount that would have been required to 
have been paid if the estimated tax were equal to 100 percent of the 
tax computed on the annualized income for the 2-month period, the 
following computation is necessary:
    (1) Annualized income for the 2 month period--$150,000
    (2) Tax on this paragraph (e)(5), Example (ii)(A)(1)--41,750
    (3) 100% of this paragraph (e)(5), Example (ii)(A)(2)--41,750
    (4) 25% of this paragraph (e)(5), Example (ii)(A)(3)--10,438
    (B) Because the total amount of estimated tax that was timely paid 
on or before the first installment date ($15,000) exceeds the amount 
required to be paid on or before this date if the estimated tax were 
100 percent of the tax determined by placing on an annualized basis the 
taxable income for the first 2-month period, the exception described in 
paragraphs (a) and (b) of this section applies, and no addition to tax 
will be imposed for the installment due on April 15, 2006.
    (iii)(A) To determine whether the installment payments made on or 
before June 15, 2006, equal or exceed the amount that would have been 
required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 4-month 
period, the following computation is necessary:
    (1) Annualized income for the 4 month period--$192,000
    (2) Tax on this paragraph (e)(5), Example (iii)(A)(1)--58,130
    (3) 100% of this paragraph (e)(5), Example (iii)(A)(2)--58,130
    (4) 50% of this paragraph (e)(5), Example (iii)(A)(3) less $10,438 
(amount due with the first installment)--18,627

[[Page 73401]]

    (B) Because the total amount of estimated tax actually paid on or 
before the second installment date ($19,562 ($15,000 second required 
installment payment plus $4,562 overpayment of first required 
installment)) exceeds the amount required to be paid on or before this 
date if the estimated tax were 100 percent of the tax determined by 
placing on an annualized basis the taxable income for the first 4-month 
period, the exception described in paragraphs (a) and (b) of this 
section applies, and no addition to tax will be imposed for the 
installment due on June 15, 2006.
    (iv)(A) To determine whether the installment payments made on or 
before September 15, 2006, equal or exceed the amount that would have 
been required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 7-month 
period, the following computation is necessary:
    (1) Annualized income for the 7 month period--$214,286
    (2) Tax on this paragraph (e)(5), Example (iv)(A)(1)--66,821
    (3) 100% of this paragraph (e)(5), Example (iv)(A)(2)--66,821
    (4) 75% of this paragraph (e)(5), Example (iv)(A)(3) less $29,065 
(amount due with the first and second installment)--21,051
    (B) Because the total amount of estimated tax actually paid on or 
before the third installment date ($15,935 ($15,000 third required 
installment payment plus $935 overpayment of second required 
installment)) does not equal or exceed the amount required to be paid 
on or before this date if the estimated tax were 100 percent of the tax 
determined by placing on an annualized basis the taxable income for the 
first 7-month period, the exception described in paragraphs (a) and (b) 
of this section does not apply, and an addition to tax will be imposed 
with respect to the underpayment of the September 15, 2006, installment 
unless another exception applies to this installment payment.
    (v)(A) To determine whether the installment payments made on or 
before December 15, 2006, equal or exceed the amount that would have 
been required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 10-month 
period, the following computation is necessary:
    (1) Annualized income for the 10 month period--$210,000
    (2) Tax on this paragraph (e)(5), Example (v)(A)(1)--65,150
    (3) 100% of this paragraph (e)(5), Example (v)(A)(2)--65,150
    (4) 100% of this paragraph (e)(5), Example (v)(A)(3) less $50,116 
(amount due with the first, second, and third installment)--15,034
    (B) Because the total amount of estimated tax payments made on or 
before the fourth installment date that is available to be applied to 
the estimated tax due for the fourth installment ($9,884 ($15,000 
fourth required installment payment less $5,116 underpayment for the 
third installment of estimated tax ($21,051 third installment of 
estimated tax due less $15,935 payments available to be applied to the 
third installment of estimated tax))) does not equal or exceed the 
amount required to be paid on or before this date if the estimated tax 
were 100 percent of the tax determined by placing on an annualized 
basis the taxable income for the first 10-month period, the exception 
described in paragraphs (a) and (b) of this section does not apply, and 
an addition to tax will be imposed with respect to the underpayment of 
the December 15, 2006, installment unless another exception applies to 
this installment payment.
    (vi) Assuming that no other exceptions apply and the addition to 
tax is computed under section 6621(a)(2) at the rate of 8 percent per 
annum for the applicable periods of underpayment, the amount of the 
addition to tax is as follows:
    (A) First installment (no underpayment)
    (B) Second installment (no underpayment)
    (C) Third installment (underpayment period 9-16-06 through 12-15-
06), computed as 91/365 x $5,116 x 8%--102
    (D) Fourth installment (underpayment period 12-16-06 through 3-15-
07), computed as 90/365 x $5,150 x 8%--102
    (E) Total of this paragraph (e)(5), Example (vi)(A) through (D)--
204

    (f) Determination of taxable income for an annualization period--
(1) In general. In determining the applicability of the exception 
described in paragraphs (a) and (b) of this section (relating to the 
annualization of income) and the exception described in Sec.  1.6655-3 
(relating to annualization of income for corporations with seasonal 
income), and for purposes of computing a taxpayer's taxable income (and 
applicable tax), an item must be taken into account in computing a 
taxpayer's taxable income for the taxable year for which the estimated 
tax is being determined, and must be properly taken into account in 
determining a taxpayer's taxable income (and applicable tax) for the 
applicable annualization period by the last day of such period. 
Generally, except as provided in paragraph (f)(2) of this section, for 
an item to be taken into account during an annualization period, the 
following must occur on or before the last day of the applicable 
annualization period (determined based on the accounting period 
employed by the taxpayer):
    (i) With respect to an item of gross income, such income is 
includible in computing taxable income in accordance with section 451 
or the appropriate provision of the Internal Revenue Code (for example, 
section 453 for installment sales or section 460 for long-term 
contracts).
    (ii) With respect to an item of loss, the loss must be permitted to 
be taken into account under the appropriate provision of the Internal 
Revenue Code.
    (iii) With respect to an item of deduction, for taxpayers using the 
cash receipts and disbursements method of accounting, the deduction 
must be paid under Sec.  1.461-1(a)(1) and otherwise deductible in 
computing taxable income for the annualization period or, for taxpayers 
using an accrual method of accounting, the deduction must be incurred 
under Sec.  1.461-1(a)(2) and otherwise deductible in computing taxable 
income for the annualization period. In the case of an accrual method 
taxpayer, the provisions of section 170(a)(2) and Sec.  1.170A-11(b) 
(charitable contributions by accrual method corporations), Sec.  1.461-
4(d)(6)(ii) (provision of services or property to a taxpayer), Sec.  
1.461-5 (recurring item exception), and any other provision that has a 
similar effect can not be used in determining whether the item of 
deduction has been incurred under Sec.  1.461-1(a)(2) and is otherwise 
deductible for purposes of computing taxable income for an 
annualization period. For purposes of section 404 and the regulations, 
regardless of the overall method of accounting employed by the 
taxpayer, the applicable 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-
month period shall not be treated as a short taxable year and the rules 
of section 404 and the regulations shall be applied on the basis of the 
taxpayer's taxable year for which estimated tax is being determined. 
Thus, the determination of whether a payment to an employee is deferred 
compensation under Sec.  1.404(b)-1T shall be made by reference to 
whether the payment is received by the employee more than a brief 
period of time after the last day of the taxable year for which 
estimated tax is being determined and not the last day of the 
applicable annualization period. With respect to

[[Page 73402]]

contributions to qualified plans governed by section 404 and the 
regulations, in determining whether an item is paid or incurred by the 
end of an annualization period, economic performance is satisfied only 
to the extent such item is paid by the last day of the applicable 
annualization period (without regard to section 404(a)(6)) and does 
not, in combination with other such items paid during the applicable 
annualization period, exceed the applicable deduction limit of section 
404(a) for the taxable year. For purposes of sections 419 and 419A and 
the regulations, regardless of the overall method of accounting 
employed by the taxpayer, the applicable 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-
, 10-, or 11-month period shall not be treated as a short taxable year 
and the rules of sections 419 and 419A and the regulations shall be 
applied on the basis of the taxpayer's taxable year for which estimated 
tax is being determined. With respect to contributions to a welfare 
benefit fund governed by sections 419 and 419A and the regulations, in 
determining whether an item is paid or incurred by the end of an 
annualization period, economic performance is satisfied only to the 
extent such item is paid by the last day of the applicable 
annualization period and does not, in combination with other such items 
paid during such annualization period, exceed the applicable deduction 
limit of section 419 for the taxable year.
    (iv) With respect to depreciation and amortization (depreciation) 
expense, a taxpayer shall take into account depreciation expense only 
as provided in paragraph (f)(2)(v) of this section.
    (v) With respect to any item taken into account in computing 
taxable income for the annualization period that is not described in 
paragraphs (f)(1)(i), (ii), (iii), and (iv) of this section, the item 
is includible in computing taxable income in accordance with the 
appropriate provision of the Internal Revenue Code.
    (vi) With respect to an item of credit, the amounts upon which the 
credit is computed must have been taken into account in computing 
taxable income for the annualization period pursuant to paragraphs 
(f)(1)(i), (ii), (iii), (iv), and (v) of this section, as applicable.
    (2) Exceptions--(i) Annual expenses paid or incurred at or after 
the end of the taxable year. (A) Except as otherwise provided in 
paragraphs (f)(2)(ii) through (vi) of this section, if an accrual 
method taxpayer has a history of incurring a specific item of expense 
under Sec.  1.461-1(a)(2) (or a cash method taxpayer has a history of 
paying a specific item of expense under Sec.  1.461-1(a)(1)) that, 
while attributable to income earned throughout the current taxable 
year, is not incurred (or paid, in the case of a cash method taxpayer) 
until the end of the taxable year, or after the end of the current 
taxable year and is deemed incurred (or paid, in the case of a cash 
method taxpayer) during the current taxable year (taking into account, 
as applicable, section 170(a)(2) and Sec.  1.170A-11(b), section 
404(a)(6), Sec.  1.461-4(d)(6)(ii), Sec.  1.461-5, and any other 
provision that has a similar effect), then the taxpayer may, in lieu of 
any amount determined under paragraph (f)(1) of this section, take into 
account for the applicable annualization period the amount of such 
expense properly allocable to such period provided the amount so 
allocated to such annualization period is determinable with reasonable 
accuracy and the amount of the item so allocated is properly deducted 
by the taxpayer during the current taxable year under the taxpayer's 
method of accounting.
    (B) For purposes of this paragraph (f)(2)(i), the portion of an 
annual expense item allocable to an annualization period will be 
considered to be determined with reasonable accuracy if such item is 
allocated evenly throughout the taxable year unless the taxpayer is 
able to clearly demonstrate such item is more appropriately allocable 
to an annualization period by some other method including, for example, 
in proportion to the earning of revenue, the use of property, or the 
provision of services. For purposes of this paragraph (f)(2)(i), a 
taxpayer has a history of incurring or paying a specific item of 
expense at the end of the taxable year, or after the end of the taxable 
year that is deemed incurred or paid during the taxable year, if, in 
each of the two taxable years immediately preceding the current taxable 
year (or the immediately preceding taxable year if the taxpayer was not 
in existence for the two preceding taxable years), the taxpayer 
incurred or paid the specific item of expense at the end of each 
taxable year, or after the end of each taxable year that was deemed 
incurred or paid during such taxable year. In addition, for purposes of 
this paragraph (f)(2)(i), the term ``the end of the taxable year'' 
means the period between and including the 15th and last day of the 
last month of the taxable year.
    (ii) Net operating loss carryover. Any net operating loss carryover 
to the current taxable year shall be taken into account in computing an 
annualized income installment only after annualizing the taxable income 
for the annualization period.
    (iii) Credit carryover. Any credit carryover to the current taxable 
year shall be taken into account in computing an annualized income 
installment only after annualizing the taxable income for the 
annualization period and computing the applicable tax, and before 
applying the applicable percentage.
    (iv) Section 481(a) adjustment. (A) Any section 481(a) adjustment 
required to be recognized during the taxable year shall be recognized 
ratably over the number of months in the taxable year.
    (B) With respect to a Form 3115, ``Application for Change in 
Accounting Method,'' filed during the current taxable year or a 
preceding taxable year, if the change in method of accounting--
    (1) Is permitted to be made with the automatic consent of the 
Commissioner, the appropriate portion of the section 481(a) adjustment 
determined under paragraph (f)(2)(iv)(A) of this section shall be taken 
into account in determining an annualized income installment if, and 
only if, the copy of the Form 3115 has been mailed to the IRS National 
Office on or before the last day of the annualization period; or
    (2) Requires the prior consent of the Commissioner, the appropriate 
portion of the section 481(a) adjustment determined under paragraph 
(f)(2)(iv)(A) of this section shall be taken into account in 
determining an annualized income installment if, and only if, the 
consent agreement reflecting the Commissioner's consent to the change 
in method of accounting and the prescribed terms and conditions for 
effecting such change has been signed by the taxpayer and mailed to the 
IRS National Office on or before the last day of the annualization 
period.
    (v) Depreciation and amortization--(A) General rule. In determining 
any annualized income installment, a proportionate amount of the 
taxpayer's estimated annual depreciation and amortization 
(depreciation) expense shall be taken into account. For purposes of the 
preceding sentence, estimated annual depreciation expense is the 
estimated depreciation expense to be properly taken into account in 
determining the taxpayer's taxable income for the taxable year. In 
determining the estimated annual depreciation expense, a taxpayer may 
take into account purchases, sales or other dispositions, changes in 
use, depreciation deductions permitted under sections 168(k) and 
1400L(b), and other similar events and provisions (for example, section 
179) that, based on all the relevant information available as of the 
last day of the annualization period (such as capital spending budgets, 
financial statement data and projections, or similar reports that 
provide evidence

[[Page 73403]]

of the taxpayer's capital spending plans for the current taxable year), 
are reasonably expected to occur or apply during the taxable year. For 
purposes of the additional first-year depreciation deduction under 
sections 168(k) and 1400L(b), only a proportionate amount of the 
current year's additional first-year depreciation deduction to be taken 
into account in determining a taxpayer's taxable income for the taxable 
year is taken into account in computing taxable income for an 
annualization period. As an alternative to estimating annual 
depreciation expense based on events that are reasonably expected to 
occur, a taxpayer may claim for an annualization period at least a 
proportionate amount of 50 percent of the taxpayer's estimated 
depreciation expense for the current taxable year attributable to 
assets that a taxpayer had in service on the last day of the preceding 
taxable year, that remain in service on the first day of the current 
taxable year, and that are subject to the half-year convention.
    (B) Short taxable years. Unless the taxable year is, or will be, a 
short taxable year, in no circumstance may an annualization period be 
treated as a short taxable year for purposes of determining the 
depreciation allowance for such annualization period. If the taxable 
year is, or will be (based on all relevant information available as of 
the last day of the annualization period), a short taxable year, annual 
depreciation expense shall be computed using the rules applicable for 
computing depreciation during a short taxable year for purposes of 
determining the annual depreciation expense to be allocated to an 
annualization period. For this purpose, the rules applicable for 
computing depreciation during a short taxable year shall be applied on 
the basis of the date the taxable year is expected to end based on all 
relevant information available as of the last day of the annualization 
period. See Rev. Proc. 89-15 (1989-1 C.B. 816), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    (vi) Member of partnership. In determining a partner's distributive 
share of partnership items that must be taken into account during an 
annualization period, the rules set forth in Sec.  1.6654-2(d)(2) are 
applicable.
    (3) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Corporation A, a calendar year taxpayer, uses an 
accrual method of accounting and uses the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate its 
first required installment payment for its 2006 taxable year. 
Consistent with its historical practice, the board of directors of 
A, on or before March 31, 2006, make a binding, irrevocable 
commitment to fund a minimum contribution of $10,000,000 to A's 
qualified retirement plan by March 15, 2007, which fixes A's 
liability to make the $10,000,000 contribution. Similarly, 
consistent with A's historical practice, A plans to remit payments 
to the retirement plan of $1,000,000 on January 2, 2007, and 
$9,000,000 on March 1, 2007. The $10,000,000 commitment is not taken 
into account for purposes of determining A's first annualized income 
installment, which is based on the income and deductions from the 
first three months of the taxable year, because A did not make any 
payments by March 31, 2006 (and therefore did not satisfy the 
economic performance requirements of Sec.  1.461-4(d)(2)(iii) by 
March 31, 2006), in accordance with paragraph (f)(1)(iii) of this 
section. The $10,000,000 is not treated as paid on or before March 
31, 2006, under section 404(a)(6) because, pursuant to paragraph 
(f)(1)(iii) of this section, the last day of the annualization 
period is not to be treated as the last day of A's taxable year. 
However, pursuant to paragraph (f)(2)(i)(A) of this section, because 
A has historically incurred a retirement plan expense during the 
taxable year pursuant to section 404 that, but for the deeming rule 
of section 404(a)(6), would have been incurred after the end of the 
taxable year, and because A satisfies the other requirements of 
paragraph (f)(2)(i)(A) of this section, A may take into account a 
$2,500,000 retirement plan expense for purposes of determining A's 
taxable income to be annualized in computing A's first annualized 
income installment for 2006 ($10,000,000/12 x 3 = $2,500,000) 
unless, pursuant to paragraph (f)(2)(i)(B) of this section, A is 
able to clearly demonstrate that the retirement plan expense is more 
appropriately allocable by some other method.
    Example 2. Same facts as Example 1 except that, consistent with 
its historical practice, A remits $9,000,000 to the retirement plan 
on June 30, 2006, and $1,000,000 to the retirement plan on September 
30, 2006. For purposes of determining A's first and second required 
installments for 2006, which are based on the income and deductions 
from the first three months of the taxable year, A may not take into 
account any of the retirement plan expense because A did not make 
any payments by March 31, 2006 (and therefore did not satisfy the 
economic performance requirements of Sec.  1.461-4(d)(2)(iii) by 
March 31, 2006), in accordance with paragraph (f)(1)(iii) of this 
section. For A's third required installment, which is based on the 
income and deductions from the first six months of the taxable year, 
A may take into account a $9,000,000 retirement plan expense for 
purposes of determining A's annualized taxable income because A 
incurred the $9,000,000 expense by June 30, 2006. For A's fourth 
required installment, which is based on the income and deductions 
from the first nine months of the taxable year, A may take into 
account a $10,000,000 retirement plan expense for purposes of 
determining A's annualized taxable income because A incurred the 
$10,000,000 retirement plan expense by September 30, 2006.
    Example 3. Corporation B, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate its first 
required installment. In each of the three preceding taxable years, 
B has paid annual bonuses on the Friday immediately preceding 
December 25 to those employees of B that provided services to B 
during the taxable year and were employed by B on the date such 
bonuses were paid. At the beginning of 2006, consistent with its 
historical experience, B's board of directors pass a resolution that 
B will pay cash bonuses of $6,000,000 to those employees that have 
provided services to B during 2006 and are employed by B on December 
22, 2006, the Friday immediately preceding December 25, 2006. B 
plans to pay, and does pay, the cash bonuses to eligible employees 
on March 1, 2007. The bonuses, pursuant to paragraph (f)(1)(iii) of 
this section, are not treated as deferred compensation for the 
taxable year or the annualization period under Sec.  1.404(b)-1T 
because the last day of the annualization period is not to be 
treated as the last day of B's taxable year. Because the bonuses are 
not treated as deferred compensation, the bonuses are not subject to 
section 404, and instead are treated as service liabilities under 
Sec.  1.461-4(d)(2)(i) rather than employee benefit liabilities 
under Sec.  1.461-4(d)(2)(iii). Thus, the bonuses are incurred when 
all the events have occurred that establish the fact of the 
liability, the amount of the liability can be determined with 
reasonable accuracy, and the services are provided to B by B's 
employees. If B's first required installment is made under the 
provisions of section 6655(e)(1), the $6,000,000 is not taken into 
account for purposes of determining B's first annualized income 
installment, which is based on the income and deductions from the 
first three months of the taxable year, because B did not incur any 
liability for bonus payments for the current taxable year by March 
31, 2006, in accordance with paragraph (f)(1)(iii) of this section. 
However, pursuant to paragraph (f)(2)(i)(A) of this section, because 
B has historically incurred a bonus expense at the end of the 
taxable year, and because B satisfies the other requirements of 
paragraph (f)(2)(i)(A) of this section, B may take into account a 
$1,500,000 bonus expense for purposes of determining B's taxable 
income to be annualized in computing B's first annualized income 
installment for 2006 ($6,000,000/12 x 3 = $1,500,000) unless, 
pursuant to paragraph (f)(2)(i)(B) of this section, B is able to 
clearly demonstrate that the bonus expense is more appropriately 
allocable by some other method.
    Example 4. Corporation C, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate its first 
required installment for its 2006 taxable year. C has a net 
operating loss carryover to 2006 of $400,000. C's taxable income 
from January 1, 2006, through March 31, 2006, without regard to any 
net operating loss carryover, is $500,000. For purposes of 
determining C's first annualized income installment, C's

[[Page 73404]]

annualized taxable income is $1,600,000, determined by placing C's 
first three months of taxable income from January 1, 2006, through 
March 31, 2006, on an annualized basis ($500,000 x 12/3 = 
$2,000,000) and reducing the resulting amount of $2,000,000 by the 
$400,000 net operating loss carryover to 2006.
    Example 5. Corporation D, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its 
required installment payments for its 2006 taxable year. On April 
15, 2005, D filed a Form 3115, ``Application for Change in 
Accounting Method,'' to request the consent of the Commissioner to 
change its method of accounting for recognizing revenue. The 
Commissioner consented to D's requested change, and D signed and 
mailed the consent letter to the IRS National Office on December 15, 
2005. The method change resulted in a positive section 481(a) 
adjustment of $200,000 to be taken into account over four taxable 
years beginning in 2005. D's taxable income from January 1, 2006, 
through March 31, 2006, prior to any section 481(a) adjustment, is 
$500,000. For purposes of determining D's first annualized income 
installment for its 2006 taxable year, D's annualized taxable income 
is $2,050,000, determined by placing the sum of D's first three 
months of taxable income from January 1, 2006, through March 31, 
2006, ($500,000) plus, pursuant to paragraph (f)(2)(iv) of this 
section, the portion of the section 481(a) adjustment required to be 
recognized during the taxable year ($200,000/4 = $50,000) that is 
attributable to the period from January 1, 2006, through March 31, 
2006, ($50,000 x 3/12 = $12,500) on an annualized basis ($512,500 x 
12/3 = $2,050,000).
    Example 6. Corporation E, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its 
required installment payments for its 2006 taxable year. E's taxable 
income from January 1, 2006, through March 31, 2006, prior to any 
section 481(a) adjustment, is $500,000. On June 30, 2006, E filed a 
copy of the Form 3115 with the IRS National Office to request a 
change in method of accounting that was permitted to be made with 
the automatic consent of the Commissioner and resulted in a negative 
section 481(a) adjustment of $400,000 to be taken into account 
entirely in 2006. For purposes of determining E's first annualized 
income installment for its 2006 taxable year, E's annualized taxable 
income is $2,000,000, determined by placing E's first three months 
of taxable income from January 1, 2006, through March 31, 2006, 
($500,000) on an annualized basis ($500,000 x 12/3 = $2,000,000). 
Because E did not file the accounting method change request until 
after the last day of the annualization period, no portion of the 
section 481(a) adjustment is taken into account in computing E's 
first annualized income installment.
    Example 7. Same facts as Example 6 except that E's taxable 
income from January 1, 2006, through June 30, 2006, prior to any 
section 481(a) adjustment, is $800,000. For purposes of determining 
E's third annualized income installment for its 2006 taxable year, 
E's annualized taxable income is $1,200,000, determined by placing 
the sum of E's first six months of taxable income from January 1, 
2006, through June 30, 2006, ($800,000) less, pursuant to paragraph 
(f)(2)(iv) of this section, the portion of the 2006 section 481(a) 
adjustment required to be recognized during the taxable year that is 
attributable to the period from January 1, 2006, through June 30, 
2006 ($400,000 x 6/12 = $200,000) on an annualized basis ($600,000 x 
12/6 = $1,200,000).
    Example 8. Same facts as Example 7 except that E's request for 
change in method of accounting required the prior consent of the 
Commissioner and the Form 3115 was filed with the IRS National 
Office on June 30, 2006. On December 10, 2006, E received the 
consent of the Commissioner to change its method of accounting. E 
signed and mailed the consent letter to the IRS National Office on 
December 15, 2006. For purposes of determining E's third annualized 
income installment for its 2006 taxable year, E's annualized taxable 
income is $1,600,000, determined by placing E's first six months of 
taxable income from January 1, 2006, through June 30, 2006, on an 
annualized basis ($800,000 x 12/6 = $1,600,000). No portion of the 
section 481(a) adjustment is taken into account in computing E's 
third annualized income installment because, although E filed the 
accounting method change request on or before the last day of E's 
third annualization period, E did not receive the Commissioner's 
consent to change its method of accounting, and E did not sign and 
mail the consent agreement to the IRS National Office, on or before 
the last day of E's third annualization period.
    Example 9. Corporation F, a calendar year taxpayer that began 
business on January 1, 2003, adopted an accrual method of accounting 
and will use the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate its first required installment payment 
for its 2003 taxable year. As of March 31, 2003, F has purchased and 
placed in service $100,000 of ``5-year property,'' as defined in 
section 168(e), and anticipates purchasing and placing in service 
another $100,000 of ``5-year property'' before December 31, 2003. F 
does not anticipate being subject to the mid-quarter convention for 
the 2003 taxable year, does not anticipate making any depreciation 
elections for this class of property, does not anticipate making a 
section 179 election, will deduct the 30% additional first year 
depreciation deduction, does not anticipate any sales or other 
dispositions of depreciable property, and no events have occurred, 
and, based on all relevant information available as of the due date 
of F's first required installment, F does not know of any event that 
will cause F's taxable year to be a short taxable year. F's annual 
depreciation expense for 2003 is estimated to be $88,000 (total 
depreciation deduction under section 168(k) of $60,000 ($200,000 x 
30% = $60,000) plus annual depreciation of $28,000 (($200,000 minus 
$60,000) x 20%)). For purposes of determining F's first annualized 
income installment for its 2003 taxable year, in accordance with 
paragraph (f)(2)(v)(A) of this section, depreciation expense of 
$22,000 ($88,000 x 3/12 = $22,000) may be taken into account in 
computing F's January 1, 2003, through March 31, 2003, taxable 
income to be annualized. Under paragraph (f)(2)(v)(B) of this 
section, F may not consider its first annualization period to be a 
short taxable year for purposes of determining the depreciation 
allowance for such annualization period.
    Example 10. Corporation G, a calendar year taxpayer that began 
business on January 5, 2004, adopted an accrual method of accounting 
and will use the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate its first required installment payment 
for its 2005 taxable year. On January 5, 2004, G purchased and 
placed in service an asset that cost $30,000, qualifies as ``5-year 
property'' as defined in section 168(e), is eligible for the 50% 
additional first year depreciation deduction under section 168(k), 
and is subject to the half-year convention. G will deduct the 50% 
additional first year depreciation deduction with respect to the 
``5-year property.'' For tax year 2004, G takes a depreciation 
deduction under section 168(k) of $18,000 ($15,000 ($30,000 x 50% = 
$15,000) plus annual depreciation of $3,000 ($15,000 x 20% = 
$3,000)). G does not anticipate being subject to the mid-quarter 
convention for the 2004 taxable year, does not anticipate making any 
depreciation elections for this class of property, does not 
anticipate making a section 179 election, will deduct the 50% 
additional first year depreciation deduction, does not anticipate 
any sales or other dispositions of depreciable property, and no 
events have occurred, and, based on all relevant information 
available as of the due date of G's first required installment, G 
does not know of any event that will cause G's taxable year to be a 
short taxable year. G's annual depreciation expense for 2005 is 
estimated to be $4,800 ($15,000 x 32% = $4,800). For purposes of 
determining G's first annualized income installment for its 2005 
taxable year, in accordance with paragraph (f)(2)(v)(A) of this 
section, depreciation expense of $1,200 ($4,800 x 3/12 = $1,200) may 
be taken into account in computing G's January 1, 2005, through 
March 31, 2005, taxable income to be annualized. As an alternative 
to estimating annual depreciation expense based on events that are 
reasonably expected to occur, depreciation expense of at least $600 
($4,800 x 50% x 3/12 = $600) may be taken into account in computing 
G's January 1, 2005, through March 31, 2005, taxable income to be 
annualized. Under paragraph (f)(2)(v)(B) of this section, G may not 
consider its first annualization period to be a short taxable year 
for purposes of determining the depreciation allowance for such 
annualization period.
    Example 11. Corporation H, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its 
required installment payments for its 2006 taxable year. H has owned 
real property in State Y since 2002 and has used the real property 
in its trade or business. H's method of

[[Page 73405]]

accounting for real estate taxes is to deduct the taxes on the lien 
date, subject to the recurring item exception of Sec.  1.461-5. 
Based on historical practice for the past five years, for the 2006 
calendar year State Y imposes a lien for real estate taxes on real 
property owned in State Y on March 15, 2006, with 90% of the tax due 
on June 30, 2006, and the remaining 10% of the tax due on June 29, 
2007. Based on the value of H's real property in State Y, H's real 
estate tax liability lien imposed on March 15, 2006, is $100,000. H 
pays the first 90% of this liability on June 30, 2006, and the 
remaining 10% on June 29, 2007. Under paragraph (f)(1)(iii) of this 
section, the $100,000 real estate tax liability is not taken into 
account for purposes of determining H's first annualized income 
installment, which is based on the income and deductions from the 
first three months of the taxable year, because economic performance 
with respect to the real estate tax liability did not occur by March 
31, 2006. However, pursuant to paragraph (f)(2)(i)(A) of this 
section, because H has historically incurred a real estate tax 
expense after the end of the taxable year and the real estate tax 
expense was deemed incurred in 2006 pursuant to Sec.  1.461-5, and 
because H satisfies the other requirements of paragraph (f)(2)(i)(A) 
of this section, a $2,500 real estate tax expense may be taken into 
account for purposes of determining H's taxable income to be 
annualized in computing H's first annualized income installment 
($10,000/12 x 3 = $2,500) unless, pursuant to paragraph (f)(2)(i)(B) 
of this section, H is able to clearly demonstrate that the real 
estate tax expense is more appropriately allocable by some other 
method.
    Example 12. Same facts as Example 11, except that H is computing 
its third required installment payment for H's 2006 taxable year. 
Pursuant to paragraph (f)(1)(iii) of this section, H may take into 
account $90,000 ($100,000 real estate tax liability x 90% paid on 
June 30, 2006) for purposes of determining the taxable income to be 
annualized in computing H's third annualized income installment 
because economic performance with respect to $90,000 of the real 
estate tax liability occurred by June 30, 2006. In addition, 
pursuant to paragraph (f)(2)(i)(A) of this section, because H has 
historically incurred a real estate tax expense after the end of the 
taxable year and the real estate tax expense was deemed incurred in 
2006 pursuant to Sec.  1.461-5, and because H satisfies the other 
requirements of paragraph (f)(2)(i)(A) of this section, a $5,000 
real estate tax expense also may be taken into account for purposes 
of determining H's taxable income to be annualized in computing H's 
third annualized income installment ($10,000/12 x 6 = $5,000) 
unless, pursuant to paragraph (f)(2)(i)(B) of this section, H is 
able to clearly demonstrate that $10,000 of the real estate tax 
expense is more appropriately allocable by some other method. 
Therefore, pursuant to paragraphs (f)(1)(iii) and (f)(2)(i)(A) of 
this section, H may take into account $95,000 of the real estate tax 
liability for purposes of computing the third required installment 
payment for H's 2006 taxable year.
    Example 13. Same facts as Example 11, except that H pays 90% of 
the real estate tax liability on June 30, 2006, and the remaining 
10% of the real estate tax liability on November 30, 2006. Under 
paragraph (f)(1)(iii) of this section, the $100,000 real estate tax 
liability is not taken into account for purposes of determining H's 
first annualized income installment, which is based on the income 
and deductions from the first three months of the taxable year, 
because economic performance with respect to the real estate tax 
liability did not occur by March 31, 2006. In addition, although H 
has a history of incurring a real estate tax expense after the end 
of the taxable year that is deemed incurred during the taxable year, 
H does not meet the requirements of paragraph (f)(2)(i)(A) of this 
section in order to take a real estate tax expense into account for 
purposes of determining H's first annualized income installment 
because H does not incur a real estate tax at the end of the current 
taxable year or after the end of the current taxable year that will 
be deemed incurred during the current taxable year.
    Example 14. Same facts as Example 13 except that H is computing 
its third required installment payment for H's 2006 taxable year. 
Pursuant to paragraph (f)(1)(iii) of this section, H may take into 
account $90,000 ($100,000 real estate tax liability x 90% paid on 
June 30, 2006) for purposes of determining the taxable income to be 
annualized in computing H's third annualized income installment 
because economic performance with respect to $90,000 of the real 
estate tax liability occurred by June 30, 2006.
    Example 15. Corporation I, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its 
required installment payments for its 2006 taxable year. As of 
December 31, 2005, I had a $1,000,000 account receivable due from Z 
related to the sale of goods from I to Z during 2005. I has 
traditionally incurred bad debt expense for worthless accounts 
receivable and, as of January 1, 2006, I projects that it will have 
a bad debt expense of $1,600,000 under section 166 and the 
regulations for its calendar year 2006. On March 31, 2006, I 
determined that its receivable from Z was totally worthless under 
section 166 and the regulations. No other receivables were 
determined to be worthless between January 1, 2006, and March 31, 
2006. In accordance with paragraph (f)(1)(ii) of this section, a 
$1,000,000 bad debt write-off is taken into account for purposes of 
determining the taxable income to be annualized in computing I's 
first annualized income installment.
    Example 16. Same facts as Example 15 except that I determines 
that its receivable from Z was totally worthless under section 166 
and the regulations on April 10, 2006. As of March 31, 2006, I had 
not determined that any receivables were worthless under section 166 
and the regulations. In accordance with paragraph (f)(1)(ii) of this 
section, the $1,000,000 bad debt expense attributable to the 
receivable from Z is not taken into account for purposes of 
determining the taxable income to be annualized in computing I's 
first annualized income installment, which is based on the income 
and deductions from the first three months of the taxable year, 
because the receivable from Z became totally worthless after the 
last day of I's annualization period. Furthermore, I may not take 
the bad debt expense into account for purposes of determining the 
taxable income to be annualized in computing I's first annualized 
income installment because the receivable from Z does not meet the 
requirements of paragraph (f)(2)(i) of this section.
    Example 17. Corporation J, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate its first 
required installment payment for its 2006 taxable year. J projects 
its annualized tax for its 2006 taxable year, based on annualizing 
J's taxable income for its first annualization period from January 
1, 2006, through March 31, 2006, to be $1,500,000 before reduction 
for any credits. J has an unused credit for increasing research 
activities from 2005 of $500,000 that is carried over to 2006. For 
purposes of determining J's first annualized income installment, J's 
annualized tax for 2006 is $1,000,000, determined as the tax for the 
taxable year computed by placing on an annualized basis J's taxable 
income from its first annualization period from January 1, 2006, 
through March 31, 2006, ($1,500,000) reduced by the $500,000 credit 
carryover from 2005.
    Example 18. Corporation K, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate its first 
required installment payment for its 2006 taxable year. K projects 
its annualized tax for its 2006 taxable year, based on annualizing 
K's taxable income for its first annualization period from January 
1, 2006, through March 31, 2006, to be $2,000,000 before reduction 
for any credits. K has historically earned a credit for increasing 
research activities and, for 2006, K estimates that it will earn a 
credit for increasing research activities under section 41 of 
$1,200,000. However, pursuant to paragraph (f)(1)(vi) of this 
section, if K were to annualize all components involved in computing 
the current year credit based on K's activity from January 1, 2006, 
through March 31, 2006, K would generate a credit of $1,600,000 for 
2006. For purposes of determining K's first annualized income 
installment, K's annualized tax for 2006 is $400,000, determined as 
the tax for the 2006 taxable year ($2,000,000) computed by placing 
on an annualized basis K's taxable income from its first 
annualization period January 1, 2006, through March 31, 2006, 
reduced by a $1,600,000 current year credit from increasing research 
activities.
    Example 19. Same facts as Example 18 except that K does not 
begin any research activities until April 3, 2006, and will not 
incur any research expenses described in paragraph (f)(2)(i) of this 
section. As a result, if K were to annualize all components involved 
in computing the current year credit based on K's activity from 
January 1, 2006, through March 31, 2006, K would generate no section 
41 research credit for purposes of

[[Page 73406]]

determining its first annualized income installment. Pursuant to 
paragraph (f)(1)(vi) of this section, K can not take into account 
any credit for its first annualization period because K did not 
incur the credit by the last day of the first annualization period. 
Accordingly, for purposes of determining K's first annualized income 
installment, K's annualized tax for its first annualization period 
January 1, 2006, through March 31, 2006, is $2,000,000.
    Example 20. Corporation L, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate its first 
required installment payment for its 2006 taxable year. L has 
licensed technology from Corporation M for the past five years. 
Pursuant to the license agreement, L pays a license fee to M equal 
to $.01 for every dollar of gross receipts earned by L. For 2006, L 
projects gross receipts of $200,000,000, of which $100,000,000 is 
earned by March 31, 2006, and no portion of L's license fee expense 
is described in paragraph (f)(2)(i) of this section. Pursuant to 
paragraph (f)(1)(iii) of this section, a license fee expense of 
$1,000,000 ($100,000,000 x $.01) is incurred by March 31, 2006, and 
may be taken into account for purposes of determining the taxable 
income to be annualized in computing L's first annualized income 
installment.
    Example 21. Same facts as Example 20 except that L does not earn 
any gross receipts by March 31, 2006. In accordance with paragraph 
(f)(1)(iii) of this section, because the license fee expense was not 
incurred under Sec.  1.461-1(a)(2) by the last day of the 
annualization period, no license fee expense is taken into account 
for purposes of determining the taxable income to be annualized in 
computing L's first annualized income installment, which is based on 
the income and deductions from the first three months of the taxable 
year.
    Example 22. Corporation N is a calendar year taxpayer that 
produces and sells candy bars. N uses an accrual method of 
accounting and the annualized income installment method under 
section 6655(e)(2)(A)(i) to calculate all of its required 
installment payments for its 2007 taxable year. N annually conducts, 
and will conduct for 2007 and 2008, a contest for its customers 
whereby N awards, on a quarterly basis, a cash prize of $100,000, 
$200,000, $300,000, and $400,000 to the first, second, third, and 
fourth quarter winners, respectively. Winners are announced on the 
last day of each calendar quarter and the prize is payable on the 
last day of the month following the announcement of the winner. N 
uses the recurring item exception of section 461(h) and the 
regulations with respect to its liability to the prize winner. On 
December 31, 2006, N announced its fourth quarter winner and 
remitted payment of $400,000 to the winner on January 31, 2007. 
Although the contest liability is incurred in accordance with Sec.  
1.461-4(g)(4) on January 31, 2007, at the time payment is made to 
the award winner, N may not take such item into account in computing 
N's first annualized income installment for 2007 because, pursuant 
to the recurring item exception, the $400,000 is deductible in 
determining N's 2006 taxable income and is not taken into account in 
determining N's taxable income for 2007, as required pursuant to 
paragraph (f)(1) of this section. However, because N has 
historically incurred an annual prize expense of $400,000 that is 
described in paragraph (f)(2)(i)(A) of this section, $100,000 may be 
taken into account for purposes of determining the taxable income to 
be annualized in computing N's first annualized income installment 
for N's 2007 taxable year based on the $400,000 liability N will 
incur for the 2007 taxable year when N makes the payment in January 
of 2008 to the 2007 fourth quarter winner ($400,000/12 x 3 = 
$100,000), unless, pursuant to paragraph (f)(2)(i)(B) of this 
section, N is able to clearly demonstrate that the annual prize 
expense is more appropriately allocable by some other method.

    (g) Items that substantially affect taxable income but cannot be 
determined accurately by the installment due date--(1) In general. In 
determining the applicability of the annualization exceptions described 
in paragraphs (a) and (b) of this section and Sec.  1.6655-3, 
reasonable estimates may be made from existing data for items that 
substantially affect income if the amount of such items cannot be 
determined accurately by the installment due date. Examples of these 
items are the inflation index for taxpayers using the dollar-value LIFO 
(last-in, first-out) inventory method, intercompany adjustments for 
taxpayers that file consolidated returns, and the liquidation of a LIFO 
layer at the installment date that the taxpayer reasonably believes 
will be replaced at the end of the year.
    (2) Example. The following example illustrates the rules of this 
paragraph (g):

    Example. Corporation X accounts for its inventory using the 
dollar-value LIFO method of accounting. If, when computing its first 
annualized income installment, no reliable inflation index exists 
for the period January 1, 2006, through March 31, 2006, X may 
interpolate from an available inflation index for the same months in 
the previous year to calculate its cost of goods sold.

    (h) Events arising after installment due date that were not 
reasonably foreseeable--(1) In general. Events arising subsequent to an 
installment due date that cause the taxpayer's computation of its 
taxable income for a prior installment period to be understated will 
not result in a recomputation of its taxable income for the prior 
installment period. The preceding sentence applies only if, based on 
all the facts and circumstances as of the due date of an installment 
payment, it was not reasonably foreseeable that these subsequent events 
would occur.
    (2) Example. The following example illustrates the rules of this 
paragraph (h):
    Example. Assume that Congress enacts retroactively effective 
legislation that causes the taxable income for the applicable 2-, 3-
, 4-, 5-, 6-, 7-;, 8-, 9-, 10- or 11-month period to be understated. 
This event, which occurs after the applicable installment due date 
and was not reasonably foreseeable at the time the installment 
payment was made, will not result in a recomputation of a 
corporation's taxable income for the applicable installment period 
because such an event was not reasonably foreseeable.

    (i) Effective date. This section applies to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register.


Sec.  1.6655-3  Adjusted seasonal installment method.

    (a) In general. In the case of any required installment, the amount 
of the adjusted seasonal installment is the excess (if any) of--
    (1) 100 percent of the amount determined under paragraph (c) of 
this section; over
    (2) The aggregate amount of all prior required installments for the 
taxable year.
    (b) Limitation on application of section. This section shall apply 
only if the base period percentage (as defined in section 
6655(e)(3)(D)(i) and paragraph (d)(1) of this section) for any six 
consecutive months of the taxable year equals or exceeds seventy 
percent.
    (c) Determination of amount. The amount determined under this 
section for any installment will be determined in the following 
manner--
    (1) Take the taxable income for all months during the taxable year 
preceding the filing month;
    (2) Divide such amount by the base period percentage for all months 
during the taxable year preceding the filing month;
    (3) Determine the tax on the amount determined under paragraph 
(c)(2) of this section; and
    (4) Multiply the tax computed under paragraph (c)(3) of this 
section by the base period percentage for the filing month and all 
months during the taxable year preceding the filing month.
    (d) Special rules--(1) Base period percentage. The base period 
percentage for any period of months shall be the average percent that 
the taxable income for the corresponding months in each of the three 
preceding taxable years bears to the taxable income for the three 
preceding taxable years.
    (2) Filing month. The term filing month means the month in which 
the installment is required to be paid.

[[Page 73407]]

    (3) Application of the rules related to the annualized income 
installment method to the adjusted seasonal installment method. The 
rules governing the computation of taxable income (and resulting tax) 
for purposes of determining any required installment payment of 
estimated tax under the annualized income installment method under 
Sec.  1.6655-2 shall apply to the computation of taxable income (and 
resulting tax) for purposes of determining any required installment 
payment of estimated tax under the adjusted seasonal installment 
method.
    (e) Example. The provisions of this section may be illustrated by 
the following example:

    Example. (i) X, a corporation that reports on a calendar year 
basis, expected that it would have an estimated tax liability of 
$1,200,000 for its taxable year ending December 31, 2006. On its 
2005 tax return, X reported a tax liability of $652,800. X paid four 
installments of estimated tax, each in the amount of $250,000, 
$250,000, $250,000, and $450,000 on April 17, 2006, June 15, 2006, 
September 15, 2006, and December 15, 2006, respectively. X reported 
a tax liability of $1,152,600 on its return due March 15, 2007, with 
no credits against tax. Under the general provision of section 
6655(b) and section 6655(d), there was an underpayment in the amount 
of $76,300 for the second installment through September 15, 2006, 
and $114,450 for the third installment through December 15, 2006, 
determined as follows:
    (A) Tax as defined in section 6655(g)--$1,152,600
    (B) 100% of this paragraph (e), Example (i)(A)--1,152,600
    (C) Amount of estimated tax required to be paid on or before the 
first installment (25% of $652,800)--163,200
    (D) Deduct amount timely paid on or before the first installment 
due date under the general rule of section 6655(b)--250,000
    (E) Amount of overpaid estimated tax for the first installment 
date--86,800
    (F) Amount of estimated tax required to be paid on or before the 
second installment (25% of $1,152,600 plus the recapture amount 
under section 6655(d)(2)(B) of $124,950 (25% of $1,152,600 less 
163,200))--413,100
    (G) Deduct amount paid on or before the due date of the second 
installment less amount applied towards the first installment under 
the general rule of section 6655(b) ($250,000 paid in each of the 
first and second installments less this paragraph (e), Example 
(i)(C))--336,800
    (H) Amount of underpayment for the second installment date--
76,300
    (I) Amount of estimated tax required to be paid on or before the 
third installment (25% of $1,152,600)--288,150
    (J) Deduct amount paid on or before the due date of the third 
installment less amount applied towards the first and second 
installments under the general rule of section 6655(b) ($250,000 
paid in each of the first, second, and third installments less this 
paragraph (e), Example (i)(C) less this paragraph (e), Example 
(i)(F))--173,700
    (K) Amount of underpayment for the third installment date--
114,450
    (L) Amount of estimated tax required to be paid on or before the 
fourth installment (25% of $1,152,600)--288,150
    (M) Deduct amount paid on or before the due date of the fourth 
installment less amount applied towards the first, second, and third 
installments under the general rule of section 6655(b) ($250,000 
paid in each of the first, second, and third installments plus 
$450,000 paid in the fourth installment less this paragraph (e), 
Example (i)(C) less this paragraph (e), Example (i)(F) less this 
paragraph (e), Example (i)(I))--335,550
    (N) Amount of overpaid estimated tax for the fourth installment 
date--47,400
    (ii) X wants to determine if it qualifies for the adjusted 
seasonal installment method. X determines that its monthly taxable 
income for the preceding three taxable years and for the current 
taxable year 2006 is as follows:

 
--------------------------------------------------------------------------------------------------------------------------------------------------------
  January      February      March        April         May          June         July        August     September     October     November    December
--------------------------------------------------------------------------------------------------------------------------------------------------------
2003:
  $100,000   $90,000      $80,000      $70,000      $60,000      $20,000      $10,000      $10,000      $10,000      $10,000      $10,000     $10,000
2004:
   200,000   170,000      170,000      130,000      125,000       45,000       21,000       19,000       20,000       20,000       20,000      20,000
2005:
   410,000   350,000      330,000      270,000      240,000       80,000       40,000       40,000       40,000       40,000       40,000      40,000
2006:
   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 period percentage 
for the same 6 consecutive months of the 3 preceding taxable years 
equals or exceeds 70 percent (see section 6655(e)(3) and paragraphs 
(b) and (c) of this section). By using its taxable income for the 
first 6 months of 2003, 2004, and 2005, X qualifies for the adjusted 
seasonal installment method because its base period percentage is 
87.5 percent (which exceeds 70 percent) computed as follows:
    (A) Taxable income for first 6 months of 2003--$420,000
    (B) Total taxable income for 2003--480,000
    (C) Divide this paragraph (e), Example (iii)(A) by this 
paragraph (e), Example (iii)(B)--.875
    (D) Taxable income for first 6 months of 2004--840,000
    (E) Total taxable income for 2004--960,000
    (F) Divide this paragraph (e), Example (iii)(D) by this 
paragraph (e), Example (iii)(E)--.875
    (G) Taxable income for first 6 months of 2005--1,680,000
    (H) Total taxable income for 2005--1,920,000
    (I) Divide this paragraph (e), Example (iii)(G) by this 
paragraph (e), Example (iii)(H)--.875
    (J) Add this paragraph (e), Example (iii)(C), (F), and (I)--
2.625
    (K) Divide this paragraph (e), Example (iii)(J) by 3--.875
    (iv) To determine the amount of the first installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 3 months of 2006--$1,930,000
    (B) Taxable income for first 3 months of 2003 ($270,000) divided 
by total taxable income for 2003 ($480,000)--.5625
    (C) Taxable income for first 3 months of 2004 ($540,000) divided 
by total taxable income for 2004 ($960,000)--.5625
    (D) Taxable income for first 3 months of 2005 ($1,090,000) 
divided by total taxable income for 2005 ($1,920,000)--.5677
    (E) Add this paragraph (e), Example (iv)(B), (C), and (D) and 
divide by 3--.5642
    (F) Divide this paragraph (e), Example (iv)(A) by this paragraph 
(e), Example (iv)(E)--3,420,773
    (G) Determine the tax on this paragraph (e), Example (iv)(F)--
1,163,049
    (H) Taxable income for first 4 months of 2003 ($340,000) divided 
by total taxable income for 2003 ($480,000)--.7083
    (I) Taxable income for first 4 months of 2004 ($670,000) divided 
by total taxable income for 2004 ($960,000)--.6979
    (J) Taxable income for first 4 months of 2005 ($1,360,000) 
divided by total taxable income for 2005 (1,920,000)--.7083
    (K) Add this paragraph (e), Example (iv)(H), (I), and (J) and 
divide by 3--.7048
    (L) Multiply this paragraph (e), Example (iv)(G) by this 
paragraph (e), Example (iv)(K)--819,717
    (M) 100% of this paragraph (e), Example (iv)(L)--819,717
    (N) Amount of all prior required installments for 2006--0
    (O) Amount of adjusted seasonal installment for the first 
installment payment (this paragraph (e), Example (iv)(M) less this 
paragraph (e), Example (iv)(N))--819,717
    (v) To determine the amount of the second installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 5 months of 2006--$2,950,000

[[Page 73408]]

    (B) Taxable income for first 5 months of 2003 ($400,000) divided 
by total taxable income for 2003 ($480,000)--.8333
    (C) Taxable income for first 5 months of 2004 ($795,000) divided 
by total taxable income for 2004 ($960,000)--.8281
    (D) Taxable income for first 5 months of 2005 ($1,600,000) 
divided by total taxable income for 2005 ($1,920,000)--.8333
    (E) Add this paragraph (e), Example (v)(B), (C), and (D) and 
divide by 3--.8316
    (F) Divide this paragraph (e), Example (v)(A) by this paragraph 
(e), Example (v)(E)--3,547,379
    (G) Determine the tax on this paragraph (e), Example (v)(F)--
1,206,109
    (H) Taxable income for first 6 months of 2003 ($420,000) divided 
by total taxable income for 2003 ($480,000)--.875
    (I) Taxable income for first 6 months of 2004 ($840,000) divided 
by total taxable income for 2004 ($960,000)--.875
    (J) Taxable income for first 6 months of 2005 ($1,680,000) 
divided by total taxable income for 2005 ($1,920,000)--.875
    (K) Add this paragraph (e), Example (v)(H), (I), and (J) and 
divide by 3--.875
    (L) Multiply this paragraph (e), Example (v)(G) by this 
paragraph (e), Example (v)(K)--1,055,345
    (M) 100% of this paragraph (e), Example (v)(L)--1,055,345
    (N) Amount of all prior required installments for 2006--163,200
    (O) Amount of adjusted seasonal installment for the second 
installment payment (this paragraph (e), Example (v)(M) less this 
paragraph (e), Example (v)(N))--892,145
    (vi) To determine the amount of the third installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 8 months of 2006--$3,250,000
    (B) Taxable income for first 8 months of 2003 ($440,000) divided 
by total taxable income for 2003 ($480,000)--.9167
    (C) Taxable income for first 8 months of 2004 ($880,000) divided 
by total taxable income for 2004 ($960,000)--.9167
    (D) Taxable income for first 8 months of 2005 ($1,760,000) 
divided by total taxable income for 2005 ($1,920,000)--.9167
    (E) Add this paragraph (e), Example (vi)(B), (C), and (D) and 
divide by 3--.9167
    (F) Divide this paragraph (e), Example (vi)(A) by this paragraph 
(vi)(E)--3,545,326
    (G) Determine the tax on this paragraph (e), Example (vi)(F)--
1,205,411
    (H) Taxable income for first 9 months of 2003 ($450,000) divided 
by total taxable income for 2003 ($480,000)--.9375
    (I) Taxable income for first 9 months of 2004 ($900,000) divided 
by total taxable income for 2004 ($960,000)--.9375
    (J) Taxable income for first 9 months of 2005 ($1,800,000) 
divided by total taxable income for 2005 ($1,920,000)--.9375
    (K) Add this paragraph (e), Example (vi)(H), (I), and (J) and 
divide by 3--.9375
    (L) Multiply this paragraph (e), Example (vi)(G) by this 
paragraph (e), Example (vi)(K)--1,130,073
    (M) 100% of this paragraph (e), Example (vi)(L)--1,130,073
    (N) Amount of all prior required installments for 2006--576,300
    (O) Amount of adjusted seasonal installment for the third 
installment payment (this paragraph (e), Example (vi)(M) less this 
paragraph (e), Example (vi)(N))--553,773
    (vii) To determine the amount of the fourth installment under 
the rules of section 6655(e)(3) and paragraph (a) of this section, 
the following computation is necessary:
    (A) Taxable income for first 11 months of 2006--$3,370,000
    (B) Taxable income for first 11 months of 2003 ($470,000) 
divided by total taxable income for 2003 ($480,000)--.9792
    (C) Taxable income for first 11 months of 2004 ($940,000) 
divided by total taxable income for 2004 ($960,000)--.9792
    (D) Taxable income for first 11 months of 2005 ($1,880,000) 
divided by total taxable income for 2005 ($1,920,000)--.9792
    (E) Add this paragraph (e), Example (vii)(B), (C), and (D) and 
divided by 3--.9792
    (F) Divide this paragraph (e), Example (vii)(A) by this 
paragraph (e), Example (vii)(E)--3,441,585
    (G) Determine the tax on this paragraph (e), Example (vii)(F)--
1,170,139
    (H) Taxable income for first 12 months of 2003 ($480,000) 
divided by total taxable income for 2003 ($480,000)--1.0000
    (I) Taxable income for first 12 months of 2004 ($960,000) 
divided by total taxable income for 2004 ($960,000)--1.0000
    (J) Taxable income for first 12 months of 2005 ($1,920,000) 
divided by total taxable income for 2005 ($1,920,000)--1.0000
    (K) Add this paragraph (e), Example (vii)(H), (I), and (J) and 
divide by 3--1.0000
    (L) Multiply this paragraph (e), Example (vii)(G) by this 
paragraph (e), Example (vi)(K)--1,170,139
    (M) 100% of this paragraph (e), Example (vii)(L)--1,170,139
    (N) Amount of all prior required installments for 2006--864,450
    (O) Amount of adjusted seasonal installment for the fourth 
installment payment (this paragraph (e), Example (vii)(M) less this 
paragraph (e), Example (vii)(N))--305,689
    (viii) Because the total amount of each required estimated tax 
payment determined under section 6655(e)(3) and paragraph (a) of 
this section exceeds the amount of each required estimated tax 
payment determined under section 6655(d) and Sec.  1.6655-1(d) and 
(e), the exception described in section 6655(e) and this section 
does not apply and the addition to the tax with respect to the 
underpayment for the June 15, 2006, and September 15, 2006, 
installments will be imposed unless another exception (for example, 
see section 6655(e)(2)) applies with respect to these installments.

    (f) Effective date. This section applies to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register.
    Par. 8. Section 1.6655-4 is added to read as follows:


Sec.  1.6655-4  Large corporations.

    (a) Large corporation defined. The term large corporation means any 
corporation (or a predecessor corporation) that had taxable income of 
at least $1,000,000 for any taxable year during the testing period. For 
purposes of this section, a predecessor corporation is the distributor 
or transferor corporation in a transaction to which section 381 
(relating to carryovers in certain corporate acquisitions) applies.
    (b) Testing period. For purposes of paragraph (a) of this section, 
the term testing period means the 3 taxable years immediately preceding 
the taxable year for which estimated tax is being determined (the 
current taxable year) or, if less, the number of taxable years the 
taxpayer has been in existence.
    (c) Computation of taxable income during testing period--(1) Short 
taxable year. In the case of a corporation (or predecessor corporation) 
that had a short taxable year during the testing period, for purposes 
of determining whether the $1,000,000 amount referred to in paragraph 
(a) of this section is equaled or exceeded, the taxable income for the 
short taxable year is computed by--
    (i) Multiplying the taxable income for the short taxable year by 
12; and
    (ii) Dividing the resulting amount by the number of months in the 
short taxable year.
    (2) Computation of taxable income in taxable year when there occurs 
a transaction to which section 381 applies. (i) For purposes of 
determining whether an acquiring corporation had taxable income of 
$1,000,000 or more for a taxable year in which there occurs a 
transaction to which section 381 applies, the acquiring corporation's 
taxable income will be the sum of--
    (A) The taxable income of the acquiring corporation for its taxable 
year; plus
    (B) The taxable income of the distributor or transferor corporation 
for that portion of the acquiring corporation's taxable year up to and 
including the date of distribution or transfer (as defined in Sec.  
1.381(b)-1(b)).
    (ii) For purposes of determining whether a transferor or 
distributor corporation had taxable income of $1,000,000 or more for a 
taxable year in which there occurs a transaction to which section 381 
applies, the distributor or transferor corporation's taxable income 
shall be reduced by the amount of its taxable income for that portion 
of its taxable year corresponding to the acquiring corporation's 
taxable year up to and including the date of distribution or transfer 
(as defined in Sec.  1.381(b)-1(b)).
    (d) Members of controlled group--(1) In general. For purposes of 
applying

[[Page 73409]]

paragraph (a) of this section, the taxable income of members of a 
controlled group of corporations (as defined in section 1563(a)) must 
be aggregated for each year of the testing period. The provisions of 
this section shall not apply to a controlled group for any taxable year 
in which the aggregate taxable income of the members of the controlled 
group is less than $1,000,000.
    (2) Aggregation. For purposes of paragraph (d)(1) of this section, 
a taxable loss of any member of the controlled group for a taxable year 
during the testing period is not taken into account.
    (3) Allocation rule. If the aggregate taxable income of members of 
a controlled group computed pursuant to paragraph (d)(1) of this 
section exceeds $1,000,000 during the testing period, the $1,000,000 
amount that is relevant for purposes of determining, under paragraph 
(a)(1) of this section, whether a corporation is a large corporation 
shall be divided equally among the component members of such group 
(including component members excluded pursuant to paragraph (d)(2) of 
this section) unless all of such component members consent to an 
apportionment plan providing for an alternative allocation of such 
amount. The procedure for making and filing this plan will be the same 
as the procedure used for making and filing an apportionment plan under 
section 1561. See section 1561 and the regulations.
    (4) Controlled group members. (i) In the case of any corporation 
that was a member of a controlled group of corporations at any time 
during the testing period but is not a member of such group during the 
taxable year involved, the taxable income of the former member for the 
testing period is determined as if such corporation were not a member 
of a group at any time during that period. With respect to the 
controlled group, the taxable income of its former member will not be 
taken into account in determining such group's taxable income for any 
taxable year during the testing period for purposes of applying 
paragraph (a)(1) of this section.
    (ii) For purposes of paragraph (d)(4)(i) of this section, the 
determination of whether a corporation is a member of a controlled 
group during the testing period is based on whether the corporation was 
a member of the controlled group on the last day of the month preceding 
the due date of the required installment.
    (e) Effect on a corporation's taxable income of items that may be 
carried back or carried over from any other taxable year. In 
determining whether a corporation (or predecessor corporation) is a 
large corporation for its current taxable year, items that could offset 
taxable income during a taxable year included in the testing period 
(for example, those described in sections 172 and 1212) are not to be 
taken into account and the taxable income of a corporation for any 
taxable year during the testing period shall be determined without 
regard to items carried back or carried over from any other taxable 
year.
    (f) Consolidated returns. [Reserved].
    (g) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Y Corporation and Z Corporation are calendar year 
taxpayers. In 2006, Z acquires all of the assets of Y in a 
transaction to which section 381 applies. Z's taxable income for 
both 2004 and 2005 was less than $1,000,000. Y's taxable income for 
2006 is determined under paragraph (c)(2) of this section to be 
$300,000 for that portion of the acquiring corporation's taxable 
year up to and including the date of transfer. Z's taxable income 
for 2006 is $800,000. Under the provisions of paragraph (c)(2) of 
this section, Z's 2006 taxable income for purposes of determining 
whether it is a large corporation for taxable year 2007 is 
$1,100,000 ($800,000 + $300,000). Thus, Z is a large corporation for 
the 2007 taxable year. In addition, if Z's 2006 taxable income, as 
determined under paragraph (c)(2) of this section, had been less 
than $1,000,000 but Y's taxable income in 2004 or 2005 had been 
$1,000,000 or more, Z would be a large corporation for taxable year 
2007 because Y is a predecessor corporation.

    (h) Effective date. This section applies to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register.


Sec.  1.6655-7  [Removed]

    Par. 9. Section 1.6655-7 is removed.


Sec.  1.6655-5  [Redesignated as Sec.  1.6655-7]

    Par. 10. Section 1.6655-5 is redesignated as Sec.  1.6655-7.
    Par. 11. Sections 1.6655-5 and 1.6655-6 are added to read as 
follows:


Sec.  1.6655-5  Short taxable year.

    (a) In general. Except as otherwise provided in this section, the 
provisions of section 6655 and the regulations are applicable in the 
case of a short taxable year (including an initial taxable year) for 
which a payment of estimated tax is required to be made.
    (b) Exception to payment of estimated tax. In the case of a short 
taxable year, no payment of estimated tax is required if--
    (1) The short taxable year is a period of less than 4 full calendar 
months; or
    (2) The tax shown on the return for such taxable year (or, if no 
return is filed, the tax) is less than $500.
    (c) Installment due dates--(1) In general--(i) Taxable year of four 
months but less than twelve months. Except as otherwise provided, in 
the case of a short taxable year, if such year results in a taxable 
year of four or more full calendar months but less than twelve full 
calendar months, the due dates prescribed in Sec.  1.6655-1(f)(2) shall 
apply.
    (ii) Exception. If the date determined under paragraph (c)(1)(i) of 
this section for the first required installment due during the 
taxpayer's short taxable year is earlier than the 15th day of the 
fourth month of the taxpayer's short taxable year, the taxpayer's first 
required installment shall be due on the first due date otherwise 
determined under paragraph (c)(1)(i) of this section that is on or 
after the 15th day of the fourth month of the short taxable year.
    (2) Early termination of taxable year--(i) In general. Except as 
provided in paragraph (c)(2)(ii) of this section, if a taxable year 
ends early (for example, as a result of an acquisition or a change in 
taxable year), the due date for the final required installment shall be 
the date that would have been the due date of the next required 
installment if the event that gave rise to the short taxable year had 
not occurred.
    (ii) Exception. If the date determined under paragraph (c)(2)(i) of 
this section is within thirty days of the last day of the short taxable 
year, the due date for the final required installment shall be the 
fifteenth day of the second month following the month that includes the 
last day of the short taxable year.
    (d) Amount due for required installment--(1) In general. The amount 
due for any required installment determined under section 
6655(d)(1)(B)(i) for a short taxable year shall be 100% of the required 
annual payment for the short taxable year divided by the number of 
required installments due (as determined under this section) for the 
short taxable year.
    (2) Tax shown on the return for the preceding taxable year. If the 
current taxable year is a short taxable year, the amount due for any 
required installment determined under section 6655(d)(1)(B)(ii) shall 
be determined in the following manner--
    (i) Take 100% of the tax shown on the return of the corporation for 
the preceding taxable year;
    (ii) Multiply such amount by the number of full calendar months in 
the current short taxable year and divide by 12; and
    (iii) Divide the amount determined under paragraph (d)(2)(ii) of 
this section by the number of required installments

[[Page 73410]]

due (as determined under this section) for the current short taxable 
year.
    (3) Applicable percentage. In the case of any required installment 
determined under section 6655(e), the applicable percentage under 
section 6655(e)(2)(B)(ii) shall be--
    (i) 25%, 50%, 75%, and 100% for the first, second, third, and 
fourth (last) required installments, respectively, if the taxpayer will 
have four required installments due for the short taxable year;
    (ii) 33.33%, 66.67%, and 100% for the first, second, and third 
(last) required installments, respectively, if the taxpayer will have 
three required installments due for the short taxable year;
    (iii) 50% and 100% for the first and second (last) required 
installments, respectively, if the taxpayer will have two required 
installments due for the short taxable year; or
    (iv) 100% for the first (and last) required installment if the 
taxpayer will have one required installment for the short taxable year.
    (e) Examples. The following examples illustrate the rules of this 
section:

    Example 1. A corporation is a calendar year taxpayer that was 
acquired by B corporation on April 16, 2007, resulting in A having a 
short taxable year from January 1 through April 16, 2007. Because A 
has a taxable year of less than four full calendar months, no 
estimated tax payments are required by A for the short taxable year.
    Example 2. B corporation began business on January 10, 2007, and 
adopted a calendar year as its taxable year. B computes its required 
installments based on 100 percent of the tax shown on the return for 
the taxable year in accordance with section 6655(d)(1)(B)(i). 
Pursuant to Sec.  1.6655-1(f)(2)(i), the due dates of B's required 
installments for B's initial taxable year from January 10, 2007, 
through December 31, 2007, are April 15, 2007, June 15, 2007, 
September 15, 2007, and December 15, 2007. However, because the due 
dates for the first, third, and fourth required installments fall on 
a weekend, B's required installment payments will be timely if paid 
on or before the first business day following the actual due date of 
the required installments, that is, April 16, 2007, September 17, 
2007, and December 17, 2007, respectively, for the first, third, and 
fourth required installments. Pursuant to paragraph (d)(1) of this 
section, the amount due with each required installment is 25% of the 
required annual payment for B's first required installment, 50% of 
the required annual payment for B's second required installment, 75% 
of the required annual payment for B's third required installment, 
and 100% of the required annual payment for B's fourth required 
installment.
    Example 3. Corporation C began business on February 12, 2007, 
and adopted a calendar year as its taxable year. C computes its 
required installments based on 100 percent of the tax shown on the 
return for the taxable year in accordance with section 
6655(d)(1)(B)(i). Pursuant to Sec.  1.6655-1(f)(2)(i), the due dates 
of C's required installments for C's initial taxable year from 
February 12, 2007, through December 31, 2007, are April 15, 2007, 
June 15, 2007, September 15, 2007, and December 15, 2007. However, 
in accordance with paragraph (c)(1)(ii) of this section, C's first 
required installment is due June 15, 2007, because April 15, 2007, 
is earlier than the fifteenth day of the fourth month of C's taxable 
year. As a result, C's second required installment is due September 
15, 2007, and C's third (and last) installment is due December 15, 
2007. However, because the due dates for the second and third (and 
last) required installments fall on a weekend, C's required 
installment payments will be timely if paid on or before the first 
business day following the actual due date of the required 
installments, that is, September 17, 2007, and December 17, 2007, 
respectively, for the second and third (and last) required 
installments. Pursuant to paragraph (d)(1) of this section, the 
amount due with each required installment is 33.33% of the required 
annual payment for C's first required installment, 66.67% of the 
required annual payment for C's second required installment, and 
100% of the required annual payment for C's third (and last) 
required installment.
    Example 4. Same facts as Example 3 except C began business on 
April 10, 2007. In accordance with paragraph (c)(1)(ii) of this 
section, C's first required installment is due September 15, 2007, 
because April 15, 2007, and June 15, 2007, are earlier than the 
fifteenth day of the fourth month of C's taxable year. As a result, 
C's second (and last) required installment is due December 15, 2007. 
However, because the due dates for the first and second (and last) 
required installments fall on a weekend, C's required installment 
payments will be timely if paid on or before the first business day 
following the actual due date of the required installments, that is, 
September 17, 2007, and December 17, 2007, respectively, for the 
first and second (and last) required installments. Pursuant to 
paragraph (d)(1) of this section, the amount due with each required 
installment is 50% of the required annual payment for C's first 
required installment, and 100% of the required annual payment for 
C's second (and last) required installment.
    Example 5. D corporation began business on February 12, 2007, 
and adopted a fiscal year ending October 31 as its taxable year. D 
computes its required installments based on 100 percent of the tax 
shown on the return for the taxable year in accordance with section 
6655(d)(1)(B)(i). Pursuant to Sec.  1.6655-1(f)(2)(ii), the due 
dates of D's required installments for D's initial taxable year from 
February 12, 2007, through October 31, 2007, are February 15, 2007, 
April 15, 2007, July 15, 2007, and October 15, 2007. However, in 
accordance with paragraph (c)(1)(ii) of this section, D's first 
required installment is due July 15, 2007, because February 15, 
2007, and April 15, 2007, are earlier than the fifteenth day of the 
fourth month of D's taxable year. As a result, D's second (and last) 
installment is due October 15, 2007. However, because the due date 
for the first required installment falls on a weekend, D's first 
required installment payment will be timely if paid on or before the 
first business day following the actual due date of the required 
installment, that is, July 16, 2007. Pursuant to paragraph (d)(1) of 
this section, the amount due with each required installment is 50% 
of the required annual payment for D's first required installment, 
and 100% of the required annual payment for D's second (and last) 
required installment.
    Example 6. Same facts as Example 5 except D corporation began 
business on May 10, 2007. In accordance with paragraph (c)(1)(ii) of 
this section, D's first (and last) installment is due October 15, 
2007, because July 15, 2007, is earlier than the fifteenth day of 
the fourth month of D's taxable year. Pursuant to paragraph (d)(1) 
of this section, the amount due with D's required installment is 
100% of the required annual payment, computed as 100% divided by the 
number of required installments due for the short taxable year.
    Example 7. E corporation is a calendar year taxpayer that 
computes its required installments based on 100 percent of the tax 
shown on the return for the taxable year in accordance with section 
6655(d)(1)(B)(i). E computes its 2007 required installments based on 
a projected 2007 total tax liability of $600,000. On July 31, 2007, 
E is acquired by F corporation resulting in E having a short taxable 
year from January 1, 2007, through July 31, 2007. E determines that 
its total tax liability for the short period is $350,000. The due 
dates for E's first and second required installments are April 15, 
2007, and June 15, 2007, respectively. However, because the due date 
for the first required installment falls on a weekend, E's first 
required installment payment will be timely if paid on or before the 
first business day following the actual due date of the required 
installment, that is, April 16, 2007. Pursuant to section 
6655(d)(1)(A), E paid $150,000 with each required installment. 
Pursuant to paragraph (c)(2) of this section, E's third (and last) 
required installment of estimated tax is due on September 15, 2007, 
and the percentage of the required annual payment due with such 
installment is 100% pursuant to paragraph (d)(1) of this section. 
However, because the due date for the third (and last) required 
installment falls on a weekend, E's third (and last) required 
installment payment will be timely if paid on or before the first 
business day following the actual due date of the required 
installment, that is, September 17, 2007. Accordingly, E is required 
to pay $50,000 with its final required installment on September 17, 
2007 ($350,000 total tax liability for the short taxable year less 
prior installment payments of $300,000).
    Example 8. Same facts as Example 7 except that E is acquired by 
F corporation on August 31, 2007. Pursuant to paragraph (c)(2)(ii) 
of this section, E's third (and last) required installment of 
estimated tax is due on October 15, 2007, because September 15, 
2007, the date that would have been the due date of E's next 
required installment if F's acquisition of E had not occurred, is 
within

[[Page 73411]]

thirty days of the last day of E's short taxable year, and 100% of 
the required annual payment is due with such installment.
    Example 9. F corporation is a calendar year taxpayer that 
computes its required installments based on 100 percent of the tax 
shown on the return for the taxable year in accordance with section 
6655(d)(1)(B)(i). F computes its 2007 estimated tax payments based 
on a projected 2007 total tax liability of $900,000. On December 3, 
2007, F is acquired by G corporation resulting in F having a short 
taxable year from January 1, 2007, through December 3, 2007. F 
determined its total tax liability for the short period to be 
$800,000. The due dates for F's first, second, and third required 
installments are April 15, 2007, June 15, 2007, and September 15, 
2007, respectively. However, because the due dates for the first and 
third required installments fall on a weekend, F's required 
installment payments will be timely if paid on or before the first 
business day following the actual due date of the required 
installments, that is, April 16, 2007, and September 17, 2007, 
respectively, for the first and third required installments. 
Pursuant to section 6655(d)(1)(A), F paid $225,000 with each 
required installment. Pursuant to paragraph (c)(2)(ii) of this 
section, F's fourth (and last) required installment of estimated tax 
is due on February 15, 2008, and the percentage of the required 
annual payment due with such installment is 100% pursuant to 
paragraph (d)(1) of this section. Accordingly, F is required to pay 
$125,000 with its final required installment due February 15, 2008 
($800,000 total tax liability for the short taxable year less prior 
installment payments of $675,000).
    Example 10. G corporation, a calendar year taxpayer, reported a 
tax liability of $75,000 on its return for the taxable year ending 
December 31, 2006, and is not a large corporation as defined in 
section 6655(g). On July 31, 2007, G makes a final distribution of 
its assets, in connection with a plan of complete liquidation, 
resulting in a short taxable year from January 1, 2007, through July 
31, 2007. To satisfy the requirements of the exception described in 
section 6655(d)(1)(B)(ii) for payments determined by reference to 
the tax shown on the return of the corporation for the preceding 
taxable year, pursuant to paragraph (d)(2) of this section, G must 
pay in a proportionate amount of its 2006 tax liability based on the 
number of months in the current taxable year. Accordingly, G must 
pay $43,750 ($75,000 x \7/12\) through payments of estimated tax 
payments in 2007, with $14,583 due on April 15, 2007, June 15, 2007, 
and September 15, 2007. However, because the due dates for the first 
and third required installments fall on a weekend, G's required 
installment payments will be timely if paid on or before the first 
business day following the actual due date of the required 
installments, that is, April 16, 2007, and September 17, 2007, 
respectively, for the first and third required installments.
    Example 11. Same facts as Example 10 except that G makes a final 
distribution of its assets, in connection with a plan of complete 
liquidation, on October 1, 2007, resulting in a short taxable year 
from January 1, 2007, through October 1, 2007. To satisfy the 
requirements of the exception described in section 
6655(d)(1)(B)(ii), G must pay $56,250 ($75,000 x \9/12\) through 
payments of estimated tax in 2007, with $14,063 due on April 15, 
2007, June 15, 2007, September 15, 2007, and December 15, 2007, 
respectively. However, because the due dates for the first, third, 
and fourth required installments fall on a weekend, G's required 
installment payments will be timely if paid on or before the first 
business day following the actual due date of the required 
installments, that is, April 16, 2007, September 17, 2007, and 
December 17, 2007, respectively, for the first, third, and fourth 
required installments.
    Example 12. H corporation began business on February 15, 2007, 
and adopted a calendar year. H computes its required installments 
based on 100 percent of the tax shown on the return for the taxable 
year in accordance with section 6655(d)(1)(B)(i). H estimated at the 
beginning of its short taxable year that its estimated tax liability 
for short taxable year February 15, 2007, through December 31, 2007, 
would be $180,000. H paid its first required installment of 
estimated tax of $60,000 on June 15, 2007, its second required 
installment of estimated tax of $60,000 on September 17, 2007, and 
its third (and last) required installment of estimated tax of 
$60,000 on December 17, 2007 ($180,000 total estimated tax liability 
for the short taxable year less prior installment payments of 
$120,000). H reported a tax liability of $240,000 on its return for 
the short period February 15, 2007, through December 31, 2007, with 
no credits against tax. There was an underpayment in the amount of 
$20,000 on the first installment date through September 15, 2007, 
$40,000 on the second installment date through December 15, 2007, 
and $60,000 on the third (and last) installment date through March 
15, 2008, determined as follows:
    (i) Tax as defined in section 6655(d)(1)(B)(i)--$240,000
    (ii) 100% of this paragraph (e), Example 12 (i)--240,000
    (iii) Amount of estimated tax required to be paid by the first 
installment date (33.33% of $240,000)--80,000
    (iv) Amount of estimated tax required to be paid by the second 
installment date (66.67% of $240,000 less $80,000 (amount due with 
first installment))--80,000
    (v) Amount of estimated tax required to be paid by the third 
installment date (100% of $240,000 less $160,000 (amount due with 
first and second installment))--80,000
    (vi) Deduct amount paid on or before the first installment 
date--60,000
    (vii) Amount of underpayment for the first installment date 
(this paragraph (e), Example 12 (iii) minus this paragraph (e), 
Example 12 (vi))--20,000
    (viii) Deduct amount available for the second installment date 
($60,000 second installment payment less this paragraph (e), Example 
12 (vii) applied towards the first installment underpayment)--40,000
    (ix) Amount of underpayment for the second installment date 
(this paragraph (e), Example 12 (iv) minus this paragraph (e), 
Example 12 (viii))--40,000
    (x) Deduct amount available for the third installment date 
($60,000 third installment payment less this paragraph (e), Example 
12 (ix) applied towards the second installment underpayment)--20,000
    (xi) Amount of underpayment for the third installment date (this 
paragraph (e), Example 12 (v) minus this paragraph (e), Example 12 
(x))--60,000

    (f) 52 or 53 week taxable year. For purposes of this section a 
taxable year of 52 or 53 weeks shall be deemed a period of 12 months in 
the case of a corporation that computes its taxable income in 
accordance with the election permitted by section 441(f).
    (g) Use of annualized income or seasonal installment method--(1) In 
general. Regardless of the annual accounting period used by a 
corporation (for example, calendar year, fiscal year) the taxpayer may 
use the method described in Sec.  1.6655-2 (annualized income 
installment method) or Sec.  1.6655-3 (adjusted seasonal installment 
method) to compute its required installments of estimated tax when the 
current taxable year is a short taxable year.
    (2) Computation of annualized income installment. To the extent a 
short taxable year includes an annualization period elected by the 
taxpayer, the taxpayer shall compute its annualized income installment 
by determining the tax on the basis of such annualized income for the 
annualization period multiplied by the number of months in the short 
taxable year divided by 12.
    (3) Annualization period for final required installment. For 
purposes of determining the final required installment (as described in 
paragraph (c)(2) of this section) for a short taxable year, annualized 
taxable income shall be determined by placing on an annualized basis 
the taxable income for the last complete annualization period that 
occurs within the short taxable year.
    (4) Examples. The provisions of paragraph (g) of this section may 
be illustrated by the following examples:

    Example 1. X corporation began business on February 12, 2007, 
and adopted a calendar year as its taxable year. X adopts an accrual 
method of accounting and uses the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its 
required installment payments for its 2007 taxable year. Pursuant to 
Sec.  1.6655-1(f)(2)(i), the due dates of X's required installments 
for X's initial taxable year from February 12, 2007, through 
December 31, 2007, are April 15, 2007, June 15, 2007, September 15, 
2007, and December 15, 2007. However, in accordance with paragraph 
(c)(1)(ii) of this section, X's first required installment is due 
June 15, 2007. As a result, X's second required installment is due 
September 15, 2007, and X's third (and last) required installment is 
due December 15,

[[Page 73412]]

2007. However, because the due dates for the third and fourth 
required installments fall on a weekend, X's required installment 
payments will be timely if paid on or before the first business day 
following the actual due date of the required installments, that is, 
September 17, 2007, and December 17, 2007, respectively, for the 
third and fourth required installments. The amount of X's first and 
second required installments are each based on annualizing X's 
taxable income from February 12, 2007, through April 30, 2007, (the 
first three months of X's taxable year) and X's third (and last) 
required installment is based on annualizing X's taxable income from 
February 12, 2007, through July 31, 2007 (the first six months of 
X's taxable year). Because X will have three required installments 
due for its short taxable year, pursuant to paragraph (d)(3)(ii) of 
this section, the applicable percentage is 33.33% for X's first 
required installment, 66.67% for X's second required installment, 
and 100% for X's third (and last) required installment.
    Example 2. Y, a calendar year corporation, made a final 
distribution of its assets, in connection with a plan of complete 
liquidation, on August 1, 2007. Y filed a timely election to use the 
alternative annualization periods described under section 
6655(e)(2)(C)(i) and determined that its taxable income for the 
first 2, 4 and 7 months of the taxable year was $25,000, $50,000 and 
$140,000. The due dates for Y's required installments for its short 
taxable year January 1, 2007, through August 1, 2007, are April 15, 
2007, June 15, 2007, and September 15, 2007. However, because the 
due dates for the first and third required installments fall on a 
weekend, Y's required installment payments will be timely if paid on 
or before the first business day following the actual due date of 
the required installments, that is, April 16, 2007, and September 
17, 2007, respectively, for the first and third required 
installments. Y made installment payments of $10,000, $10,000, and 
$20,000, respectively, on April 16, 2007, June 15, 2007, and 
September 17, 2007. The taxable income for each period is annualized 
as follows:

$25,000 x \12/2\ = $150,000
$50,000 x \12/4\ = $150,000
$140,000 x \12/7\ = $240,000

    (i)(A) To determine whether the first required installment 
equals or exceeds the amount that would have been required to have 
been paid if the estimated tax were equal to one hundred percent of 
the tax computed on the annualized income for the 2-month period 
taking into account the number of months in the short taxable year, 
the following computation is necessary:
    (1) Annualized income for the 2-month period--$150,000
    (2) Tax on this paragraph (g)(4), Example 2 (i)(A)(1)--39,250
    (3) Tax determined under this paragraph (g)(4), Example 2 
(i)(A)(2) multiplied by 7 (the number of months in the short taxable 
year) divided by 12--22,896
    (4) 100% of this paragraph (g)(4), Example 2 (i)(A)(3)--22,896
    (5) 33.33% of this paragraph (g)(4), Example 2 (i)(A)(4)--7,631
    (B) Because the total amount of estimated tax that is timely 
paid on or before the first installment date ($10,000) exceeds the 
amount required to be paid on or before this date if the estimated 
tax were one hundred percent of the tax determined by placing on an 
annualized basis the taxable income for the first 2-month period 
taking into account the number of months in the short taxable year, 
the exception described in Sec.  1.6655-2(a) applies and no addition 
to tax will be imposed for the installment due on April 15, 2007.
    (ii)(A) To determine whether the required installments made on 
or before June 15, 2007, equal or exceed the amount that would have 
been required to have been paid if the estimated tax were equal to 
one hundred percent of the tax computed on the annualized income for 
the 4-month period taking into account the number of months in the 
short taxable year, the following computation is necessary:
    (1) Annualized income for the 4-month period--$150,000
    (2) Tax on this paragraph (g)(4), Example 2 (ii)(A)(1)--39,250
    (3) Tax determined under this paragraph (g)(4), Example 2 
(ii)(A)(2) multiplied by 7 (the number of months in the short 
taxable year) divided by 12--22,896
    (4) 100% of this paragraph (g)(4), Example 2 (ii)(A)(3)--22,896
    (5) 66.67% of this paragraph (g)(4), Example 2 (ii) (A)(4) less 
$7,631 (amount due with first installment)--7,631
    (B) Because the total amount of estimated tax available to apply 
towards the amount due for the second installment ($12,369 ($10,000 
paid on the second installment date plus $2,369 overpayment of the 
first installment)) exceeds the amount required to be paid on or 
before this date if the estimated tax were one hundred percent of 
the tax determined by placing on an annualized basis the taxable 
income for the first 4-month period for the taxable year taking into 
account the number of months in the short taxable year, the 
exception described in Sec.  1.6655-2(a) applies and no addition to 
tax will be imposed for the installment due on June 15, 2007.
    (iii)(A) Pursuant to paragraph (c) and (d) of this section, the 
final required installment is due by September 15, 2007, and the 
applicable percentage due for the final required installment is 
100%. However, because the due date for the final required 
installment falls on a weekend, Y's final required installment 
payment will be timely if paid on or before the first business day 
following the actual due date of the required installment, that is, 
September 17, 2007. To determine whether the installment payments 
made on or before September 17, 2007, equal or exceed the amount 
that would have been required to have been paid if the estimated tax 
were equal to one hundred percent of the tax computed on the 
annualized income for the 7-month period taking into account the 
number of months in the short taxable year, the following 
computation is necessary:
    (1) Annualized income for the 7-month period--$240,000
    (2) Tax on this paragraph (g)(4), Example 2 (iii)(A)(1)--56,100
    (3) Tax determined under this paragraph (g)(4), Example 2 
(iii)(A)(2) multiplied by 7 (the number of months in the short 
taxable year) divided by 12--32,725
    (4) 100% of this paragraph (g)(4), Example 2 (iii)(A)(3)--32,725
    (5) 100% of this paragraph (g)(4), Example 2 (iii)(A)(4) less 
$15,262 (amount due with first and second installment)--17,463
    (B) Because the total amount of estimated tax available to apply 
towards the amount due for the final installment ($24,738 ($20,000 
that is timely paid on the third installment date plus $4,738 
overpayment of the second installment)) exceeds the amount required 
to be paid on or before this date if the estimated tax were one 
hundred percent of the tax determined by placing on an annualized 
basis the taxable income for the first 7-month period for the 
taxable year taking into account the number of months in the short 
taxable year, the exception described in Sec.  1.6655-2(a) applies 
and no addition to tax will be imposed for the final installment due 
on September 15, 2007.

    (h) Preceding taxable year a short taxable year. If the preceding 
taxable year referred to in section 6655(d)(1) was a short taxable 
year, the tax computed on the basis of the facts shown on the return 
for such preceding year, for purposes of determining the applicability 
of the exception described in section 6655(d)(2), shall be the tax 
computed on the annual basis in the manner described in section 
443(b)(1) (prior to the reduction of the tax liability in the manner 
described in the last sentence).
    (i) Effective date. This section applies to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register.


Sec.  1.6655-6  Methods of accounting.

    (a) In general. In computing any required installment, a 
corporation must use the methods of accounting used in computing 
taxable income for the taxable year for which estimated tax is being 
determined (the current taxable year).
    (b) Exceptions--(1) Automatic accounting method changes. If a 
taxpayer is making a change in method of accounting for the current 
taxable year that is permitted to be made with the automatic consent of 
the Commissioner, the new method of accounting shall be used in 
determining any required installment if, and only if, the copy of the 
Form 3115, ``Application for Change in Accounting Method,'' has been 
mailed to the IRS National Office on or before the last day of the 
annualization period.
    (2) Non-automatic accounting method changes. If a taxpayer is 
making a change in method of accounting for the current taxable year 
that requires the prior consent of the Commissioner, the new method of 
accounting shall be used

[[Page 73413]]

in determining any required installment if, and only if, the consent 
agreement reflecting the Commissioner's consent to the change in method 
of accounting and the prescribed terms and conditions for effecting 
such change has been signed by the taxpayer and mailed to the IRS 
National Office on or before the last day of the annualization period.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. X corporation, a calendar year taxpayer, uses an 
accrual method of accounting and the annualization method under 
section 6655(e)(2)(A)(i) to calculate its 2006 required 
installments. X receives advance payments each taxable year with 
respect to agreements for the sale of goods properly includible in 
X's inventory. The advance payments received by X qualify for 
deferral under Sec.  1.451-5(c). Although X is eligible to defer the 
advance payments in accordance with Sec.  1.451-5(c), X's method of 
accounting with respect to the advance payments is to include the 
advance payments in income when received. If, as of the last day of 
the annualization period, X's method of accounting for advance 
payments is to include the advance payments in income when received, 
and the requirements of paragraph (b)(1) or (b)(2) of this section, 
as applicable, are not met, then X must use that method of 
accounting for purposes of computing such required installment.
    Example 2. Y corporation, a calendar year taxpayer, uses an 
accrual method of accounting and the annualization method under 
section 6655(e)(2)(A)(i) to calculate its 2006 required 
installments. Y computes its annual taxable income by deducting its 
liability for state income taxes in the taxable year the taxes are 
paid, without regard to the recurring item exception of section 
461(h) and the regulations. If, as of the last day of the 
annualization period, Y's method of accounting for state income 
taxes is to deduct such taxes in the taxable year the taxes are paid 
without regard to the recurring item exception, and the requirements 
of paragraph (b)(1) or (b)(2) of this section, as applicable, are 
not met, then Y must use that method of accounting for purposes of 
computing such required installment.

    (d) Effective date. This section applies to taxable years beginning 
after the date that is 30 days after the date the final regulations are 
published in the Federal Register.
    Par. 12. Newly designated Sec.  1.6655-7 is revised to read as 
follows:


Sec.  1.6655-7  Addition to tax on account of excessive adjustment 
under section 6425.

    (a) Section 6655(h) imposes an addition to the tax under chapter 1 
of the Internal Revenue Code in the case of any excessive amount (as 
defined in paragraph (c) of this section) of an adjustment under 
section 6425 that is made before the 15th day of the third month 
following the close of a taxable year beginning after December 31, 
1967. This addition to tax is imposed whether or not there was 
reasonable cause for an excessive adjustment.
    (b) If the amount of an adjustment under section 6425 is excessive, 
there shall be added to the tax under chapter 1 of the Internal Revenue 
Code for the taxable year an amount determined at the annual rate 
referred to in the regulations under section 6621 upon the excessive 
amount from the date on which the credit is allowed or refund paid to 
the 15th day of the third month following the close of the taxable 
year. A refund is paid on the date it is allowed under section 6407.
    (c) The excessive amount is equal to the lesser of the amount of 
the adjustment or the amount by which--
    (1) The income tax liability (as defined in section 6425(c)) for 
the taxable year, as shown on the return for the taxable year; exceeds
    (2) The estimated income tax paid during the taxable year, reduced 
by the amount of the adjustment.
    (d) The computation of the addition to the tax imposed by section 
6425 is made independent of, and does not affect the computation of, 
any addition to the tax that a corporation may otherwise owe for an 
underpayment of an installment of estimated tax.
    (e) The following example illustrates the rules of this section:

    Example. (i) Corporation X, a calendar year taxpayer, had an 
underpayment as defined in section 6655(b), for its fourth 
installment of estimated tax that was due on December 15, 2006, in 
the amount of $10,000. On January 2, 2007, X filed an application 
for adjustment of overpayment of estimated income tax for 2006 in 
the amount of $20,000.
    (ii) On February 16, 2007, the IRS, in response to the 
application, refunded $20,000 to X. On March 15, 2007, X filed its 
2006 tax return and made a payment in settlement of its total tax 
liability. Assuming that the addition to tax is computed under 
section 6621(a)(2) at a rate of 8% per annum for the applicable 
periods of underpayment, under section 6655(a), X is subject to an 
addition to tax in the amount of $197 (90/365 x $10,000 x 8%) on 
account of X's December 15, 2006, underpayment. Under section 
6655(h), X is subject to an addition to tax in the amount of $118 
(27/365 x $20,000 x 8%) on account of X's excessive adjustment under 
section 6425. In determining the amount of the addition to tax under 
section 6655(a) for failure to pay estimated income tax, the 
excessive adjustment under section 6425 is not taken into account.

    (f) An adjustment is generally to be treated as a reduction of 
estimated income tax paid as of the date of the adjustment. However, 
for purposes of Sec.  1.6655-1 through Sec.  1.6655-6, the adjustment 
is to be treated as if not made in determining whether there has been 
any underpayment of estimated income tax and, if there is an 
underpayment, the period during which the underpayment existed.
    (g) This section applies to taxable years beginning after the date 
that is 30 days after the date the final regulations are published in 
the Federal Register.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 13. The authority citation for part 301 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 14. Section 301.6655-1 is revised to read as follows:


Sec.  301.6655-1  Failure by corporation to pay estimated income tax.

    (a) For regulations under section 6655, see Sec. Sec.  1.6655-1 
through 1.6655-7 of this chapter.
    (b) This section applies to taxable years beginning after the date 
that is 30 days after the date the final regulations are published in 
the Federal Register.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-23872 Filed 12-7-05; 8:45 am]
BILLING CODE 4830-01-P