[Federal Register Volume 72, Number 151 (Tuesday, August 7, 2007)]
[Rules and Regulations]
[Pages 44338-44366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14946]



[[Page 44337]]

-----------------------------------------------------------------------

Part IV





Department of the Treasury





-----------------------------------------------------------------------



Internal Revenue Service



-----------------------------------------------------------------------



26 CFR Parts 1, 301 and 602



Corporate Estimated Tax; Final Rule

  Federal Register / Vol. 72, No. 151 / Tuesday, August 7, 2007 / Rules 
and Regulations  

[[Page 44338]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9347]
RIN 1545-AY22


Corporate Estimated Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations that provide guidance 
to corporations with respect to estimated tax requirements. These final 
regulations generally affect corporate taxpayers who are required to 
make estimated tax payments. These final regulations reflect changes to 
the law since 1984. This document also removes the section 6154 
regulations.

DATES: Effective date: These regulations are effective on August 7, 
2007.
    Applicability date: These regulations apply to tax years beginning 
after September 6, 2007.

FOR FURTHER INFORMATION CONTACT: Timothy Sheppard, at (202) 622-4910 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1), the Procedure and Administration Regulations (26 CFR part 
301), and the OMB Control Numbers under the Paperwork Reduction Act 
Regulations (26 CFR part 602) relating to corporate estimated taxes 
under section 6425 and section 6655 of the Internal Revenue Code 
(Code). This document also removes Sec. Sec.  1.6154-1, 1.6154-2, 
1.6154-3, 1.6154-4, 1.6154-5, and 301.6154-1. The IRS is removing the 
section 6154 regulations because Congress repealed section 6154 in 
1987.
    These 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).
    These regulations do not reflect changes made by the Tax Increase 
Prevention and Reconciliation Act of 2005, Public Law 109-222 (120 
Stat. 345) (TIPRA), as amended by the U.S. Troop Readiness, Veterans' 
Care, Katrina Recovery, and Iraq Accountability Act of 2007, Public Law 
110-28 (121 Stat. 112), because TIPRA made temporary, targeted changes 
to the time and amount of any required installment otherwise due in 
September 2010 and September 2011. TIPRA also changed the amount of 
required installments in 2006, 2012, and 2013 for corporations with 
assets of not less than $1 billion. Although these changes are not 
reflected in these regulations, these and any further changes made in 
the Code supersede the rules in these regulations.
    A notice of proposed rulemaking under section 6655 (REG-107722-00) 
was published in the Federal Register (70 FR 73393) on December 12, 
2005. The proposed regulations provide guidance on how to determine the 
amount of a corporation's estimated tax due with each quarterly 
installment. No requests for a public hearing were received, so the 
public hearing on the proposed regulations, scheduled for March 15, 
2006, was cancelled. The IRS received written and electronic comments 
responding to the notice of proposed rulemaking. After consideration of 
all comments, the proposed regulations are adopted as revised by this 
Treasury decision.

Explanation of Provisions and Summary of Comments

    Section 6655 generally requires corporations to make quarterly 
estimated tax payments or be assessed an addition to tax for any 
underpayment. As a general rule, payments are due on the fifteenth day 
of the fourth, sixth, ninth, and twelfth months. Each quarterly payment 
must be at least twenty-five percent of the required annual payment in 
order to avoid an underpayment penalty. Generally, the required annual 
payment equals one hundred percent of the tax shown on the return for 
the current year tax, or for certain small taxpayers, the lesser of one 
hundred percent of the tax shown on the return for the current year tax 
or one hundred percent of the tax shown on the return for the preceding 
taxable year. Alternatively, corporations may elect to use an 
annualized income installment or an adjusted seasonal installment if 
less than the amount computed under the general rules.

1. Comments Concerning Sec.  1.6655-1 (Addition to Tax in the Case of a 
Corporation) of the Proposed Regulations

A. Recapture of a Tax Credit Not Included in the Definition of ``Tax''
    One commentator requested that the final regulations clarify that 
the recapture of a tax credit under Chapter 1 is not a section 11 tax 
and not included within the definition of tax for purposes of section 
6655 unless there is authority that provides that the recaptured credit 
is treated as a tax imposed by section 11.
    Revenue Ruling 78-257 (1978-1 CB 440) provides that the term tax, 
as defined in section 6655, includes the amount of tax resulting from 
the recomputation of a prior year's investment credit at the applicable 
rate for the current year. However, Berkshire Hathaway, Inc. v. United 
States, 802 F.2d 429 (Fed. Cir. 1986), held that, for purposes of the 
definition of tax under section 6655, the recapture tax under former 
section 47 was not a tax imposed by section 11. The Court concluded 
that because the taxpayer paid no tax imposed by section 11 in the 
preceding taxable year, that taxpayer was not subject to an addition to 
tax for failing to pay estimated tax in the current year under the 
former provision in section 6655(d)(2) that allowed a taxpayer to pay 
estimated tax in the current year based on the law applicable to (other 
than the rates), and the known facts of,

[[Page 44339]]

the prior year's return. Based on the holding in Berkshire Hathaway, 
Sec.  1.6655-1(g)(1)(iii) of the final regulations provides that, 
unless otherwise provided in the Internal Revenue Code, for purposes of 
the definition of tax as used in section 6655, a recapture of tax, such 
as a recapture provided by section 50(a)(1)(A) and any other similar 
provision, is not considered to be a tax imposed by section 11. 
Therefore, Rev. Rul. 78-257 is removed. See Sec.  601.601(d)(2)(ii)(b).
B. Tax Rate Changes for Preceding Year Safe Harbor
    Section 6655(d)(1)(B)(ii) allows taxpayers to determine their 
required annual payment based on 100 percent of the tax shown on the 
preceding year's return. Commentators suggested that the rule provided 
in Sec.  1.6655-1(g)(3) of the proposed regulations, which requires 
taxpayers to recompute the tax determined for the preceding taxable 
year based on the current year tax rates if the tax rates for the 
current year and the preceding year differ, is not authorized by 
section 6655. The commentators suggested that, prior to the effective 
date of its amendment in 1987, section 6655 allowed estimated tax 
payments to be based on the facts shown on the return for the preceding 
taxable year and the law applicable to that year but using the tax 
rates for the current taxable year. The commentators requested that the 
final regulations not adopt the rule provided in Sec.  1.6655-1(g)(3) 
of the proposed regulations.
    Section 6655 no longer provides specific statutory authority to 
recompute tax determined for the preceding taxable year using the rates 
applicable to the current taxable year. Therefore, the final 
regulations do not adopt the rule provided in Sec.  1.6655-1(g)(3) of 
the proposed regulations.
C. Return for the Preceding Taxable Year
    One commentator requested that the final regulations clarify that 
the regulations adopt the holding in Mendes v. Commissioner, 121 T.C. 
308 (2003). In Mendes, the Tax Court held that a tax return that is 
filed after the IRS issues a notice of deficiency is not a return for 
purposes of section 6654(d)(1)(B)(i). Id. at 324-325. Mendes cited 
Evans Cooperage Co., Inc. v. United States, 712 F.2d 199 (5th Cir. 
1983), for the proposition that the purpose of the preceding year safe 
harbor is ``to provide a predictable escape from any possible penalty 
liability [and this purpose] would be defeated if penalties for 
underpayment of estimated taxes during the year were based, not on the 
easily determinable amount reflected on the preceding year's return, 
but instead upon the ultimate tax liability, possibly determined by 
adverse tax audit, a year or so after the tax year for * * * which the 
estimated tax installments were paid.'' Mendes, 121 T.C. at 326 
(quoting Evans Cooperage, 712 F.2d at 204). Evans Cooperage held that 
the statutory reference to ``tax shown on the return of the corporation 
for the preceding taxable year'' refers to the timely filed return for 
the preceding year, not to any later-filed amended return. Evans 
Cooperage, 712 F.2d at 204.
    Section 1.6655-1(g)(2) of the proposed regulations provides that 
the reference in section 6655(d)(1)(B)(ii) to ``return of the 
corporation of the preceding taxable year'' includes the Federal income 
tax return as amended, only if an amended Federal income tax return has 
been filed before the due date for an installment. As long as a 
taxpayer has remaining estimated tax installment payments to make 
during the tax year and is basing the payments on the preceding year 
return, the remaining payments should be made based on the most recent 
information the IRS has on the preceding year return. This includes the 
information on an amended return for the preceding year filed before an 
installment due date. Section 1.6655-1(g)(2) of the final regulations 
retains this rule but clarifies that the term ``return for the 
preceding taxable year'' includes the Federal income tax return as 
amended only if filed before the applicable installment due date if an 
amended Federal income tax return is filed for the preceding taxable 
year. If an amended Federal income tax return is filed on or after an 
installment due date, then the term ``return for the preceding taxable 
year'' does not include that amended Federal income tax return with 
respect to the installments due prior to the time the amended Federal 
income tax return is filed. This rule applies regardless of whether the 
IRS issues a notice of deficiency prior to the filing of the amended 
Federal income tax return.

2. Comments Concerning Sec.  1.6655-2 (Annualized Income Installment 
Method) of the Proposed Regulations

    As a general comment to the proposed regulations, one commentator 
noted that the estimated tax payment rules should strive to provide the 
most accurate picture of annualized taxable income based on facts known 
as of the end of an annualization period. The IRS and Treasury 
Department agree with this comment and recognize that treating an 
annualization period as a short taxable year does not necessarily 
result in an accurate estimate of annualized taxable income. The final 
regulations make it clear that taxpayers may not determine taxable 
income for an annualization period or an adjusted seasonal installment 
period as though the period is a short taxable year.
    Consistent with the general rejection of a short taxable year 
approach, the final regulations recognize that certain types of items 
that are generally incurred once (or otherwise infrequently) during the 
taxable year or that are subject to special exceptions, should not be 
annualized because doing so would create a distortion in the estimate 
of annualized taxable income. This approach also recognizes that 
although distortions may occur in the annualization process due to 
general fluctuations in the timing of items of income and deductions 
incurred throughout the year, taxpayers should generally be permitted 
to rely on such annualized estimates to the extent the estimate is 
based upon information available to the taxpayer as of the end of the 
annualization period.
    A commentator expressed concern that the rules provided in the 
proposed regulations were too mechanical and created traps for the 
unwary. In response to this comment, the final regulations provide 
rules which are intended to produce a reasonably accurate estimate of 
annualized taxable income for estimated tax purposes without imposing 
an undue compliance burden on taxpayers. Specifically, the final 
regulations address this general concern by allowing taxpayers to make 
a reasonably accurate allocation of certain items of income or expense. 
However, a taxpayer's annualized taxable income for estimated tax 
purposes is primarily based on items of income and expense recognized 
during the annualization period. Therefore, the annualization method is 
as inherently complex as computing taxable income.
A. Reasonably Accurate Allocation
    Commentators noted that many of the rules provided in the proposed 
regulations with respect to economic performance and recurring expenses 
would create significant administrative burdens, result in similarly 
situated taxpayers being treated differently, and did not further the 
underlying goal of providing an accurate picture of annualized taxable 
income.
    The final regulations do not retain the recurring expense rules 
provided in the proposed regulations. The final regulations provide 
special rules for specific items of deduction that are routinely 
incurred on an annual basis or for which a special exception to the

[[Page 44340]]

general accounting rules exists. Given the nature of these items, 
applying the general annualization rules to these items could result in 
a significant distortion in the estimate of annualized taxable income. 
These items include real property tax deductions; employee and 
independent contractor bonus compensation deductions (including the 
employer's share of employment taxes related to such compensation); 
deductions under sections 404 (deferred compensation) and 419 (welfare 
benefit funds); items allowed as a deduction for the taxable year by 
reason of section 170(a)(2) and Sec.  1.170A-11(b) (certain charitable 
contributions by accrual method corporations), Sec.  1.461-5 (recurring 
item exception) or Sec.  1.263(a)-4(f) (12-month rule); and items of 
deduction designated by the Secretary by publication in the Internal 
Revenue Bulletin (IRB) (see Sec.  601.601(d)(2)(ii)(b)).
    The final regulations require that these specified items of 
deduction be allocated in a reasonably accurate manner. The item of 
deduction that must be allocated in a reasonably accurate manner 
includes the total amount of the item of deduction recognized by the 
taxpayer during the taxable year regardless of whether the item is 
deemed to be paid or incurred during the taxable year as a result of 
events that occurred during the taxable year, after the taxable year, 
or both. While a reasonably accurate allocation may permit certain 
items to be recognized in an annualization period prior to being paid 
or incurred, an amount may only be taken into account to the extent the 
item of deduction is properly recognized by the taxpayer during the 
taxable year. Therefore, taxpayers will be subject to a section 6655 
addition to tax for an underpayment of estimated tax if an underpayment 
results from a deduction the taxpayer expected to be incurred but was 
not ultimately recognized as a deduction by the taxpayer in the 
computation of taxable income for that year.
    The final regulations provide that an allocation will be considered 
to be made in a reasonably accurate manner if the item is allocated 
ratably throughout the tax year. In addition, an allocation will be 
considered to be made in a reasonably accurate manner to the extent it 
provides a reasonable estimate of taxable income for the taxable year 
based upon the facts known as of the end of the annualization period. 
The final regulations provide a list of some relevant factors to be 
taken into consideration in determining whether an allocation provides 
a reasonable estimate of taxable income based upon facts known as of 
the end of the annualization period. The IRS and Treasury Department 
recognize that various allocations may be considered to be done in a 
reasonably accurate manner and intend for taxpayers to have flexibility 
in determining which allocation to use, particularly when use of a 
specific allocation reduces administrative burdens on the taxpayer. In 
general, allocations that are made with the intent to distort will not 
be considered to have been made in a reasonably accurate manner.
    Many of the items of deduction which are required to be allocated 
in a reasonably accurate manner include items that may not have 
otherwise been allowed to be taken into account by taxpayers (for 
example, year-end bonus liabilities, items paid after year end) under 
the general annualization rules to the extent they were deemed to be 
incurred in the last quarter of the year. In this regard, the final 
regulations provide a measure of relief to taxpayers with respect to 
such items. The final regulations provide that the Secretary may 
designate in future IRB guidance additional items of deduction that are 
required to be allocated in a reasonably accurate manner. Taxpayers are 
encouraged to bring items to the attention of the IRS and Treasury 
Department that they believe should be allocated in a reasonably 
accurate manner rather than applying the general annualization rules.
    Commentators requested that taxpayers be permitted to take the 
exceptions provided in section 170(a)(2) and Sec.  1.170A-11(b) 
(certain charitable contributions by accrual method corporations), 
Sec.  1.461-5 (recurring item exception) or Sec.  1.263(a)-4(f) (12-
month rule) into account for purposes of determining items of expense 
incurred during an annualization period. As noted above, these 
exceptions frequently apply either to expenses paid annually or to 
expenses paid after the end of the taxable year. The specific rules and 
underlying intent of these exceptions do not easily translate to the 
concept of an annualization period. The final regulations provide that 
items of expense that utilize these exceptions will be considered to be 
properly taken into account if they are allocated among annualization 
periods in a reasonably accurate manner. Therefore, the final 
regulations permit taxpayers for estimated tax payment purposes to 
allocate throughout the tax year items of deduction recognized in the 
taxable year as a result of these exceptions to the extent the 
allocation is made in a reasonably accurate manner. The final 
regulations adopt this approach in order to reduce the complexity and 
burden associated with the computation of estimate taxes by allowing 
taxpayers to allocate these specific items of expense in a reasonably 
accurate manner while also preventing unintended distortions under the 
annualization method.
B. Net Operating Loss Deductions
    Several commentators addressed provisions in the proposed 
regulations requiring a net operating loss (NOL) deduction to be taken 
into account in computing an annualized installment after annualizing 
the taxable income for the annualization period. One commentator argued 
that economic performance with respect to an NOL carryover has already 
occurred and therefore, the NOL deduction should be taken into account 
in computing an annualized installment before annualizing the taxable 
income for the annualization period. Another commentator suggested that 
special rules be provided for extraordinary items such as NOL 
deductions noting the unique nature of such items. Comments were also 
received suggesting that NOL deductions should be treated the same as 
any other deduction.
    NOL deductions are different from other items of deduction 
occurring throughout the year in that there is no anticipation that 
similar deductions will recur throughout the year or in future years. 
In this regard, NOL deductions are more like extraordinary items. 
Treating NOL deductions in the same manner as other recurring 
deductions would be inconsistent with attempting to provide a 
reasonably accurate picture of annualized taxable income and could 
result in a distorted estimate of annualized taxable income similar to 
the distortions created by the various techniques the regulations are 
intended to prevent. The final regulations treat a NOL deduction as an 
extraordinary item that is treated as occurring on the first day of the 
taxable year and is taken into account after annualization. As a result 
of the final regulations, Rev. Rul. 67-93 (1967-1 CB 366) is removed. 
See Sec.  601.601(d)(2)(ii)(b).
C. Credit Carryovers
    One commentator suggested that a credit carryover should be taken 
into account in computing an annualized installment before annualizing 
the taxable income for the annualization period because economic 
performance has occurred for the credit carryover. In general, 
taxpayers annualize components of a credit for the current taxable year 
to determine the amount of a credit because the credit is based on

[[Page 44341]]

components for the current year. However, credit carryovers are 
generally based on the components for the entire year in which the 
credit arose. Therefore, the credit carryover already is computed based 
on annualized components for the year in which the credit arose. 
Because a credit carryover is based on annualized components, the final 
regulations provide that a credit carryover must be taken into account 
after determining the annualized tax and before taking into account the 
applicable percentage for the annualization period.
D. Credits Incurred in an Annualization Period and Recaptured Credits
    One commentator suggested that the final regulations provide that 
credits incurred in an annualization period are not annualized. The 
commentator suggested that annualization should be based on the 
underlying basis for the credit. The commentator also suggested that if 
a credit is based on an item that is annualized in computing the 
required installment for the annualization period, the amounts should 
be annualized in determining the amount of the credit. Finally, the 
commentator suggested that similar rules should apply to the recapture 
of credits that are included within the definition of tax.
    Section 1.6655-2(f)(3)(iii) of the final regulations provides that 
the items upon which the credit is computed are annualized pursuant to 
the provisions of Sec.  1.6655-2(f)(1) and the amount of the credit is 
computed based on the annualized items. The amount of the credit is 
then deducted from the annualized tax. For example, for an 
annualization period consisting of three months in a full 12-month 
taxable year, the items upon which the credit is based that are taken 
into account for the three-month period are multiplied by four, the 
credit is determined, and the credit reduces the annualized tax. 
Reducing the annualized tax by a credit before taking into account the 
applicable percentage is consistent with the statutory definition of 
tax provided in section 6655(g)(1) and the annualized income 
installment method provided in section 6655(e). In order to clarify 
this rule, Sec.  1.6655-2(b)(1) of the final regulations provides that 
tax means tax after taking into account credits and before applying the 
applicable percentage. These rules generally do not apply to a credit 
recapture because, as discussed in heading 1A of the preamble, a credit 
recapture, such as a recapture provided by section 50(a)(1)(A), is not 
taken into account when determining the tax for an annualized income 
installment for purposes of section 6655.
E. Depreciation and Amortization Expense
    One commentator requested clarification on the alternative method 
in Sec.  1.6655-2(f)(2)(v)(A) of the proposed regulations. The proposed 
regulations provide that a taxpayer may claim for an annualization 
period at least a proportionate amount of 50 percent of the taxpayer's 
estimated depreciation and amortization (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. Several commentators suggested 
that the regulations were not clear on how a taxpayer determines how 
much more than 50 percent may be used and requested that the final 
regulations provide criteria for making this determination.
    Another commentator suggested that the general rule in Sec.  
1.6655-2(f)(2)(v)(A) of the proposed regulations for taking into 
account depreciation was impractical for many taxpayers because of the 
administrative burdens associated with the computation of actual and 
expected depreciation expense. The commentator also suggested that the 
rule does not provide an alternative calculation methodology for assets 
subject to a convention other than the half-year convention or for 
intangible assets. The commentator requested that the final regulations 
provide alternative computation methodologies for all depreciable and 
amortizable assets and allow taxpayers to take into account section 179 
deductions. The commentator also requested that the final regulations 
eliminate the alternative rule in Sec.  1.6655-2(f)(2)(v)(A) of the 
proposed regulations that allows taxpayers to take into account a 
proportionate amount of 50 percent of taxpayers' current year estimated 
depreciation expense. The commentator requested that instead the final 
regulations provide a safe harbor that allows taxpayers to claim a 
proportionate amount of 90 percent of the prior year depreciation 
expense for all assets placed in service in an earlier year.
    By including the alternative rule in Sec.  1.6655-2(f)(2)(v)(A) of 
the proposed regulations, the IRS and Treasury Department intended to 
illustrate the minimum amount of depreciation a taxpayer is entitled to 
take for a taxable year. In response to the comments referenced above, 
the final regulations do not include the alternative method in Sec.  
1.6655-2(f)(2)(v)(A) of the proposed regulations. The final regulations 
provide a general rule that permits taxpayers to estimate their annual 
depreciation expense and include a proportionate amount of such expense 
for annualization purposes. The final regulations also provide that, in 
determining the estimated annual depreciation expense, a taxpayer may 
take into account purchases, sales or other dispositions, changes in 
use, additional first-year depreciation deductions, and other similar 
events and provisions 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 of the taxpayer's capital 
spending plans for the current taxable year), are reasonably expected 
to occur or apply during the taxable year. The IRS and Treasury 
Department believe that prescribing special rules for depreciation is 
appropriate because unlike many other deductions, depreciation 
generally accrues ratably throughout the taxable year. Therefore, in 
contrast to the general annualization rules, the final regulations 
require depreciation expense to be taken into account ratably 
throughout the taxable year.
    As an alternative to the general rule for depreciation expense, the 
final regulations provide two safe harbors. The first safe harbor 
requires taxpayers to take into account for an annualization period a 
proportionate amount of depreciation expense allowed for the taxable 
year from: (1) Assets that were in service on the last day of the prior 
taxable year, are in service on the first day of the current taxable 
year, and have not been disposed of during the annualization period; 
(2) assets that were placed in service during the annualization period 
and have not been disposed of during that period; and (3) assets that 
were in service on the last day of the prior taxable year and that are 
disposed of during the annualization period. For purposes of additional 
first-year depreciation deductions, the final regulations provide that 
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. In addition, the 
final regulations provide that amounts that the taxpayer deducts under 
section 179 or any similar provision, are treated

[[Page 44342]]

the same as additional first-year depreciation.
    The second safe harbor included in the final regulations provides 
that a taxpayer may take into account a proportionate amount of 90 
percent of its preceding year's depreciation that is taken on its 
Federal income tax return for the preceding taxable year. However, if 
the taxpayer's preceding taxable year is less than 12 months (a short 
taxable year), the amount of depreciation expense taken into account 
for the preceding taxable year must be put on an annualized basis. In 
addition, a taxpayer must use whatever depreciation safe harbor method 
it selects under Sec.  1.6655-2(f)(3)(iv)(B) of the final regulations 
for all depreciation deductions within the annualization period for the 
annualized income installment but may use a different depreciation 
method provided in Sec.  1.6655-2(f)(3)(iv) for each annualized income 
installment during the taxable year.
F. Events Arising After the Installment Due Date
    One commentator requested that the final regulations include 
examples of events that would arise after the installment due date that 
would be considered reasonably unforeseeable to illustrate the rule 
provided in Sec.  1.6655-2(h) of the proposed regulations. In 
considering the request for more specific guidance as to what 
constitutes an unforeseeable event, the IRS and Treasury Department 
determined that providing relief for certain unforeseeable events would 
more appropriately be addressed through contemporaneous guidance. 
Furthermore, the unforeseeable event exception provided in the proposed 
regulations was inherently subjective and retaining such a rule would 
be difficult to administer. In addition, certain provisions in the 
final regulations allow events that occur after the end of an 
annualization period to be taken into account but only to the extent 
the anticipated events actually occur. Therefore, the final regulations 
do not retain the unforeseeable event exception as provided in Sec.  
1.6655-2(h) of the proposed regulations.
    The final regulations do permit taxpayers in specific circumstances 
to take into account transactions that are properly reflected in the 
taxpayer's return for a particular year to be taken into account for 
annualization purposes regardless of when the underlying event giving 
rise to the item occurs. For example, the final regulations permit 
taxpayers to defer income related to a transaction to which sections 
1031 or 1033 may apply even if the replacement of property required 
under sections 1031 or 1033 has not occurred as of the end of an 
annualization period to the extent the taxpayer has a reasonable belief 
that qualifying replacement property will be acquired.
G. Items That Substantially Affect Taxable Income But Cannot Be 
Determined Accurately by the Installment Due Date
    Section 1.6655-2(g) of the proposed regulations provides that in 
determining the applicability of the annualized income installment 
method or the adjusted seasonal installment method, reasonable 
estimates may be made from existing data for items that substantially 
affect income if the amount of such items cannot be determined with 
reasonable accuracy 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.
    The IRS and Treasury Department believe that the language in Sec.  
1.6655-2(g) of the proposed regulations could be misinterpreted and 
broadly applied to items to which the rule was not intended. The final 
regulations provide that Sec.  1.6655-2(g) applies only to the items 
specifically listed. These items include the inflation index for 
taxpayers using the dollar-value LIFO inventory method, adjustments 
required under section 263A, intercompany adjustments for taxpayers 
that file consolidated returns, the liquidation of a LIFO layer at the 
installment date that the taxpayer reasonably believes will be replaced 
at the end of the year, section 199 computations, deferred gain under 
sections 1031 and 1033 that the taxpayer reasonably believes will be 
replaced with qualifying property, and to any other item specifically 
designated in guidance published in the Internal Revenue Bulletin.
H. Taking Into Account a Section 199 Deduction
    Commentators requested clarification on how taxpayers using the 
annualized income installment method (or the adjusted seasonal 
installment method) should take into account a section 199 deduction. 
One commentator suggested that because the section 199 deduction is 
calculated based on income and expense items incurred during the 
taxable year and has some characteristics of a credit, the final 
regulations should treat a section 199 deduction as a credit. 
Commentators also suggested that the final regulations require 
taxpayers to annualize income and compute the section 199 deduction 
based on the annualized amount. Another commentator requested that the 
final regulations treat a section 199 deduction as an item that 
substantially affects taxable income but cannot be accurately 
determined by the installment due date. The commentator requested that 
the final regulations allow taxpayers to make a reasonable estimate of 
the section 199 deduction for purposes of determining the proportionate 
amount that should be taken into account in determining annualized 
taxable income.
    Although the section 199 deduction is calculated based on income 
and expense items incurred during the taxable year, the section 199 
deduction is a deduction and not a credit. Therefore, a section 199 
deduction must be taken into account to reduce taxable income, not to 
reduce tax. Under the final regulations, a section 199 deduction is 
computed prior to annualizing the taxable income for the annualization 
period. However, in recognition that qualification for the section 199 
deduction is restricted by various annual limitations that may not be 
known as of the end any specific annualization period, the final 
regulations provide that a section 199 deduction should be treated as 
an item that substantially affects taxable income but cannot be 
accurately determined by the installment due date. Therefore, the final 
regulations permit taxpayers to make a reasonable estimate of the 
section 199 deduction for purposes of determining the amount to be 
taken into account in determining annualized taxable income.
I. Section 263A Expenses
    One commentator suggested that the proposed regulations do not 
provide rules on how taxpayers should account for section 263A 
adjustments to compute annualized taxable income. The commentator 
requested that the final regulations not require taxpayers to compute 
an actual section 263A adjustment for an installment period because 
this computation would create a significant administrative burden for 
taxpayers. The commentator also requested that the final regulations 
provide simplifying rules that allow taxpayers to compute the section 
263A adjustment for an installment period by multiplying the prior 
year's absorption ratio by the inventory on hand at the end of the 
annualization period or by

[[Page 44343]]

estimating the annual adjustment and prorating it to each annualization 
period.
    Section 263A expenses are added to the items covered by the rules 
provided in Sec.  1.6655-2(g) of the final regulations for items that 
substantially affect taxable income but cannot be accurately determined 
by the installment due date. Therefore, taxpayers may use reasonable 
estimates from existing data with respect to the amount of adjustments 
required under section 263A if that amount cannot be determined with 
reasonable accuracy by the installment due date.
J. LIFO
    One commentator noted that although the proposed regulations 
provide simplifying rules to determine the internal inflation index for 
taxpayers using internal dollar-value LIFO inventory methods, the 
proposed regulations do not provide rules for taxpayers to determine an 
external inflation index under the inventory price index computation 
(IPIC) LIFO method. The commentator requested that the final 
regulations include a rule that allows taxpayers to determine an 
estimated external inflation index by multiplying the prior year 
inventory mix by the applicable inflation index for the annualization 
period. The commentator also requested that the final regulations 
include a rule that allows a taxpayer that elected to use final indices 
to use preliminary indices if the final indices for the appropriate 
month have not been published. The dollar-value LIFO inventory method 
includes the use of external indexes, such as the IPIC LIFO method, as 
well as internal indexes. Therefore, the IRS and Treasury Department do 
not believe that a separate rule is necessary for the use of external 
inflation indexes.
K. Advance Payment
    One commentator noted that the proposed regulations do not address 
how a taxpayer who defers revenue either under Sec.  1.451-5(c) or Rev. 
Proc. 2004-34 (2004-1 CB 991) should account for an advance payment to 
determine annualized taxable income. Section 1.451-5(c) and Rev. Proc. 
2004-34 generally allow a taxpayer to defer recognition of a qualifying 
advance payment for a limited time but only to the extent that 
financial statements also defer recognition of the income. The 
commentator requested that the final regulations include a rule that 
allows a taxpayer using the deferral method under Sec.  1.451-5(c) or 
Rev. Proc. 2004-34 to not recognize an advance payment as income in the 
annualization period until the advance payment is recognized in the 
taxpayer's applicable financial statements for the annualization 
period. The commentator also requested that the final regulations allow 
a taxpayer using a deferral method to recognize any portion of an 
advance payment on the last day of the taxable year in which the 
advance payment is required to be recognized under Sec.  1.451-5(c) or 
Rev. Proc. 2004-34, if that portion of the advance payment is not 
recognized in the taxpayer's financial statements for any of the 
annualization periods arising within the limited time provided in Sec.  
1.451-5(c) or Rev. Proc. 2004-34. See Sec.  601.601(d)(2)(ii)(b).
    The IRS and Treasury Department agree with the commentator that the 
final regulations should specifically address advance payments and that 
the rule should be consistent with Sec.  1.451-5 and Rev. Proc. 2004-
34. Pursuant to Sec.  1.6655-2(f)(3)(i)(A) of the final regulations, if 
the taxpayer uses the method of accounting provided in Sec.  1.451-
5(b)(1)(ii) for an advance payment, the advance payment is includible 
in computing taxable income under that method of accounting except 
that, if Sec.  1.451-5(c) applies, any amount not included in computing 
taxable income by the end of the second taxable year following the year 
in which a substantial advance payment is received, and not previously 
included in accordance with the taxpayer's accrual method of 
accounting, is includible in computing taxable income on the last day 
of such second taxable year. In addition, Sec.  1.6655-2(f)(3)(i)(B) of 
the final regulations provides that if the taxpayer uses the deferral 
method provided in section 5.02 of Rev. Proc. 2004-34 for an advance 
payment, the advance payment is includible in computing taxable income 
under that method of accounting for annualization purposes. But any 
amount not included in computing taxable income by the end of the 
taxable year succeeding the taxable year of receipt is includible in 
computing taxable income on the last day of such succeeding taxable 
year. The final regulations provide an example involving an advance 
payment.
L. Extraordinary Items
    One commentator suggested that the final regulations provide 
special treatment for extraordinary items for purposes of computing 
annualized taxable income and suggested that the regulations consider 
the extraordinary items listed in Sec.  1.1502-76(b)(2)(ii)(C). The 
commentator requested that the final regulations not require taxpayers 
to take into account extraordinary items under the general rules of 
Sec.  1.6655-2(f) of the proposed regulations because doing so would 
result in a distortion of annualized taxable income. The commentator 
requested that extraordinary items be taken into account after 
annualizing taxable income. The commentator requested that the final 
regulations provide that taxpayers begin to account for extraordinary 
items in the annualization period in which the extraordinary event 
occurs or, alternatively, in the annualization period in which it 
becomes reasonably foreseeable that the extraordinary event will occur. 
The commentator also requested that the final regulations provide an 
exclusive list of extraordinary items by referring to the list of 
extraordinary items in Sec.  1.1502-76(b)(2)(ii)(C) with certain 
modifications.
    The IRS and Treasury Department agree with the commentator that the 
annualization of extraordinary items could result in a distortion of 
annualized taxable income. The final regulations include a list of 
extraordinary items similar to the items in Sec.  1.1502-
76(b)(2)(ii)(C). Included in the list of extraordinary items in the 
final regulations are NOL deductions and section 481(a) adjustments. In 
addition, the final regulations also provide a de minimis rule wherein 
only extraordinary items in excess of $1,000,0000 will be required to 
be accounted for after annualizing taxable income. However, this de 
minimis rule does not apply to NOL deductions and section 481(a) 
adjustments.
M. Section 481(a) Adjustments
    The rule in Sec.  1.6655-2(f)(2)(iv) of the proposed regulations 
provides that a taxpayer takes into account a section 481(a) adjustment 
related to an automatic accounting method change during an 
annualization period only if a 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. One 
commentator suggested that the rule provided by Sec.  1.6655-
2(f)(2)(iv) of the proposed regulations creates administrative burdens 
for taxpayers, is inconsistent with the depreciation and amortization 
rules provided in Sec.  1.6655-2(f)(2)(v) of the proposed regulations, 
and could result in the filing of incomplete Forms 3115. The 
commentator suggested that the rule in Sec.  1.6655-2(f)(2)(iv)(B)(1) 
of the proposed regulations causes an administrative burden by 
requiring taxpayers to recompute taxable income using a different 
method of accounting than would be used to calculate taxpayers' tax 
provision for financial

[[Page 44344]]

accounting purposes, which generally allows taxpayers to take into 
account section 481(a) adjustments for an automatic accounting method 
change if they anticipate that the change will be timely filed. The 
commentator also suggested that if the final regulations adopt the rule 
in Sec.  1.6655-2(f)(2)(v) of the proposed regulations that allows 
taxpayers to anticipate capital expenditures to estimate depreciation 
expense for an annualization period, the final regulations should 
provide a similar rule for automatic accounting method changes by 
allowing taxpayers to take into account section 481(a) adjustments 
resulting from anticipated filings for automatic accounting method 
changes.
    The final regulations provide that, in general, any section 481(a) 
adjustment that results from a change in accounting method that is 
approved by the Commissioner and properly reflected in the taxpayer's 
return for the tax year is taken into account as an extraordinary item 
deemed to occur on the first day of the tax year for annualization 
purposes. The final regulations provide that a section 481(a) 
adjustment may be taken into account in this manner notwithstanding (i) 
the annualization period in which the Form 3115 is filed (including 
requests filed after year-end), (ii) whether the requested change in 
accounting method is considered an automatic or non-automatic 
accounting method change request, (iii) whether the section 481(a) 
adjustment is positive or negative, and (iv) the date on which the 
taxpayer receives the approval of the Commissioner. In allowing for a 
section 481(a) adjustment to be taken into account in this manner, 
taxpayers should be aware that they will be subject to a section 6655 
addition to tax for an underpayment of estimated tax in an installment 
period caused from taking into account a section 481(a) adjustment the 
taxpayer expected to be incurred but for which the taxpayer does not 
receive the consent of the Commissioner to change its method of 
accounting for that particular tax year. The final regulations also 
provide an exception to the general rule. Under the exception a 
taxpayer may choose to treat the filing of a Form 3115 as the date on 
which the extraordinary item is deemed to occur rather than the first 
day of the tax year but only with respect to the section 481(a) 
adjustment (or a portion thereof) that is recognized in the year of 
change. Use of this exception will impact the period in which the 
taxpayer will be required to take into account the new method of 
accounting as provided in Sec.  1.6655-6.
N. Simplify the 52/53 Week Taxable Year Rules
    One commentator suggested that the 52/53 week taxable year rules 
provided by Sec.  1.6655-2(e) of the proposed regulations are too 
complex and administratively burdensome. The commentator suggested that 
the final regulations not include the 52/53 week taxable year rules in 
Sec.  1.6655-2(e) of the proposed regulations and rely on the general 
concept of annualization. The commentator suggested that taxpayers with 
52/53 week taxable years under section 441(f) know how to annualize 
their applicable annualization period without the rules provided by 
Sec.  1.6655-2(e) of the proposed regulations.
    The purpose of the annualized income installment method is to give 
taxpayers a method of determining annualized income based on the actual 
facts that occur in the annualization period. Therefore, with limited 
exceptions, the IRS and Treasury Department drafted the proposed 
regulations and these final regulations to provide rules that only 
allow taxpayers to take into account items of income and expense that 
arise in the applicable annualization period. The IRS and Treasury 
Department recognize that the 52/53 week taxable year rules provided by 
Sec.  1.6655-2(e) of the proposed regulations are complex. Although the 
final regulations retain the 52/53 week taxable year rules provided by 
Sec.  1.6655-2(e) of the proposed regulations, the final regulations 
also provide a safe harbor that allows a taxpayer with a 52/53 week 
taxable year to determine its annualization period on the month that 
ends closest to the end of its applicable thirteen-week period or four-
week period that ends within the applicable annualization period. 
However, an eligible taxpayer may only use this safe harbor if it is 
used for determining annualization periods for all required 
installments for the taxable year.
O. Controlled Foreign Corporations, Partnerships, and Other Pass-
Through Entities
    One commentator suggested that the final regulations provide rules 
on how taxpayers should take into account distributions from a section 
936 corporation or a controlled foreign corporation to determine 
annualized taxable income for an installment period. The commentator 
also suggested that the final regulations provide rules on how 
taxpayers should take into account a distributive share of income from 
passthrough entities other than partnerships, such as trusts, S 
corporations, and real estate investment trusts (REITs), to determine 
annualized taxable income for an installment period. The commentator 
requested that the final regulations expand the scope of Sec.  1.6655-
2(f)(2)(vi) of the proposed regulations to incorporate the statutory 
provisions for section 936(h), section 951(a), and closely held REITs, 
and also provide rules to take into account the distributive share of 
income received from other types of passthrough entities.
    Section 1.6655-2(f)(3)(v) of the final regulations expands the rule 
in Sec.  1.6655-2(f)(2)(vi) of the proposed regulations to provide for 
the statutory rules in section 6655(e)(4) and section 6655(e)(5) for 
taking into account subpart F income, income under section 936(h), and 
dividends received by closely held REITs when computing any annualized 
income installment. In addition, Sec.  1.6655-2(f)(3)(v)(D) adds a rule 
that requires items from passthrough entities other than partnerships 
and closely held REITs to be taken into account in computing any 
annualized income installment in a manner similar to the manner under 
which partnership items are taken into account under Sec.  1.6655-
2(f)(3)(v)(A) of the final regulations.

3. Comments Concerning Sec.  1.6655-3 (Adjusted Seasonal Installment 
Method) of the Proposed Regulations

A. Adjusted Seasonal Installment Method and Alternative Minimum Tax
    One commentator suggested that the determination of whether a 
corporation qualifies for the adjusted seasonal installment method 
under section 6655(e)(3), and the amount of the required installment 
under this method, is based only on the corporation's taxable income 
and tax on that taxable income. The commentator requested that the 
final regulations clarify that a corporation using the adjusted 
seasonal installment method is only required to make estimated tax 
payments with respect to taxable income and tax on that taxable income, 
and not on the alternative minimum tax (AMT) or any other tax. Any 
required installment must include AMT because AMT is included in the 
definition of tax in section 6655(g)(1) and Sec.  1.6655-1(g)(1) of the 
final regulations. Including AMT in the determination of tax is 
consistent with the general annualization method and adjusted seasonal 
installment method and recognizes the overall separate and parallel 
nature of the AMT. Therefore, Sec.  1.6655-3(d)(4) of the final 
regulations provides that the amount of an installment determined using 
the adjusted seasonal installment method

[[Page 44345]]

must properly take into account the amount of any AMT under section 55 
that would apply for the period of the computation. For this purpose, 
the amount of any AMT that would apply is determined by applying to 
alternative minimum taxable income, tentative minimum tax, and AMT, the 
rules provided in Sec.  1.6655-3(c) of the final regulations for 
determining the amount of an installment using the adjusted seasonal 
installment method.
B. Adjusted Seasonal Installment Method Base Period Percentage
    Section 6655(e)(3)(D)(i) provides that the base period percentage 
for any period of months is the average percent that the taxable income 
for the corresponding months in each of the 3 preceding taxable years 
bears to the taxable income for the 3 preceding taxable years. One 
commentator requested that the final regulations clarify whether the 
base period percentage provided in Sec.  1.6655-3(d)(1) of the proposed 
regulations can be negative.
    The rule provided in section 6655(e)(3)(D)(i) requires that the 
base period percentage be computed based on taxable income. The rule 
does not provide that taxpayers take into account a loss. Therefore, a 
taxpayer can never have a negative base period percentage. The lowest 
number the base period percentage can equal is zero. Section 1.6655-
3(d)(1) of the final regulations provides that the base period 
percentage is computed based on taxable income, which the IRS and 
Treasury Department believe provides a clear rule that an overall loss 
for the applicable period of months used to calculate the base period 
percentage cannot be used to compute the base period percentage. If a 
taxpayer has an overall loss for an applicable period of months used in 
the computation of the base period percentage, the taxpayer must use 
zero in place of the loss.

4. Comments Concerning Sec.  1.6655-4 (Large Corporations) of the 
Proposed Regulations

A. Section 381 Transactions to Determine Large Corporation Status
    One commentator requested that the final regulations modify the 
rules in Sec.  1.6655-4(c)(2) of the proposed regulations to clarify 
that, when computing taxable income for a year in which there is a 
section 381 transaction to determine if a corporation is a large 
corporation, the adjustment for the section 381 transaction relates 
only to the portion of taxable income applicable to the transferred 
assets.
    Generally, for a transaction to qualify under section 381, an 
acquiring corporation must acquire a majority of the assets of the 
acquired corporation. Section 1.6655-4(c)(2) of the proposed 
regulations provides that when determining if a corporation is a large 
corporation for a taxable year in which a section 381 transaction 
occurs, an acquiring corporation must include in its income the 
distributor or transferor corporation's income for the taxable year up 
to and including the date of distribution or transfer. This rule 
requires the acquiring corporation to include 100 percent of the 
distributor or transferor corporation's taxable income (or loss) in the 
acquiring corporation's income even if the acquiring corporation 
acquires less than 100 percent of the assets of the distributor or 
transferor corporation as long as section 381 applies to the 
transaction. The final regulations do not include a rule providing that 
the adjustment for a section 381 transaction relates only to the 
portion of taxable income applicable to the transferred assets when 
computing taxable income for a year in which there is a section 381 
transaction to determine if a corporation is a large corporation. The 
IRS and Treasury Department believe that such a rule would be 
unnecessarily complex considering that the rule in the proposed 
regulations is both taxpayer favorable (if there are losses of the 
distributor or transferor corporation) and taxpayer unfavorable (if 
there is taxable income of the distributor or transferor corporation) 
and considering that in these transactions, the acquiring corporation 
generally acquires a majority of the distributor or transferor 
corporation's assets. However, Sec.  1.6655-4(c)(2)(i)(B) of the final 
regulations amends Sec.  1.6655-4(c)(2)(i)(B) of the proposed 
regulations to clarify that an acquiring corporation takes into account 
the distributor or transferor corporation's taxable income or loss for 
purposes of determining whether a corporation is a large corporation 
for a taxable year in which a section 381 transaction occurs.
B. Aggregation
    One commentator suggested that the rule provided by Sec.  1.6655-
4(d)(2) of the proposed regulations, which does not allow taxpayers to 
take into account a taxable loss of a member of a controlled group of 
corporations for a taxable year during the testing period, results in a 
distorted view of the taxable income of the controlled group of 
corporations. The commentator requested that the final regulations 
modify the rule in Sec.  1.6655-4(d)(2) of the proposed regulations to 
allow taxpayers to take into account losses of a member of a controlled 
group of corporations when determining whether a corporation is 
considered a large taxpayer because this is consistent with the 
principles for the computation of consolidated taxable income.
    Section 6655(g)(2)(B)(ii) requires that the $1,000,000 exemption be 
divided among members of a controlled group under rules similar to the 
rules of section 1561. The purpose of the statute is to limit members 
of a controlled group, as an aggregate, to $1,000,000 of exemption from 
large corporation treatment. The aggregation rule in Sec.  1.6655-
4(d)(2) is intended to allow a controlled group to quickly determine 
whether the controlled group must allocate the $1,000,000 limitation 
among the members of the group. It is not intended to treat the 
controlled group as a single taxpayer, in which all members of the 
group will be treated as a large corporation, if the taxable income of 
the controlled group, as an aggregate, is over $1,000,000. Thus, for 
example, if member A of a controlled group had taxable income of 
$900,000 and member B of the group had taxable income greater than 
$1,000,000, the controlled group could choose to allocate $900,000 to 
member A so that member A will not be treated as a large corporation, 
but member B would be treated as a large corporation no matter how much 
of the $1,000,000 limitation is allocated to member B. This is 
consistent with the rules under section 1561.

5. Comments Concerning Sec.  1.6655-5 (Short Taxable Years) of the 
Proposed Regulations

A. Taxpayer's Initial Taxable Year
    One commentator noted that a taxpayer is not required to choose its 
taxable year until it files a tax return on its chosen basis in 
accordance with Sec.  1.441-1(c)(1). The commentator requested that the 
final regulations modify the rule in Sec.  1.6655-5(c)(1)(ii) of the 
proposed regulations to provide that a taxpayer will not be penalized 
if, in its initial taxable year, it makes estimated tax payments based 
on a presumption that the taxpayer will have a taxable year that is a 
calendar year even if the taxpayer subsequently chooses a fiscal year.
    Because a taxpayer has until the date it files its initial tax 
return to choose its taxable year, the final regulations modify the 
rule in Sec.  1.6655-5(c)(1)(ii) of the proposed regulations to allow a 
taxpayer with an initial short taxable year to make estimated tax 
payments as

[[Page 44346]]

though it chose to be a calendar year taxpayer until the taxpayer files 
its return for its initial short taxable year. Pursuant to this 
modified rule, a taxpayer with an initial short taxable year may make 
estimated tax payments as though it were a calendar year taxpayer until 
it files its tax return for its initial taxable year.
B. Taxpayer's Final Taxable Year
    One commentator suggested that Sec. Sec.  1.6655-5(d)(1), 1.6655-
5(d)(2), and 1.6655-5(d)(3) of the proposed regulations provide rules 
that may require taxpayers with short taxable years to make installment 
payments based on an applicable percentage that is more than the 
standard 25 percent per installment period. The commentator suggested 
that these rules may result in a section 6655 addition to tax being 
imposed on a taxpayer who makes annualization payments based on 25 
percent of its annualized tax and later in the year discovers that, due 
to an unforeseen termination of its tax year, it should have made its 
annualization payments based on a higher applicable percentage because 
it will have fewer than four installment payments. The commentator also 
suggested that the rule in Sec.  1.6655-2(h) of the proposed 
regulations, which addresses events arising after an installment due 
date that were not reasonably foreseeable, does not appear to protect a 
taxpayer that makes an installment payment based on 25 percent of its 
annualized tax and later discovers that it should have based its 
installment payment on a higher applicable percentage because it had an 
unforeseen termination of its tax year resulting in a short taxable 
year. The commentator requested that the final regulations revise the 
rules in Sec. Sec.  1.6655-5(d)(1), 1.6655-5(d)(2), and 1.6655-5(d)(3) 
of the proposed regulations so that payments made for an installment 
period in a short taxable year do not exceed 25 percent. As an 
alternative, the commentator requested that the final regulations 
revise the rules in Sec.  1.6655-2(h) of the proposed regulations to 
allow a taxpayer with an unexpected termination of its tax year to make 
a payment with its final required installment equal to the remaining 
portion of 100 percent of its required annual payment to avoid a 
penalty on its earlier required installments.
    A taxpayer should not be penalized for making payments based on the 
applicable percentage of 25 percent for each installment period when it 
does not know that it will have an early termination year that will 
result in it making less than four installment payments. Therefore, 
Sec.  1.6655-5(d)(4) of the final regulations provides a rule 
addressing the applicable percentage for an installment period in which 
the taxpayer does not reasonably expect that the taxable year will be 
an early termination year. In the case of any required installment 
determined under section 6655(e) in which the taxpayer does not know 
that the taxable year will be an early termination year, the applicable 
percentage under section 6655(e)(2)(B)(ii) and Sec.  1.6655-5(d)(3)(i) 
of the final regulations is the applicable percentage for each 
installment period with the remaining balance of the estimated tax 
payment for the year due with the final installment.
C. Internal Revenue Manual Provisions and Annualizing Taxable Income in 
an Initial or Final Taxable Year
    One commentator noted that Internal Revenue Manual Part 
20.1.3.6.3(2) provides that a corporation filing a short period return 
that is either an initial or final return is not required to annualize 
its taxable income to compute the penalty. The commentator requested 
that the final regulations clarify this rule.
    The rule in IRM 20.1.3.6.3(2) provides that if a taxpayer has a 
short taxable year that is either an initial or final year, the 
taxpayer should not annualize its taxable income based on a full 12 
month period. Instead, the taxpayer should annualize its taxable income 
based on the number of months in the short taxable year. This rule was 
intended to be provided in Sec.  1.6655-5(g)(2) of the proposed 
regulations. However, the computational rule in Sec.  1.6655-5(g)(2) of 
the proposed regulations is incorrect and does not result in the 
computation of the correct amount for every installment payment during 
a short taxable year. The final regulations revise the rule in Sec.  
1.6655-5(g)(2) of the proposed regulations to provide that a taxpayer 
computes its annualized income installment by determining the tax on 
the basis of the annualized income for the annualization period, 
dividing the resulting tax by 12, multiplying that result by the number 
of months in the short taxable year, and finally multiplying that 
result by the applicable percentage for the annualized income 
installment. The final regulations also revise an example to reflect 
the new computational rule.
D. Preceding Taxable Year Rule for Large Corporations When the 
Preceding Taxable Year Is a Short Year
    One commentator suggested that the rule provided in Sec.  1.6655-
5(h) of the proposed regulations, which requires taxpayers to compute 
the preceding year tax on an annual basis if the preceding taxable year 
was a short taxable year when using section 6655(d)(2) to determine 
their first installment, is not authorized by section 6655. Consistent 
with Sec.  1.6655-1(g)(3), the final regulations do not adopt the rule 
provided in Sec.  1.6655-5(h) of the proposed regulations.

6. Change in Method of Accounting

    The rule in Sec.  1.6655-6(b) of the proposed regulations provides 
that 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 is used in determining any 
required installment if, and only if, a copy of the Form 3115 has been 
mailed to the IRS National Office on or before the last day of the 
annualization period. One commentator suggested that the rule provided 
by Sec.  1.6655-6(b) of the proposed regulations creates administrative 
burdens for taxpayers, is inconsistent with the depreciation and 
amortization rules provided in Sec.  1.6655-2(f)(2)(v) of the proposed 
regulations, and could result in the filing of incomplete Forms 3115. 
The commentator suggested that the rule in Sec.  1.6655-6(b) of the 
proposed regulations causes an administrative burden by requiring 
taxpayers to recompute taxable income using a different method of 
accounting than would be used to calculate taxpayers' tax provision for 
financial accounting purposes, which generally allows taxpayers to take 
into account an automatic accounting method change if they anticipate 
that the change will be timely filed.
    Consistent with the rules for section 481(a) adjustments as 
discussed in heading (2)(M) above, the final regulations require a 
taxpayer to take into account any change in method of accounting for 
which the taxpayer has received the consent of the Commissioner in the 
same manner the taxpayer chooses to treat the section 481(a) adjustment 
resulting from such a change (for example, as of the first day of the 
taxable year or as of the date the Form 3115 was filed). For a change 
in accounting method that does not result in a section 481(a) 
adjustment, the final regulations provide that in the year of change 
the taxpayer will have the choice for annualization purposes to either 
use the new method as of the first day of the taxable year or as of the 
date the Form 3115 was filed.

[[Page 44347]]

Effect on Other Documents

    The following publications are obsolete for tax years beginning 
after September 6, 2007:
    Revenue Ruling 67-93 (1967-1 CB 366).
    Revenue Ruling 76-450 (1976-2 CB 444).
    Revenue Ruling 78-257 (1978-1 CB 440).
    Revenue Ruling 67-93 (1967-1 CB 366) provides that the entire 
amount of a net operating loss carryover should be deducted from income 
prior to annualization under the annualized income installment method. 
The rational underlying the conclusion in Rev. Rul. 67-93 was based on 
the position that each annualization period should be treated as a 
short taxable year. The final regulations specifically provide that an 
annualization period is not treated as a short taxable year. Therefore, 
Rev. Rul. 67-93 will be removed when the final regulations are 
effective.
    Revenue Ruling 76-450 (1976-2 CB 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 final regulations provide 
specific rules related to address the application of section 461(h) and 
real property taxes for purposes of the annualized income installment 
method. As a result of the rules provided in the final regulations, 
Rev. Rul. 76-450 is no longer applicable and will be removed when the 
final regulations are effective. See Sec.  601.601(d)(2)(ii)(b).
    Revenue Ruling 78-257 (1978-1 CB 440) provides that the term tax, 
as defined in section 6655, includes the amount of tax resulting from 
the recomputation of a prior year's investment credit at the applicable 
rate for the current year. In Rev. Rul. 78-257, a corporation incurred 
a net operating loss in 1975 but showed an amount of tax from the 
recomputation of the prior year's investment credit. For 1976 the 
corporation had a liability for income tax but made no deposits of 
estimated tax, relying on the former provision in section 6655 that 
allowed a taxpayer to base its estimated tax payments on an amount 
equal to the tax computed at the rates applicable to the taxable year 
but otherwise on the basis of the facts shown on the return of the 
corporation for, and the law applicable to, the preceding taxable year. 
The revenue ruling concludes that the corporation was subject to an 
addition to tax for the underpayment of estimated tax because it failed 
to pay on or before the prescribed installment due dates an amount 
equal to the tax resulting from the recomputation of the prior year's 
investment credit. However, as discussed in heading (1)(A) of the 
preamble, based on the holding in Berkshire Hathaway, Inc. v. United 
States, 802 F.2d 429 (Fed. Cir. 1986), Sec.  1.6655-1(g)(1)(iii) of the 
final regulations provides that, unless otherwise provided, for 
purposes of the definition of tax as used in section 6655, a recapture 
of tax, such as a recapture provided by section 50(a)(1)(A) and any 
other similar provision, is not considered to be a tax imposed by 
section 11. Therefore, Rev. Rul. 78-257 is no longer applicable and 
will be removed when the final regulations are effective. See Sec.  
601.601(d)(2)(ii)(b).

Special Analyses

    It has been determined that this Treasury decision 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, the notice of proposed rulemaking preceding this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small businesses.

Drafting Information

    The principal authors of these regulations are Joseph P. Dewald, 
formerly of the Office of Associate Chief Counsel (Procedure and 
Administration), and Timothy S. Sheppard, Office of Associate Chief 
Counsel (Procedure and Administration).

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.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:

PART 1--INCOME TAXES

0
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). * * *


0
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/applicability date.

0
Par. 3. Section 1.56-1(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 
estimated tax liability. See Sec.  1.6655-7, as contained in 26 CFR 
part 1 revised as of April 1, 2007, for special rules for estimating 
the corporate alternative

[[Page 44348]]

minimum tax book income adjustment under the annualization exception.
    (5) Effective/applicability date. Paragraph (e)(4) of this section 
is applicable for taxable years beginning after September 6, 2007.


Sec. Sec.  1.6154-1, 1.6154-2, 1.6154-3, 1.6154-4, and 1.6154-
5  [Removed].

0
Par. 4. Sections 1.6154-1, 1.6154-2, 1.6154-3, 1.6154-4, and 1.6154-5 
are removed.

0
Par. 5. Section 1.6425-2(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.  1.6425-1, 
this section, Sec. Sec.  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/applicability 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 September 6, 
2007.

0
Par. 6. Section 1.6425-3 is amended by revising paragraph (f) to 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 is 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) Effective/applicability date: This paragraph (f) is applicable 
to applications for adjustments of overpayments of estimated income tax 
that are filed in taxable years beginning after September 6, 2007.

0
Par. 7. 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.
    (1) In general.
    (2) Exception.
    (e) Large corporation required to pay 100 percent of current 
year tax.
    (1) In general.
    (2) May use last year's tax for first 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/applicability 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.
    (3) Annualization period not a short taxable year.
    (d) Election of different annualization periods.
    (e) 52-53 week taxable year.
    (f) Determination of taxable income for an annualization period.
    (1) In general.
    (i) Items of income.
    (ii) Items of deduction.
    (iii) Losses.
    (2) Certain deductions required to be allocated in a reasonably 
accurate manner.
    (i) In general.
    (ii) Application of the reasonably accurate manner requirement 
to certain charitable contributions, recurring items, and 12-month 
rule items.
    (iii) Reasonably accurate manner defined.
    (iv) Special rule for certain real property tax liabilities.
    (v) Examples.
    (3) Special rules.
    (i) Advance payments.
    (A) Advance payments under Sec.  1.451-5(b)(1)(ii).
    (B) Advance payments under Rev. Proc. 2004-34.
    (ii) Extraordinary items.
    (A) In general.
    (B) De minimis extraordinary items.
    (C) Special rules for net operating loss deductions and section 
481(a) adjustments.
    (iii) Credits.
    (A) Current year credits.
    (B) Credit carryovers.
    (iv) Depreciation and amortization.
    (A) Estimated annual depreciation and amortization.
    (B) Safe harbors.
    (1) Proportionate depreciation allowance.
    (2) 90 percent of preceding year's depreciation.
    (3) Safe harbor operational rules.
    (C) Short taxable years.
    (v) Distributive share of items
    (A) Member of partnership.
    (B) Treatment of subpart F income and income under section 
936(h).
    (1) General rule.
    (2) Prior year safe harbor.
    (i) General rule.
    (ii) Special rule for noncontrolling shareholder.
    (C) Dividends from closely held real estate investment trust.
    (1) General rule.
    (2) Closely held real estate investment trust.
    (D) Other passthrough entities.
    (vi) Alternative minimum taxable income exemption amount.
    (vii) Examples.
    (g) Items that substantially affect taxable income but cannot be 
determined accurately by the installment due date.
    (1) In general.
    (2) Example.
    (h) Effective/applicability 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.
    (4) Alternative minimum tax.
    (e) Example.
    (f) Effective/applicability 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.

[[Page 44349]]

    (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/applicability 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 at least four months but less than twelve 
months.
    (ii) Exceptions.
    (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.
    (4) Applicable percentage for installment period in which 
taxpayer does not reasonably expect that the taxable year will be an 
early termination year.
    (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) Effective/applicability date.
Sec.  1.6655-6 Methods of accounting.
    (a) In general.
    (b) Accounting method changes.
    (c) Examples.
    (d) Effective/applicability date.
Sec.  1.6655-7 Addition to tax on account of excessive adjustment 
under section 6425.
0
Par. 8. Sections 1.6655-1 and 1.6655-2 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 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--(1) In general. 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--
    (i) 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
    (ii) 100 percent of the tax shown on the return for the preceding 
taxable year.
    (2) Exception. This paragraph (d)(1)(ii) does not apply if the 
preceding taxable year was not a taxable year of 12 months or the 
corporation did not file a return for the 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)(1)(ii) of this section does 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 does not apply for purposes of determining the amount 
of the 1st required installment for any taxable year. Any reduction in 
such 1st installment by reason of the preceding sentence is recaptured 
by increasing the amount of the next required installment determined 
under paragraph (d)(1)(i) 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)(i) 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. Unless 
otherwise provided, 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 
is 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
    (ii) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the Internal Revenue Code.
    (2)(i) 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 is treated as a 
tax imposed by section 11.
    (ii) 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 is treated as 
a tax imposed by section 11.
    (iii) Unless otherwise provided in the Internal Revenue Code or 
Treasury regulations, for purposes of the definition of ``tax'' as used 
in this section, a recapture of tax, such as a recapture provided by 
section 50(a)(1)(A), and any other similar provision, is not considered 
to be a tax imposed by section 11.
    (iv) For the purposes of paragraph (d) of this section, the return 
for the preceding taxable year is the Federal income tax return for 
such taxable year

[[Page 44350]]

that is required by section 6012(a)(2). However, if an amended Federal 
income tax return has been filed before the due date of an installment, 
then the return for the preceding taxable year is the Federal income 
tax return as amended. If an amended Federal income tax return has been 
filed on or after the due date for an installment, then the return for 
the preceding taxable year does not include for such installment period 
the Federal income tax return as amended subsequent to the due date for 
such installment. Paragraph (d) 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.
    (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 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 CB 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 is illustrated by the following examples:

    Example 1. (i) X, a calendar year corporation, estimates its tax 
liability for its taxable year ending December 31, 2009, 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, 2008, 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 15, 2009, 
June 15, 2009, September 15, 2009, and December 15, 2009, 
respectively. X reported a tax liability of $88,900 on its return 
due March 15, 2010. X had a $5,000 credit against tax for tax year 
2009 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 2009 for any of the four installments, determined as follows:
    (A) Tax as defined in paragraph (g) of this section for 2009 
($88,900-$5,000) = $83,900
    (B) Tax as defined in paragraph (g) of this section for 2008 = 
$74,900
    (C) 100% of the lesser of this paragraph (j), Example 1 (i)(A) 
or (i)(B) = $74,900
    (D) Amount of estimated tax required to be paid on or before 
each installment date (25% of $74,900) = $18,725
    (E) Deduct amount paid on or before each installment date = 
$18,725
    (F) Amount of underpayment for each installment date = $0
    (ii) [Reserved].
    Example 2. (i) Facts. Y, a calendar year corporation, estimates 
its tax liability for its taxable year ending December 31, 2009, 
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, 2008. 
Y paid no installment of estimated tax on or before April 15, 2009, 
June 15, 2009, or September 15, 2009, but made a payment of $63,000 
on December 15, 2009. On March 15, 2010, Y filed its income tax 
return showing a tax of $70,000. Y had no credits against tax for 
tax year 2009. Of the $63,000 paid by Y on December 15, 2009, 
$17,500 is applied to each of the first three installments due on 
April 15, June 15, and September 15, 2009, 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 2009 = 
$70,000
    (B) Tax as defined in paragraph (g) of this section for 2008 = 
$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 each of 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 4-16-09 through 12-
15-09), computed as 244/365 x $17,500 x 8% = $936
    (B) Second installment (underpayment period 6-16-09 through 12-
15-09), computed as 183/365 x $17,500 x 8% = $702
    (C) Third installment (underpayment period 9-16-09 through 12-
15-09), computed as 91/365 x $17,500 x 8% = $349
    (D) Fourth installment (underpayment period 12-16-09 through 3-
15-10), 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/applicability date. This section applies to taxable 
years beginning after September 6, 2007.


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 is 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 (after 
reducing the annualized tax by the amount of any allowable credits) for 
the taxable year

[[Page 44351]]

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 is treated as a month.
    (3) Annualization period not a short taxable year. An annualization 
period is not treated as a short taxable year for purposes of 
determining the taxable income of an annualization period.
    (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''.
    (3) The application of the annualized income installment method is 
illustrated by the following example:

    Example. (i) ABC, a calendar year corporation, had a taxable 
year of less than twelve months for tax year 2008 and no credits 
against tax for tax year 2009. ABC made an estimated tax payment of 
$15,000 on the installment dates of April 15, 2009, June 15, 2009, 
September 15, 2009, and December 15, 2009, respectively. Assume 
that, under paragraph (d)(1) of this section, ABC 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 15, 2009, 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 (d)(3), Example (ii)(A)(1) = $41,750
    (3) 100% of this paragraph (d)(3), Example (ii)(A)(2) = $41,750
    (4) 25% of this paragraph (d)(3), 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 
($10,438), 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, 2009.
    (iii)(A) To determine whether the installment payments made on 
or before June 15, 2009, 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 (d)(3), Example (iii)(A)(1) = $58,130
    (3) 100% of this paragraph (d)(3), Example (iii)(A)(2) = $58,130
    (4) 50% of this paragraph (d)(3), Example (iii)(A)(3) less 
$10,438 (amount due with the first installment) = $18,627
    (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 ($18,627), 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, 2009.
    (iv)(A) To determine whether the installment payments made on or 
before September 15, 2009, 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 (d)(3), Example (iv)(A)(1) = $66,821
    (3) 100% of this paragraph (d)(3), Example (iv)(A)(2) = $66,821
    (4) 75% of this paragraph (d)(3), 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 ($21,051), 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, 2009, installment unless another 
exception applies to this installment payment.
    (v)(A) To determine whether the installment payments made on or 
before December 15, 2009, 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 (d)(3), Example (v)(A)(1) = $65,150
    (3) 100% of this paragraph (d)(3), Example (v)(A)(2) = $65,150
    (4) 100% of this paragraph (d)(3), 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

[[Page 44352]]

100 percent of the tax determined by placing on an annualized basis 
the taxable income for the first 10-month period ($15,034), 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, 2009, 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) = $0
    (B) Second installment (no underpayment) = $0
    (C) Third installment (underpayment period 9-16-09 through 12-
15-09), computed as \91/365\ x $5,116 x 8% = $102
    (D) Fourth installment (underpayment period 12-16-09 through 3-
15-10), computed as \90/365\ x $5,150 x 8% = $102
    (E) Total of this paragraph (d)(3), Example (vi)(A) through (D) 
= $204

    (e) 52-53 week taxable year. (1) Generally, except as provided in 
the alternative rule in paragraph (e)(4) of this section, 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 
are 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 is--
    (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 number of 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 is 
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) As an alternative to using the 52/53 week taxable year rules 
provided in paragraphs (e)(1), (e)(2), and (e)(3) of this section, a 
taxpayer whose taxable year constitutes 52 or 53 weeks in accordance 
with section 441(f) may base its annualization period on the month that 
ends closest to the end of its applicable 4-week period or 13-week 
period that ends within the applicable annualization period. This 
alternative may only be used if it is used for determining 
annualization periods for all required installments for the taxable 
year.
    (5) The following examples illustrate the rules of this paragraph 
(e):

    Example 1. Corporation ABC, 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 28, 
2007, ABC 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 28th, the 
thirteenth Friday of ABC's taxable year. For purposes of its third 
required installment, the first 6 months of ABC's taxable year will 
end on June 27th, the twenty-sixth Friday of ABC's taxable year. For 
purposes of its fourth required installment, the first 9 months of 
ABC's taxable year will end on September 26th, the thirty-ninth 
Friday of ABC's taxable year.
    Example 2. Same facts as Example 1 except that ABC uses thirteen 
four-week periods and there are 52 weeks during ABC's taxable year 
beginning December 28, 2007, and ending December 26, 2008. For 
purposes of computing ABC's first and second required installments, 
ABC's annualized taxable income for the first three months will be 
the taxable income for the first three four-week periods of ABC's 
taxable year (December 28, 2007, through March 21, 2008) 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 ABC's third required 
installment, ABC's annualized taxable income for the first six 
months will be the taxable income for the first six four-week 
periods of ABC's taxable year (December 28, 2007, through June 13, 
2008) divided by 24 and multiplied by 52. For purposes of computing 
ABC's fourth required installment, ABC's annualized taxable income 
for the first nine months will be the taxable income for the first 
nine four-week periods of ABC's taxable year (December 28, 2007, 
through September 5, 2008) divided by 36 and multiplied by 52.
    Example 3. Same facts as Example 1 except that ABC uses the 
alternative method under paragraph (e)(4) of this section for 
computing its required installments for 2008. For purposes of 
computing its first and second required installments, the first 
three months of ABC's taxable year under paragraph (b)(1)(i) of this 
section will end on March 31, 2008, the month that ends closest to 
the end of ABC's applicable thirteen-week period for the first and 
second required installments. For purposes of ABC's third required 
installment, the first six months of ABC's taxable year will end on 
June 30, 2008, the month that ends closest to the end of ABC's 
applicable thirteen-week period for the third required installment. 
For purposes of ABC's fourth required installment, the first nine 
months of ABC's taxable year will end on September 30, 2008, the 
month that ends closest to the end of ABC's applicable thirteen-week 
period for the fourth required installment.

    (f) Determination of taxable income for an annualization period--
(1) In general. This paragraph (f) applies for purposes of 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). An item of income, 
deduction, gain or loss is to be taken into account in determining the 
taxable income and alternative minimum taxable income (and applicable 
tax and alternative minimum tax) for an annualization period in the 
manner provided in this paragraph (f). An item may not be taken into 
account in determining taxable income for any annualization period 
unless the item is properly taken into account by the last day of that 
annualization period and the item is properly taken into account in 
determining the taxpayer's taxable income and alternative minimum 
taxable income (and applicable tax and alternative minimum tax) for the 
taxable year that includes the annualization period.
    (i) Items of income. An item of income is taken into account in the 
annualization period in which the item is properly includible under the 
method of accounting employed by the taxpayer with respect to the item 
and in accordance with the appropriate provision of the Internal 
Revenue Code (for example, section 451 for accrual method taxpayers, 
section 453 for

[[Page 44353]]

installment sales or section 460 for long-term contracts).
    (ii) Items of deduction. An item of deduction is taken into account 
in the annualization period in which the item is properly deductible 
under the method of accounting employed by the taxpayer with respect to 
the item and in accordance with the appropriate provision of the 
Internal Revenue Code (for example, under the cash receipts and 
disbursements method of accounting, the deduction must be paid under 
Sec.  1.461-1(a)(1) and be otherwise deductible in computing taxable 
income; under an accrual method of accounting, the deduction must be 
incurred under Sec.  1.461-1(a)(2) and be otherwise deductible in 
computing taxable income). Section 170(a)(2) and Sec.  1.170A-11(b) 
(charitable contributions by accrual method corporations) and Sec.  
1.461-5 (recurring item exception) may not be taken into consideration 
by an accrual method taxpayer in any annualization period in 
determining whether an item of deduction has been incurred under Sec.  
1.461-1(a)(2) during that annualization period.
    (iii) Losses. An item of loss is to be taken into account during 
the annualization period in which events have occurred that permit the 
loss to be taken into account under the appropriate provision of the 
Internal Revenue Code.
    (2) Certain deductions required to be allocated in a reasonably 
accurate manner--(i) In general. The following deductions allowed for a 
taxable year must be allocated throughout the taxable year in a 
reasonably accurate manner (as defined in paragraph (f)(2)(iii) of this 
section), regardless of the annualization period in which the item is 
paid or incurred:
    (A) Real property tax deductions.
    (B) Employee and independent contractor bonus compensation 
deductions (including the employer's share of employment taxes related 
to such compensation).
    (C) Deductions under sections 404 (deferred compensation) and 419 
(welfare benefit funds).
    (D) Items allowed as a deduction for the taxable year by reason of 
section 170(a)(2) and Sec.  1.170A-11(b) (certain charitable 
contributions by accrual method corporations), Sec.  1.461-5 (recurring 
item exception) or Sec.  1.263(a)-4(f) (12-month rule).
    (E) Items of deduction designated by the Secretary by publication 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of 
this chapter).
    (ii) Application of the reasonably accurate manner requirement to 
certain charitable contributions, recurring items, and 12-month rule 
items. For purposes of paragraph (f)(2)(i)(D) of this section, the 
total amount of the item deducted in the computation of taxable income 
for the taxable year must be allocated in a reasonably accurate manner, 
notwithstanding the fact that section 170(a)(2) and Sec.  1.170A-11(b), 
Sec.  1.461-5, or Sec.  1.263(a)-4(f) applies to only a portion of the 
total amount of the item deducted for the taxable year. For example, if 
a portion of a taxpayer's rebate liabilities are deducted in the 
computation of taxable income under the recurring item exception, all 
rebate liabilities deducted in the computation of taxable income for 
the taxable year must be allocated in a reasonably accurate manner.
    (iii) Reasonably accurate manner defined. (A) An item is allocated 
throughout the taxable year in a reasonably accurate manner if the item 
is allocated ratably throughout the taxable year or if the allocation 
provides a reasonably accurate estimate of taxable income for the 
taxable year based upon the facts known as of the end of the 
annualization period. In determining that an allocation of an item 
provides a reasonably accurate estimate of taxable income for the 
taxable year, relevant considerations include--
    (1) The extent to which the allocation is consistent with the 
taxpayer's accounting for the item on its non-tax books and records;
    (2) The extent to which the allocable portion of the item becomes 
fixed and determinable (under Sec.  1.461-1(a)(2)) during the 
applicable annualization period; and
    (3) The extent to which the allocation, if compared to the ratable 
allocation of the item, results in a better matching of the item of 
deduction to revenue, earnings, the use of property or the provision of 
services occurring during the annualization period.
    (B) None of the relevant considerations above override the general 
requirement that the allocation must be done in a reasonably accurate 
manner based upon the facts known as of the end of the annualization 
period. For example, the fact that a liability for an annual expense 
becomes fixed and determinable during an annualization period will not 
establish that allocating all of the expense to that annualization 
period has been done in a reasonably accurate manner if the facts known 
as of the end of the annualization period indicate otherwise.
    (iv) Special rule for certain real property tax liabilities. 
Notwithstanding paragraph (f)(2)(iii) of this section, real property 
tax liabilities for which an election under section 461(c) is in effect 
must be allocated ratably throughout the taxable year for purposes of 
this section.
    (v) Examples. Unless otherwise stated, the following examples 
assume that the taxpayer uses the 3-3-6-9 annualization period:

    Example 1. (i) Corporation ABC, 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 2008 taxable year. ABC 
has adopted a plan under which ABC pays an annual bonus to its 
employees. As of March 31, 2008, ABC estimates that it will pay a 
year-end bonus of $500,000 to its employees if earnings remain 
constant throughout the tax year. ABC does not pay any of the 
estimated bonus liability as of March 31, 2008. On October 31, 2008, 
ABC declares a $600,000 bonus to its employees which is paid out on 
November 15, 2008, and properly deducted in ABC's December 31, 2008, 
tax year. No other bonus liabilities are incurred by ABC during the 
tax year.
    (ii) Under the general rule provided in paragraph (f)(2)(i) of 
this section, ABC is required to allocate its employee bonus 
liability in a reasonably accurate manner for annualization 
purposes. Under paragraph (f)(2)(iii) of this section, ABC's 
employee bonus liability will be deemed to be allocated in a 
reasonably accurate manner if the item is allocated ratably 
throughout the taxable year. Therefore, ABC is permitted to 
recognize a $150,000 bonus deduction (one quarter of the $600,000 
bonus liability properly recognized by ABC in the tax year ending 
December 31, 2008) in the first annualization period ending March 
31, 2008.
    Example 2. (i) Corporation ABC, 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 2008 taxable year. ABC 
has adopted a plan under which ABC pays an annual bonus to its 
employees. ABC's employee bonus plan generally calls for an annual 
bonus equal to 2% of earnings. A bonus reserve for this amount is 
reported each quarter in ABC's non-tax books and records. ABC's 
quarterly revenues throughout the year are $10,000,000; $6,000,000; 
$7,000,000; and $7,000,000 respectively. As of March 31, 2008, ABC 
estimates that it will pay a year-end bonus of $800,000 ($10,000,000 
x 4 x 2%) to its employees if earnings remain constant throughout 
the year. ABC does not pay any of the estimated bonus payment as of 
March 31, 2008. On December 31, 2008, ABC declares a $600,000 bonus 
to its employees which is paid out on January 15, 2009, and properly 
deducted in ABC's December 31, 2008, tax year.
    (ii) Under the general rule provided in paragraph (f)(2)(i) of 
this section, ABC must allocate its employee bonus liability in a 
reasonably accurate manner for annualization purposes. Under 
paragraph (f)(2)(iii) of this section, ABC's employee bonus 
liability will be deemed to be allocated in a reasonably accurate 
manner if the allocation provides a reasonable estimate of taxable 
income based upon the facts known as of the end of the

[[Page 44354]]

annualization period. Based upon its earnings activities and other 
information available as of March 31, 2008, ABC estimated that its 
total deduction for employee bonuses for the taxable year ending 
December 31, 2008, would be $800,000 ($10,000,000 first quarter 
earnings x 4 x 2%). Allocating $200,000 ($10,000,000 x 2%) of ABC's 
annual bonus liability of $600,000 to ABC's first quarter based upon 
earnings during the quarter represents a better matching of ABC's 
bonus expense to earnings in the quarter as compared to allocating 
$150,000 to ABC's first quarter under a ratable accrual method and 
is consistent with the allocation provided in ABC's non-tax books 
and records. Accordingly, allocating ABC's employee bonus deductions 
based upon ABC's earnings will be considered allocated in a 
reasonably accurate manner.
    Example 3. (i) Corporation ABC, 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 2008 taxable year. ABC 
has adopted a plan under which ABC pays a bonus to its employees 
each quarter based upon earnings for that quarter. On March 31, 
2008, ABC pays out $2,000,000 to its employees as a quarterly bonus 
based upon the earnings of ABC for the period January 1, 2008, 
through March 31, 2008. The $2,000,000 bonus is recognized as an 
expense on ABC's audited financial statements in the quarter ending 
March 31, 2008. As of March 31, 2008, ABC anticipates that its 
earnings will continue throughout the year resulting in future 
quarterly bonus payments in 2008 similar to the $2,000,000 first 
quarter payment.
    (ii) Under the general rule provided in paragraph (f)(2)(i) of 
this section, ABC is required to allocate its employee bonus 
liability in a reasonably accurate manner for annualization 
purposes. Under paragraph (f)(2)(iii) of this section , ABC's 
employee bonus liability will be deemed to be allocated in a 
reasonably accurate manner if the item is allocated ratably 
throughout the taxable year. Therefore, ABC may recognize a $500,000 
bonus deduction (one quarter of the $2,000,000 bonus liability 
properly recognized by ABC in the tax year ending December 31, 2008) 
in the first annualization period ending March 31, 2008 (as well as 
one quarter of any additional bonus liability properly recognized by 
ABC in the tax year ending December 31, 2008).
    (iii) In addition, paragraph (f)(2)(iii) of this section 
provides that an allocation will be considered reasonable if the 
allocation provides an accurate estimate of taxable income for the 
taxable year based upon the facts known as of the end of the 
annualization period. Based upon its earnings activities and other 
information available as of March 31, 2008, ABC estimates that its 
total deduction for employee bonuses for the taxable year ending 
December 31, 2008, would be $8,000,000. In addition, the $2,000,000 
bonus liability became fixed and determinable during the first 
quarter. Allocating $2,000,000 to ABC's first quarter earnings is 
also consistent with ABC's non-tax books and records and represents 
a better matching of ABC's bonus expense to earnings in the quarter 
as compared to a ratable accrual. Accordingly, allocating ABC's 
bonus liability based upon earnings will be considered a reasonably 
accurate manner for estimated tax purposes.
    Example 4. (i) Corporation ABC, a calendar year taxpayer, uses 
an accrual method of accounting with the recurring item exception 
and the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate all of its required installment 
payments for its 2009 taxable year. ABC regularly incurs rebate 
obligations related to the sale of its products. Rebate coupons that 
are received and validated by ABC are generally paid in the 
following month. During the tax year ending December 31, 2009, ABC 
received, validated and paid $400,000 in rebates. In addition, as of 
the end of December 31, 2009, ABC had received and validated 
$100,000 in rebate claims that were paid in January of 2010 and 
deducted in ABC's December 31, 2009, tax year under the recurring 
item exception. Therefore, ABC properly recognized a $500,000 rebate 
liability deduction on ABC's December 31, 2009, tax return.
    (ii) Under the rule provided in paragraph (f)(2)(ii) of this 
section, an item must be allocated in a reasonably accurate manner 
if any portion of the item is deducted under the recurring item 
exception. Therefore, ABC will be required to allocate its entire 
$500,000 rebate liability deduction in a reasonably accurate manner 
as defined in paragraph (f)(2)(iii) of this section.

    (3) Special rules--(i) Advance payments--(A) Advance payments under 
Sec.  1.451-5(b)(1)(ii). An advance payment for which the taxpayer uses 
the method of accounting provided in Sec.  1.451-5(b)(1)(ii) is 
includible in computing taxable income for an annualization period in 
accordance with that method of accounting except that, if Sec.  1.451-
5(c) applies, any amount not included in computing taxable income by 
the end of the second taxable year following the year in which 
substantial advance payments are received, and not previously included 
in accordance with the taxpayer's accrual method of accounting, is 
includible in computing taxable income on the last day of such second 
taxable year.
    (B) Advance payments under Rev. Proc. 2004-34. An advance payment 
for which the taxpayer uses the Deferral Method provided in section 
5.02 of Rev. Proc. 2004-34 (2004-1 CB 991), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) is includible in computing 
taxable income for an annualization period in accordance with that 
method of accounting, except that any amount not included in computing 
taxable income by the end of the taxable year succeeding the taxable 
year of receipt is includible in computing taxable income on the last 
day of such succeeding taxable year.
    (ii) Extraordinary items--(A) In general. In general, extraordinary 
items must be taken into account after annualizing the taxable income 
for the annualization period. For purposes of the preceding sentence an 
extraordinary item is any item identified in Sec.  1.1502-
76(b)(2)(ii)(C)(1), (2), (3), (4), (7), and (8), a net operating loss 
carryover, a section 481(a) adjustment, net gain or loss from the 
disposition of 25 percent or more of the fair market value of a 
taxpayer's business assets during a taxable year, and any other item 
designated by the Secretary by publication in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (B) De minimis extraordinary items. A taxpayer may treat any de 
minimis extraordinary item, other than a net operating loss carryover 
or section 481(a) adjustment, as an item under the general rule of 
paragraph (f)(1) of this section rather than an extraordinary item as 
provided for in paragraph (f)(3)(ii) of this section. A de minimis 
extraordinary item is any item identified in paragraph (f)(3)(ii)(A) of 
this section resulting from a transaction in which the total 
extraordinary items resulting from such transaction is less than 
$1,000,000.
    (C) Special rule for net operating loss deductions and section 
481(a) adjustments. For purposes of paragraph (f)(3)(ii) of this 
section, a taxpayer must treat a net operating loss deduction and 
section 481(a) adjustment as extraordinary items arising on the first 
day of the tax year in which the item is taken into account in 
determining taxable income. Notwithstanding the preceding sentence, a 
taxpayer may choose to treat the portion of a section 481(a) adjustment 
recognized during the tax year of the accounting method change as an 
extraordinary item arising on the date the Form 3115, ``Application for 
Change in Accounting Method,'' requesting the change was filed with the 
national office of the Internal Revenue Service.
    (iii) Credits--(A) Current year credits. With respect to a current 
year credit, the items upon which the credit is computed are 
annualized, the amount of the credit is computed based on the 
annualized items, and the amount of the credit is deducted from the 
annualized tax. For example, for an annualization period consisting of 
three months in a full 12-month taxable year, the items upon which the 
credit is based that are taken into account for the three month period 
are multiplied by four, the credit is determined based on the 
annualized amount of the items, and the credit reduces the annualized 
tax.

[[Page 44355]]

    (B) Credit carryovers. Any credit carryover to the current taxable 
year is 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) Depreciation and amortization--(A) Estimated annual 
depreciation and amortization. In general, in determining taxable 
income for any annualization period, a proportionate amount of the 
taxpayer's estimated annual depreciation and amortization 
(depreciation) expense may 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, additional first-year depreciation and expense deductions and 
section 179 or any similar provision, and other events 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 of the taxpayer's capital spending plans for the current 
taxable year), are reasonably expected to occur or apply during the 
taxable year.
    (B) Safe harbors--(1) Proportionate depreciation allowance. In 
determining taxable income for any annualization period, in lieu of the 
rule provided in paragraph (f)(3)(iv)(A) of this section a taxpayer may 
take into account a proportionate amount of the depreciation and 
amortization (depreciation) expense, including special depreciation and 
expense deductions such as those provided for in section 168(k) and 
section 179 or any similar provision, allowed for the taxable year 
from--
    (i) Assets that were in service on the last day of the prior 
taxable year, are in service on the first day of the current taxable 
year, and that have not been disposed of during the annualization 
period;
    (ii) Assets placed in service during the annualization period and 
have not been disposed of during that period; and
    (iii) Assets that were in service on the last day of the prior 
taxable year and that are disposed of during the annualization period.
    (2) 90 percent of preceding year's depreciation. In determining 
taxable income for any annualization period, in lieu of the general 
rule provided in paragraph (f)(3)(iv)(A) of this section, a 
proportionate amount of 90 percent of the amount of depreciation and 
amortization (depreciation) expense taken on the taxpayer's Federal 
income tax return for the preceding taxable year may be taken into 
account. If the taxpayer's preceding taxable year is less than 12 
months (a short taxable year), the amount of depreciation expense taken 
into account is annualized by multiplying the depreciation and 
amortization for the short taxable year by 12, and dividing the result 
by the number of months in the short taxable year.
    (3) Safe harbor operational rules. If a taxpayer selects one of the 
two safe harbors provided in paragraph (f)(3)(iv)(B)(1) or paragraph 
(f)(3)(iv)(B)(2) of this section, the taxpayer must use that safe 
harbor for all depreciation expenses within the annualization period 
for the annualized income installment. However, a taxpayer may use 
either the method provided for in paragraph (f)(3)(iv)(A) of this 
section or a method provided for in this paragraph (f)(3)(iv)(B) of 
this section for each annualized income installment during the taxable 
year. For example, a taxpayer may use the safe harbor provided in 
paragraph (f)(3)(iv)(B)(1) of this section for its first annualized 
income installment and may use the general rule provided in paragraph 
(f)(3)(iv)(A) of this section for its second annualized income 
installment.
    (C) Short taxable years. If the taxable year is, or will be, a 
short taxable year (based on all relevant information available as of 
the last day of the annualization period), annual depreciation expense 
is 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 are 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 CB 816) for computing depreciation expense under section 168 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter). An annualization 
period is not treated as a short taxable year for purposes of 
determining the depreciation expense for an annualization period. See 
paragraph (c)(3) of this section.
    (v) Distributive share of items--(A) 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.
    (B) Treatment of subpart F income and income under section 936(h)--
(1) General rule. Any amounts required to be included in gross income 
under section 936(h) or section 951(a), and credits properly allocable 
thereto, are taken into account in computing any annualized income 
installment in a manner similar to the manner under which partnership 
inclusions, and credits properly allocable thereto, are taken into 
account in accordance with paragraph (f)(3)(v)(A) of this section.
    (2) Prior year safe harbor--(i) General rule. If a taxpayer elects 
to have the safe harbor in this paragraph (f)(3)(v)(B)(2) apply for any 
taxable year, then paragraph (f)(3)(v)(B)(1) of this section does not 
apply; and, for purposes of computing any annualized income installment 
for the taxable year, the taxpayer is treated as having received 
ratably during the taxable year items of income and credit described in 
paragraph (f)(3)(v)(B)(1) of this section in an amount equal to 115 
percent of the amount of such items shown on the return of the taxpayer 
for the preceding taxable year (the second preceding taxable year in 
the case of the first and second required installments for such taxable 
year).
    (ii) Special rule for noncontrolling shareholder. If a taxpayer 
making the election under paragraph (f)(3)(v)(B)(2)(i) of this section 
is a noncontrolling shareholder of a corporation, paragraph 
(f)(3)(v)(B)(2)(i) of this section is applied with respect to items of 
such corporation by substituting ``100 percent'' for ``115 percent''. 
For purposes of paragraph (f)(3)(v)(B)(2)(ii) of this section, the term 
noncontrolling shareholder means, with respect to any corporation, a 
shareholder that, as of the beginning of the taxable year for which the 
installment is being made, does not own within the meaning of section 
958(a), and is not treated as owning within the meaning of section 
958(b), more than 50 percent by vote or value of the stock in the 
corporation.
    (C) Dividends from closely held real estate investment trust--(1) 
General rule. Any dividend received from a closely held real estate 
investment trust by any person that owns, after the application of 
section 856(d)(5), 10 percent or more by vote or value of the stock or 
beneficial interests in the trust is taken into account in computing 
annualized income installments in a manner similar to the manner under

[[Page 44356]]

which partnership income inclusions are taken into account.
    (2) Closely held real estate investment trust. For purposes of 
paragraph (f)(3)(v)(C)(1) of this section, the term closely held real 
estate investment trust means a real estate investment trust with 
respect to which 5 or fewer persons own, after the application of 
section 856(d)(5), 50 percent or more by vote or value of the stock or 
beneficial interests in the trust.
    (D) Other passthrough entities. A taxpayer's distributive share of 
items from a passthrough entity, other than those described in 
paragraphs (f)(3)(v)(A) and (f)(3)(v)(C) of this section, is taken into 
account in computing any annualized income installment in a manner 
similar to the manner under which partnership items are taken into 
account under paragraph (f)(3)(v)(A) of this section.
    (vi) Alternative minimum taxable income exemption amount. The 
alternative minimum taxable income exemption amount provided by section 
55(d)(2) is applied after the alternative minimum taxable income for 
the annualization period is annualized.
    (vii) Examples. The provisions of this paragraph (f) are 
illustrated by the following examples. Unless otherwise stated, the 
following examples assume that the taxpayer uses the 3-3-6-9 
annualization period.

    Example 1. Expense paid or incurred in the installment period. 
Corporation ABC, 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 2008 taxable year. ABC has licensed 
technology from Corporation XYZ. Pursuant to the license agreement, 
ABC pays a license fee to XYZ equal to $.01 for every dollar of 
gross receipts earned by ABC. For 2008, ABC projects gross receipts 
of $200,000,000, of which $100,000,000 is earned by March 31, 2008. 
Pursuant to paragraph (f)(1) of this section, a license fee expense 
of $1,000,000 ($100,000,000 x $.01) is incurred by March 31, 2008, 
and may be taken into account for purposes of determining the 
taxable income to be annualized in computing ABC's first annualized 
income installment.
    Example 2. Expense not paid or incurred in the installment 
period. Same facts as Example 1 except that ABC does not earn any 
gross receipts by March 31, 2008. In accordance with paragraph 
(f)(1) 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 ABC's first annualized income installment, which is based 
on the income and deductions from the first three months of the 
taxable year.
    Example 3. Bad debt expense. Corporation ABC, 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 2008 
taxable year. As of December 31, 2007, ABC had a $100,000 account 
receivable due from XYZ related to the sale of goods from ABC to XYZ 
during 2007. On March 30, 2008, ABC determined that its receivable 
from XYZ was worthless under section 166 and the regulations. No 
other receivables were determined to be worthless between January 1, 
2008, and March 31, 2008. In accordance with paragraph (f)(1) of 
this section, a $100,000 bad debt write-off is taken into account 
for purposes of determining the taxable income to be annualized in 
computing ABC's first annualized income installment.
    Example 4. Bad debt expense. Same facts as Example 3 except that 
ABC determines that the receivable from XYZ was worthless under 
section 166 and the regulations on April 10, 2008. As of March 31, 
2008, ABC had not determined that any receivables were worthless 
under section 166 and the regulations. In accordance with paragraph 
(f)(1) of this section, the $100,000 bad debt expense attributable 
to the receivable from XYZ is not taken into account for purposes of 
determining the taxable income to be annualized in computing ABC'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 XYZ became worthless after the last day 
of the annualization period.
    Example 5. Employer deductions under section 404 and 419. (i) 
Corporation ABC, 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 all of its required 
installment payments for its 2008 taxable year. On March 1, 2008, 
the board of directors of ABC makes a binding, irrevocable 
commitment to fund a minimum contribution of $10,000,000 to ABC's 
qualified retirement plan by March 14, 2009. ABC remits a $1,000,000 
payment to the retirement plan on March 1, 2008, and a $9,000,000 
payment on March 3, 2009. ABC does not incur any other related 
retirement plan deductions during its 2008 taxable year.
    (ii) Under the rule provided in paragraph (f)(2)(i) of this 
section, ABC's employer deduction for payment made to the qualified 
plan must be allocated throughout the tax year for estimated tax 
purposes in a reasonably accurate manner. Therefore, ABC will not be 
permitted to allocate the $10,000,000 deduction to its first 
installment period. Under paragraph (f)(2)(iii) of this section, 
ABC's qualified plan deduction will be deemed to be allocated in a 
reasonably accurate manner if the item is allocated ratably 
throughout the taxable year. Therefore, ABC will be permitted to 
allocate $2,500,000 of its qualified plan deduction in its first 
installment period.
    Example 6. Prepaid expense. (i) Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and does not 
capitalize qualifying costs under the exception provided for in 
Sec.  1.263(a)-4(f). ABC uses the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its 
required installment payments for its 2008 taxable year. On July 1, 
2008, ABC purchases an annual business license from State X which 
permits ABC to operate its business in State X from July 1, 2008, 
through June 30, 2009. An annual payment of $12,000 is due on July 
1, 2008, and ABC pays the fee on this date. ABC has not elected out 
of the 12-month rule provided by Sec.  1.263(a)-4(f) and therefore 
ABC is not required to capitalize any amount paid for the license 
and will recognize a $12,000 deduction for the tax year ending 
December 31, 2008, with respect to this license.
    (ii) Under the rule provided in paragraph (f)(2)(ii) of this 
section, ABC's $12,000 business license expense must be allocated in 
a reasonably accurate manner because ABC utilizes the 12-month rule 
exception provided for in the Sec.  1.263(a)-4(f). Under paragraph 
(f)(2)(iii) of this section, ABC's deduction will be deemed to be 
allocated in a reasonably accurate manner if the item is allocated 
ratably throughout the taxable year. Therefore, ABC will be 
permitted to allocate $3,000 of its business license deduction in 
its first installment period.
    Example 7. Real property tax liability. (i) Corporation ABC, 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 2008 
taxable year. ABC owns real property in State Y and uses the real 
property in its trade or business. ABC incurs a $400,000 deduction 
for State Y real estate taxes during ABC's December 31, 2008, 
taxable year. ABC has elected to recognize its real property taxes 
ratably under section 461(c).
    (ii) Under the rule provided in paragraph (f)(2)(i) of this 
section, ABC's $400,000 real property tax liabilities must be 
allocated in a reasonably accurate manner. However, paragraph 
(f)(2)(iv) of this section provides that with respect to real 
property taxes for which an election has been made under section 
461(c), ratable accrual is the only method which will be considered 
a reasonably accurate method. Therefore, ABC will be required to 
allocate its $400,000 real property taxes ratably for estimated tax 
purposes and thus $100,000 will be allocated to the ABC's first 
annualized income installment.
    Example 8. NOL (Net Operating Loss) deduction. Corporation ABC, 
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 2008 taxable year. ABC has a net operating loss 
carryover to 2008 of $2,000,000. ABC's taxable income from January 
1, 2008, through March 31, 2008, without regard to any net operating 
loss deduction, is $1,500,000 (pre-NOL taxable income). Under the 
special rule for net operating loss deductions provided in paragraph 
(f)(3)(ii) of this section, the NOL deduction is treated as an 
extraordinary item incurred on the first day of ABC's December 31, 
2008, tax year. Therefore, the NOL

[[Page 44357]]

deduction is taken into account after annualization for purposes of 
determining ABC's first annualized income installment.
    Example 9. Advance payment. (i) Corporation ABC, 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 2008 and 
2009 taxable years. ABC is in the business of giving dancing lessons 
and receives advance payments. For Federal income tax purposes, ABC 
uses the Deferral Method provided in section 5.02 of Rev. Proc. 
2004-34 for the advance payments it receives for dance lessons. On 
November 1, 2008, ABC receives an advance payment of $2,400 for a 2-
year contract commencing on November 1, 2008, and providing for up 
to 24 individual, 1-hour lessons. ABC provides 2 lessons in 2008, 12 
lessons in 2009, and 10 lessons in 2010. ABC recognizes $200 in 
revenues in its financial statements for the last quarter of 2008. 
ABC recognizes $300 in revenues in its financial statements for each 
quarter of 2009 for a total of $1,200 in 2009. ABC recognizes the 
remaining $1,000 in revenues in its financial statements during 
2010. For tax purposes, ABC recognizes $200 into revenue in 2008 and 
$2,200 into revenue in 2009 under Rev. Proc. 2004-34. See Sec.  
601.601(d)(2)(ii)(b).
    (ii) Pursuant to paragraph (f)(3)(i)(B) of this section, ABC is 
not required to take into account any of the advance payment for 
purposes of computing any required installment payment for ABC's 
2008 taxable year because no part of the $2,400 advance payment was 
recognized as income in ABC's financial statements during the first 
nine months of ABC's 2008 taxable year. In 2009, ABC must take into 
account $300 of revenue for purposes of computing its first and 
second required installment payments, $600 of revenue for purposes 
of computing its third required installment payment and $900 for 
purposes of computing its fourth required installment payment. 
Pursuant to paragraph (f)(3)(i)(B) of this section, the remaining 
deferred revenue is recognized on December 31, 2009, for purposes of 
computing ABC's annualized income installments for 2009.
    Example 10. Section 481(a) adjustment. Corporation ABC, 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 2008 
taxable year. On December 20, 2008, ABC files a Form 3115 requesting 
permission to change its method of accounting. The requested change 
results in a negative section 481(a) adjustment of $80,000. ABC 
subsequently receives the consent of the Commissioner to make the 
change and therefore, the negative $80,000 section 481(a) adjustment 
is properly recognized in ABC's tax return for the year ending 
December 31, 2008. Under paragraph (f)(3)(ii) of this section ABC is 
permitted to recognize the negative $80,000 section 481(a) 
adjustment as an extraordinary item occurring on January 1, 2008 
(the first day of ABC's December 31, 2008, tax year), or December 
20, 2008 (the date ABC filed the Form 3115). ABC chooses to 
recognize the negative $80,000 section 481(a) adjustment as an 
extraordinary item occurring in January 1, 2008. Accordingly, 
$80,000 of the negative section 481(a) adjustment is taken into 
account after annualization for purposes of determining ABC's first 
annualized income installment. In addition, under Sec.  1.6655-6(b), 
ABC is required to use its new method of accounting as of January 1, 
2008 for estimated tax purposes, consistent with the recognition of 
the section 481(a) adjustment for estimated tax purposes. Therefore, 
ABC will be required to use the new method of accounting in 
determining taxable income to be annualized in computing ABC's first 
annualized income installment.
    Example 11. Section 481(a) adjustment. Corporation ABC, 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 all of its required installment 
payments for its 2008 taxable year. On June 15, 2008, ABC files a 
Form 3115 requesting permission to change its method of accounting. 
The requested change results in a positive section 481(a) adjustment 
of $240,000. ABC subsequently receives the consent of the 
Commissioner to make the change and therefore, $60,000 of the 
section 481(a) adjustment (one quarter of the positive $240,000 
section 481(a) adjustment) is properly recognized in ABC's tax 
return for the year ending December 31, 2008. Under paragraph 
(f)(3)(ii) of this section, ABC is permitted to recognize the 
positive $60,000 section 481(a) adjustment as an extraordinary item 
occurring on January 1, 2008 (the first day of ABC's December 31, 
2008, tax year), or June 15, 2008 (the date ABC filed the Form 
3115). ABC chooses to recognize the positive $60,000 section 481(a) 
adjustment as an extraordinary item occurring on June 15, 2008. 
Accordingly, the $60,000 positive section 481(a) adjustment is not 
taken into account for purposes of determining ABC's first 
annualized income installment. However, in all futures years any 
portion of the section 481(a) adjustment related to this change in 
method of accounting will be treated as an extraordinary item 
occurring on the first day of the tax year under paragraph 
(f)(3)(ii) of this section. In addition, under Sec.  1.6655-6(b), 
ABC is required to use its new method of accounting as of June 15, 
2008 for estimated tax purposes, consistent with the recognition of 
the section 481(a) adjustment for estimated tax purposes. Therefore, 
ABC will be required to use the new method of accounting (as of the 
beginning of the tax year) for purposes of determining taxable 
income to be annualized in computing ABC's third and fourth 
annualized income installments (which are based upon annualization 
periods that include June 15, 2008.)
    Example 12. Extraordinary item. Corporation ABC, 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 2008 
taxable year. On May 10, 2008, ABC reaches a settlement agreement 
with XYZ over a tort action filed by ABC. As a result, ABC receives 
a payment of $10,000,000 on June 15, 2006, that is recognized as 
income by ABC. The settlement of a tort action is an extraordinary 
item defined in paragraph (f)(3)(ii)(A) of this section. 
Accordingly, the $10,000,000 of income will be taken into account by 
ABC on May 10, 2008, for purposes of computing ABC's annualized 
income installments for 2008. Therefore, the $10,000,000 settlement 
will only be taken into account in computing ABC's third and fourth 
annualized income installments (which are based upon annualization 
periods that include May 10, 2008). In addition, the $10,000,000 
settlement income will be taken into account as an extraordinary 
item of income after annualization for purposes of determining ABC's 
third and fourth annualized installment payments.
    Example 13. Credit carryover. Corporation ABC, 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 2008 
taxable year. ABC projects its annualized tax for its 2008 taxable 
year, based on annualizing ABC's taxable income for its first 
annualization period from January 1, 2008, through March 31, 2008, 
to be $1,500,000 before reduction for any credits. ABC has an unused 
section 38 credit from 2007 for increasing research activities from 
2007 of $500,000 that is carried over to 2008. For purposes of 
determining ABC's first annualized income installment, ABC's 
annualized tax for 2008 is $1,000,000, determined as the tax for the 
taxable year computed by placing on an annualized basis ABC's 
taxable income from its first annualization period from January 1, 
2008, through March 31, 2008 ($1,500,000) reduced by the $500,000 
credit carryover from 2007. Therefore, ABC's first required 
installment payment for 2008 is $250,000 ($1,000,000 x 25%).
    Example 14. Current year credit. Corporation ABC, 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 2008 
taxable year. ABC projects its annualized tax for its 2008 taxable 
year, based on annualizing ABC's taxable income for its first 
annualization period from January 1, 2008, through March 31, 2008, 
to be $2,000,000 before reduction for any credits. ABC has 
historically earned a section 41 credit for increasing research 
activities and, for 2008, ABC estimates that it will earn a credit 
for increasing research activities under section 41 of $1,200,000. 
However, pursuant to paragraph (f)(3)(iii) of this section, if ABC 
were to annualize all components involved in computing the current 
year credit based on ABC's activity from January 1, 2008, through 
March 31, 2008, ABC would generate a credit of $1,600,000 for 2008. 
For purposes of determining ABC's first annualized income 
installment, ABC's annualized tax for 2008 is $400,000, determined 
as the tax for the 2008 taxable year ($2,000,000) computed by 
placing on an annualized basis ABC's taxable income from its first 
annualization period January 1, 2008, through March 31, 2008, 
reduced by a $1,600,000 current year section

[[Page 44358]]

41 credit from increasing research activities. Therefore, ABC's 
first required installment payment for 2008 is $100,000 ($400,000 x 
25%).
    Example 15. Current year credit. Same facts as Example 14 except 
that ABC does not begin any research activities until April 3, 2008, 
and will not incur any research expenses described in paragraph 
(f)(1)(ii) of this section. As a result, if ABC were to annualize 
all components involved in computing the current year credit based 
on ABC's activity from January 1, 2008, through March 31, 2008, ABC 
would generate no section 41 research credit for purposes of 
determining its first annualized income installment. Pursuant to 
paragraph (f)(3)(iii) of this section, ABC cannot take into account 
any credit for its first annualization period because ABC did not 
incur any qualified research expenses by the last day of the first 
annualization period. Accordingly, for purposes of determining ABC's 
first annualized income installment, ABC's annualized tax for its 
first annualization period January 1, 2008, through March 31, 2008, 
is $2,000,000. Therefore, ABC's first required installment payment 
for 2008 is $500,000 ($2,000,000 x 25%).
    Example 16. Depreciation and amortization expense. Corporation 
ABC, a calendar year taxpayer that began business on January 2, 
2007, adopted an accrual method of accounting and will use the 
annualized income installment method under section 6655(e)(2)(A)(i) 
to calculate all of its required installment payments for its 2008 
taxable year. On January 2, 2007, ABC purchased and placed in 
service a tangible depreciable asset that costs $50,000 and is 5-
year property under section 168(e). ABC depreciates its 5-year 
property placed in service in 2007 under the general depreciation 
system using the 200-percent declining balance method, a 5-year 
recovery period, and the half year convention. On January 2, 2008, 
ABC purchased and placed in service qualified Gulf Opportunity Zone 
property (GO Zone property) that costs $30,000 and is 5-year 
property under section 168(e). ABC will depreciate its 5-year 
property placed in service in 2008 under the general depreciation 
system using the 200-percent declining balance method, a 5-year 
recovery period, and the half-year convention. ABC will deduct the 
50% additional first year depreciation deduction under section 
1400N(d) with respect to the GO Zone property. For tax year 2007, 
ABC takes a depreciation deduction under section 168 of $10,000 
($50,000 x 20% = $10,000). ABC does not anticipate being subject to 
the mid-quarter convention for the 2008 taxable year, does not 
anticipate making any depreciation elections for any class of 
property, does not anticipate making a section 179 election, does 
not anticipate any sales or other dispositions of depreciable 
property, and no events have occurred, nor does ABC know, based on 
all relevant information available as of the due date of ABC's first 
required installment for 2008, of any event that will occur to cause 
ABC's 2008 taxable year to be a short taxable year. The optional 
amounts of depreciation expense ABC may take into account for its 
first annualized income installment for its 2008 taxable year are 
determined as follows:
    (i) General rule--Estimated annual depreciation. In accordance 
with the general rule provided in paragraph (f)(3)(iv)(A) of this 
section, ABC may take a depreciation expense of $8,500 ($34,000 x 
\3/12\ = $8,500) into account in computing ABC's January 1, 2008, 
through March 31, 2008, taxable income. ABC's estimated annual 
depreciation expense for 2008 of $34,000 is computed as follows: 
$15,000 for the 50% additional first year depreciation deduction 
under section 1400N(d) ($30,000 x 50% = $15,000) plus annual 
depreciation of $16,000 ($40,000 x 40% = $16,000) and $3,000 
($15,000 x 20% = $3,000). Under paragraphs (c)(3) and (f)(3)(iv)(C) 
of this section, ABC may not consider its first annualization period 
to be a short taxable year for purposes of determining the 
depreciation allowance for such annualization period.
    (ii) Safe Harbor--Proportionate depreciation allowance. In 
accordance with the safe harbor provided in paragraph 
(f)(3)(iv)(B)(1) of this section, ABC may take a depreciation 
expense of $8,500 ($34,000 x \3/12\ = $8,500) into account in 
computing ABC's January 1, 2008, through March 31, 2008, taxable 
income based on annual depreciation expense for 2008 of $34,000, 
computed as follows: $15,000 for the 50% additional first year 
depreciation deduction under section 1400N(d) ($30,000 x 50% = 
$15,000) plus annual depreciation of $16,000 ($40,000 x 40% = 
$16,000) and $3,000 ($15,000 x 20% = $3,000). Under paragraphs 
(c)(3) and (f)(3)(iv)(C) of this section, ABC may not consider its 
first annualization period to be a short taxable year for purposes 
of determining the depreciation allowance for such annualization 
period.
    (iii) Safe Harbor--90 percent of preceding year's depreciation. 
In accordance with the safe harbor in paragraph (f)(3)(iv)(B)(2) of 
this section, ABC may take a depreciation expense of $2,250 ($10,000 
prior year's depreciation x 90% = $9,000 x \3/12\ = $2,250) into 
account in computing ABC's January 1, 2008, through March 31, 2008, 
taxable income. Under paragraphs (c)(3) and (f)(3)(iv)(C) of this 
section, ABC may not consider its first annualization period to be a 
short taxable year for purposes of determining the depreciation 
allowance for such annualization period.

    (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. This paragraph (g) 
applies only to the inflation index for taxpayers using the dollar-
value LIFO (last-in, first-out) inventory method, adjustments required 
under section 263A, the computation of a taxpayer's section 199 
deduction, intercompany adjustments for taxpayers that file 
consolidated returns, the liquidation of a LIFO layer at the 
installment date that the taxpayer reasonably believes will be replaced 
at the end of the year, deferred gain on a qualifying conversion or 
exchange of property under sections 1031 and 1033 that the taxpayer 
reasonably believes will be replaced with qualifying replacement 
property, and any other item designated by the Secretary by publication 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of 
this chapter).
    (2) Example. The following example illustrates the rules of this 
paragraph (g):

    Example. Section 199 deduction. Corporation ABC, 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 2008 
taxable year. ABC engages in production activities that generate 
qualified production activities income (QPAI), as defined in Sec.  
1.199-1(c), and projects taxable income of $50,000 for its first 
annualization period from January 1, 2008, through March 31, 2008, 
without taking into account the section 199 deduction. During its 
first annualization period from January 1, 2008, through March 31, 
2008, ABC incurs W-2 wages allocable to domestic production gross 
receipts pursuant to section 199(b)(2) of $10,000. Pursuant to 
paragraph (g)(1) of this section, ABC is permitted to take into 
account its estimated section 199 deduction before annualizing 
taxable income based on the lesser of its estimated QPAI or taxable 
income and W-2 wages for its first installment period for 2008. For 
the first installment period in 2008, ABC's is permitted to 
recognize a deduction under section 199 of $3,000 ($50,000 x .06 = 
$3,000) subject to the wage limitation of $5,000 (50 percent of 
$10,000 of W-2 wages incurred during the first installment period). 
Accordingly, ABC's annualized income for the first installment for 
2008 is $188,000 (($50,000-$3,000) x 1\2/3\ = $188,000). The tax on 
$188,000 is $56,570 and ABC's first required installment for 2008 is 
$14,143 ($56,570 x .25 = $14,143).

    (h) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

0
Par. 8A. Section 1.6655-3 is revised to read as follows:


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.

[[Page 44359]]

    (b) Limitation on application of section. This section applies 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 
paragraph (c) 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 is 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. If there is no taxable income for the 
corresponding months, taxable income for this purpose is zero.
    (2) Filing month. The term filing month means the month in which 
the installment is required to be paid.
    (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 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.
    (4) Alternative minimum tax. The amount determined under paragraph 
(c) of this section must properly take into account the amount of any 
alternative minimum tax under section 55 that would apply for the 
period of the computation. The amount of any alternative minimum tax 
that would apply is determined by applying to alternative minimum 
taxable income, tentative minimum tax, and alternative minimum tax, the 
rules described in paragraph (c) of this section for taxable income and 
tax.
    (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, expects to have an estimated tax liability of $1,200,000 for 
its taxable year ending December 31, 2009. On its 2008 tax return, X 
reports a tax liability of $652,800. X pays four installments of 
estimated tax, each in the amount of $250,000, $250,000, $250,000, 
and $450,000 on April 15, 2009, June 15, 2009, September 15, 2009, 
and December 15, 2009, respectively. X reports a tax liability of 
$1,152,600 on its return due March 15, 2010, 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, 2009, and $114,450 for the 
third installment through December 15, 2009, 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) Deduction of 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) Deduction of 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) Deduction of 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) Deduction of 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 2009 is as follows:

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    January          February          March           April            May            June            July           August         September        October        November        December
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006:
    $100,000          $90,000          $80,000         $70,000         $60,000         $20,000         $10,000         $10,000         $10,000         $10,000         $10,000         $10,000
2007:
     200,000          170,000          170,000         130,000         125,000          45,000          21,000          19,000          20,000          20,000          20,000          20,000
2008:
     410,000          350,000          330,000         270,000         240,000          80,000          40,000          40,000          40,000          40,000          40,000          40,000
2009:
     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 2006, 2007, and 2008, 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 2006 = $420,000
    (B) Total taxable income for 2006 = $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 2007 = $840,000
    (E) Total taxable income for 2007 = $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 2008 = $1,680,000

[[Page 44360]]

    (H) Total taxable income for 2008 = $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 2009 = $1,930,000
    (B) Taxable income for first 3 months of 2006 ($270,000) divided 
by total taxable income for 2006 ($480,000) = .5625
    (C) Taxable income for first 3 months of 2007 ($540,000) divided 
by total taxable income for 2007 ($960,000) = .5625
    (D) Taxable income for first 3 months of 2008 ($1,090,000) 
divided by total taxable income for 2008 ($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 2006 ($340,000) divided 
by total taxable income for 2006 ($480,000) = .7083
    (I) Taxable income for first 4 months of 2007 ($670,000) divided 
by total taxable income for 2007 ($960,000) = .6979
    (J) Taxable income for first 4 months of 2008 ($1,360,000) 
divided by total taxable income for 2008 (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 2009 = $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 2009 = $2,950,000
    (B) Taxable income for first 5 months of 2006 ($400,000) divided 
by total taxable income for 2006 ($480,000) = .8333
    (C) Taxable income for first 5 months of 2007 ($795,000) divided 
by total taxable income for 2007 ($960,000) = .8281
    (D) Taxable income for first 5 months of 2008 ($1,600,000) 
divided by total taxable income for 2008 ($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 2006 ($420,000) divided 
by total taxable income for 2006 ($480,000) = .875
    (I) Taxable income for first 6 months of 2007 ($840,000) divided 
by total taxable income for 2007 ($960,000) = .875
    (J) Taxable income for first 6 months of 2008 ($1,680,000) 
divided by total taxable income for 2008 ($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 2009 = 
$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 2009 = $3,250,000
    (B) Taxable income for first 8 months of 2006 ($440,000) divided 
by total taxable income for 2006 ($480,000) = .9167
    (C) Taxable income for first 8 months of 2007 ($880,000) divided 
by total taxable income for 2007 ($960,000) = .9167
    (D) Taxable income for first 8 months of 2008 ($1,760,000) 
divided by total taxable income for 2008 ($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 
(e), Example (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 2006 ($450,000) divided 
by total taxable income for 2006 ($480,000) = .9375
    (I) Taxable income for first 9 months of 2007 ($900,000) divided 
by total taxable income for 2007 ($960,000) = .9375
    (J) Taxable income for first 9 months of 2008 ($1,800,000) 
divided by total taxable income for 2008 ($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 2009 = 
$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 2009 = $3,370,000
    (B) Taxable income for first 11 months of 2006 ($470,000) 
divided by total taxable income for 2006 ($480,000) = .9792
    (C) Taxable income for first 11 months of 2007 ($940,000) 
divided by total taxable income for 2007 ($960,000) = .9792
    (D) Taxable income for first 11 months of 2008 ($1,880,000) 
divided by total taxable income for 2008 ($1,920,000) = .9792
    (E) Add this paragraph (e), Example (vii)(B), (C), and (D) and 
divide 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 2006 ($480,000) 
divided by total taxable income for 2006 ($480,000) = 1.0000
    (I) Taxable income for first 12 months of 2007 ($960,000) 
divided by total taxable income for 2007 ($960,000) = 1.0000
    (J) Taxable income for first 12 months of 2008 ($1,920,000) 
divided by total taxable income for 2008 ($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 2009 = 
$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, 2009, and September 15, 2009, 
installments will be imposed unless another exception (for example, 
see section 6655(e)(2)) applies with respect to these installments.

    (f) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.
0
Par. 9. 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

[[Page 44361]]

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 a section 381 
transaction occurs, 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 (or loss) of the distributor or transferor 
corporation 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)).
    (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 a section 381 transaction occurs, the distributor 
or transferor corporation's taxable income (or loss) is reduced by the 
amount of taxable income (or loss) that is included in the acquiring 
corporation's taxable income for the taxable year in which the 
distribution or transfer (as defined in Sec.  1.381(b)-1(b)) occurs, as 
described in paragraph (c)(2)(i)(B) of this section.
    (d) Members of controlled group--(1) In general. For purposes of 
applying 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 do 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 is 
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 is 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 2008, Z acquires all of the assets of Y in a 
transaction to which section 381 applies. Z's taxable income for 
both 2006 and 2007 was less than $1,000,000. Y's taxable income for 
2008 is determined under paragraph (c)(2) of this section to be 
$300,000 for that portion of Y's taxable year corresponding to Z's 
taxable year up to and including the date of transfer. Z's taxable 
income for 2008 is $800,000. Under the provisions of paragraph 
(c)(2) of this section, Z's 2008 taxable income for purposes of 
determining whether it is a large corporation for taxable year 2009 
is $1,100,000 ($800,000 + $300,000). Thus, Z is a large corporation 
for the 2009 taxable year. In addition, if Z's 2008 taxable income, 
as determined under paragraph (c)(2) of this section, had been less 
than $1,000,000 but Y's taxable income in 2006 or 2007 had been 
$1,000,000 or more, Z would be a large corporation for taxable year 
2009 because Y is a predecessor corporation.

    (h) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.


Sec.  1.6655-7  [Removed].

0
Par. 10. Section 1.6655-7 is removed.


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

0
Par. 11. Section 1.6655-5 is redesignated as Sec.  1.6655-7.

0
Par. 12. 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 these 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 at 
least 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) apply.
    (ii) Exceptions. (A) If the date determined under paragraph 
(c)(1)(i) of this section for the first required

[[Page 44362]]

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 is 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.
    (B) A taxpayer with an initial short taxable year may make 
estimated tax payments as though it were a calendar year taxpayer until 
it files its tax return for its initial taxable year and will not be 
subject to an addition to tax under section 6655 for making estimated 
tax payments as though it were a calendar year taxpayer for the period 
beginning with its initial short taxable year to the time it files its 
tax return for its initial short taxable year if, when filing its tax 
return for its initial short taxable year, the taxpayer chooses to be a 
fiscal year taxpayer.
    (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 is 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 is 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 is 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) is 
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 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) is--
    (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.
    (4) Applicable percentage for installment period in which taxpayer 
does not reasonably expect that the taxable year will be an early 
termination year. In the case of any required installment determined 
under section 6655(e) in which the taxpayer does not reasonably expect 
that the taxable year will be an early termination year, the applicable 
percentage under section 6655(e)(2)(B)(ii) is the applicable percentage 
provided by paragraph (d)(3)(i) of this section with the remaining 
balance of the estimated tax payment for the year due with the final 
installment.
    (e) Examples. The following examples illustrate the rules of this 
section:

    Example 1. Short year of less than 4 months. Corporation A is a 
calendar year taxpayer that was acquired by corporation B, a member 
of a consolidated group (as defined in Sec.  1.1502-1(h)) on April 
16, 2009, resulting in A having a short taxable year from January 1, 
2009, through April 16, 2009. 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. Initial short year with four required installments. 
Corporation B began business on January 9, 2009, 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 9, 2009, 
through December 31, 2009, are April 15, 2009, June 15, 2009, 
September 15, 2009, and December 15, 2009. 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. Initial short year with three required installments. 
Corporation C began business on February 12, 2009, 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, 2009, 
through December 31, 2009, are April 15, 2009, June 15, 2009, 
September 15, 2009, and December 15, 2009. However, in accordance 
with paragraph (c)(1)(ii)(A) of this section, C's first required 
installment is due June 15, 2009, because April 15, 2009, 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, 2009, 
and C's third (and last) installment is due December 15, 2009. 
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. Initial short year with two required installments. 
Same facts as Example 3 except C began business on April 10, 2009. 
In accordance with paragraph (c)(1)(ii)(A) of this section, C's 
first required installment is due September 15, 2009, because April 
15, 2009, and June 15, 2009, 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, 2009. 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. Initial short year for fiscal year taxpayer with two 
required installments. Corporation D began business on February 12, 
2009, 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, 2009, through October 31, 2009, are February 15, 
2009, April 15, 2009, July 15, 2009, and October 15, 2009. However, 
in accordance with paragraph (c)(1)(ii)(A) of this section, D's 
first required installment is due July 15, 2009, because February 
15, 2009, and April 15, 2009, are earlier than the fifteenth day of 
the fourth month of D's

[[Page 44363]]

taxable year. As a result, D's second (and last) installment is due 
October 15, 2009. 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. Initial short year for fiscal year taxpayer with one 
required installment. Same facts as Example 5 except D corporation 
began business on May 11, 2009. In accordance with paragraph 
(c)(1)(ii)(A) of this section, D's first (and last) installment is 
due October 15, 2009, because July 15, 2009, 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. Short termination year with three required 
installments. Corporation E 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 2009 required installments based on 
a projected 2009 total tax liability of $600,000. On July 31, 2009, 
E is acquired by corporation F, a member of a consolidated group (as 
defined in Sec.  1.1502-1(h)), resulting in E having a short taxable 
year from January 1, 2009, through July 31, 2009. 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, 
2009, and June 15, 2009, respectively. 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, 2009, 
and the percentage of the required annual payment due with such 
installment is 100% pursuant to paragraph (d)(1) of this section. 
Accordingly, E is required to pay $50,000 with its final required 
installment on September 15, 2009 ($350,000 total tax liability for 
the short taxable year less prior installment payments of $300,000).
    Example 8. Unexpected short termination year with three required 
installments using the annualization method. Same facts as Example 7 
except that E uses the annualized income installment method under 
section 6655(e)(2)(A)(i) to calculate all of its required 
installment payments for its 2009 taxable year. In addition, E does 
not reasonably expect until July 28, 2009, that it will have a short 
termination year caused by E being acquired by F on July 31, 2009. 
Had E known about its acquisition by F in the first quarter of 2009, 
E's applicable percentages for computing the amount of its three 
required installments would be 33.33%, 66.67%, and 100% for the 
first, second, and third (last) required installments, respectively, 
pursuant to paragraph (d)(3)(ii) of this section. However, because E 
had an unexpected short termination year that E was not aware of 
until after its second required installment payment, E's applicable 
percentages for computing the amount of its three required 
installment are 25%, 50%, and 100% for the first, second, and third 
(last) required installments, respectively, pursuant to paragraph 
(d)(4) of this section.
    Example 9. Short termination year ending within 30 days of the 
regular final installment due date. Same facts as Example 7 except 
that E is acquired by F on August 31, 2009. Pursuant to paragraph 
(c)(2)(ii) of this section, E's third (and last) required 
installment of estimated tax is due on October 15, 2009, because 
September 15, 2009, 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 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 10. Short termination year ending within 30 days of the 
regular final installment due date. Corporation F 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 2009 
estimated tax payments based on a projected 2009 total tax liability 
of $900,000. On December 3, 2009, F is acquired by corporation G, a 
member of a consolidated group (as defined in Sec.  1.1502-2(h)), 
resulting in F having a short taxable year from January 1, 2009, 
through December 3, 2009. 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, 2009, June 15, 
2009, and September 15, 2009, respectively. 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, 
2010, 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 fourth required 
installment falls on a legal holiday, F's required installment 
payment will be timely if paid on or before the first business day 
following the actual due date of the fourth required installment, 
that is, February 16, 2010. Accordingly, F is required to pay 
$125,000 with its final required installment on February 16, 2010 
($800,000 total tax liability for the short taxable year less prior 
installment payments of $675,000).
    Example 11. Short termination year using the tax shown on the 
return for the preceding taxable year. Corporation G, a calendar 
year taxpayer, reported a tax liability of $75,000 on its return for 
the taxable year ending December 31, 2008, and is not a large 
corporation as defined in section 6655(g). On July 31, 2009, 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, 2009, through July 31, 2009. 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 
2008 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 2009, with $14,583 due 
on April 15, 2009, June 15, 2009, and September 15, 2009.
    Example 12. Short termination year using the tax shown on the 
return for the preceding taxable year. Same facts as Example 11 
except that G makes a final distribution of its assets, in 
connection with a plan of complete liquidation, on October 1, 2009, 
resulting in a short taxable year from January 1, 2009, through 
October 1, 2009. 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 2009, with $14,063 
due on April 15, 2009, June 15, 2009, September 15, 2009, and 
December 15, 2009, respectively.
    Example 13. Short initial year with three required installments 
resulting in an underpayment. (i) Corporation H began business on 
February 17, 2009, 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 17, 2009, through December 31, 2009, would be $180,000. H 
paid its first required installment of estimated tax of $60,000 on 
June 15, 2009, its second required installment of estimated tax of 
$60,000 on September 15, 2009, and its third (and last) required 
installment of estimated tax of $60,000 on December 15, 2009 
($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 
17, 2009, through December 31, 2009, with no credits against tax. 
There was an underpayment in the amount of $20,000 on the first 
installment date through September 15, 2009, $40,000 on the second 
installment date through December 15, 2009, and $60,000 on the third 
(and last) installment date through March 15, 2010, determined as 
follows:
    (A) Tax as defined in section 6655(d)(1)(B)(i) = $240,000
    (B) 100% of this paragraph (e), Example 13 (A) = $240,000
    (C) Amount of estimated tax required to be paid by the first 
installment date (33.33% of $240,000) = $80,000
    (D) 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
    (E) 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
    (F) Deduction of amount paid on or before the first installment 
date = $60,000
    (G) Amount of underpayment for the first installment date (this 
paragraph (e), Example 13 (i)(C) minus this paragraph (e), Example 
13 (i)(F)) = $20,000
    (H) Deduction of amount available for the second installment 
date ($60,000 second installment payment less this paragraph (e), 
Example 13 (i)(G) applied towards the first installment 
underpayment) = $40,000

[[Page 44364]]

    (I) Amount of underpayment for the second installment date (this 
paragraph (e), Example 13 (i)(D) minus this paragraph (e), Example 
13 (i)(H)) = $40,000
    (J) Deduction of amount available for the third installment date 
($60,000 third installment payment less this paragraph (e), Example 
13 (i)(I) applied towards the second installment underpayment) = 
$20,000
    (K) Amount of underpayment for the third installment date (this 
paragraph (e), Example 1 (i)(E) minus this paragraph (e), Example 13 
(i)(J)) = $60,000
    (ii) [Reserved].

    (f) 52 or 53 week taxable year. For purposes of this section a 
taxable year of 52 or 53 weeks is 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 computes its annualized income installment by 
determining the tax on the basis of such annualized income for the 
annualization period, divided by 12, multiplied by the number of months 
in the short taxable year, and multiplied by the applicable percentage 
for the required installment.
    (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 is 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. Corporation X began business on February 12, 2009, 
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 2009 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, 2009, through 
December 31, 2009, are April 15, 2009, June 15, 2009, September 15, 
2009, and December 15, 2009. However, in accordance with paragraph 
(c)(1)(ii)(A) of this section, X's first required installment is due 
June 15, 2009. As a result, X's second required installment is due 
September 15, 2009, and X's third (and last) required installment is 
due December 15, 2009. The amount of X's first and second required 
installments are each based on annualizing X's taxable income from 
February 12, 2009, through April 30, 2009, (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, 2009, 
through July 31, 2009 (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. (i) Y, a calendar year corporation, made a final 
distribution of its assets, in connection with a plan of complete 
liquidation, on August 3, 2009. 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, 2009, through August 3, 2009, are April 15, 
2009, June 15, 2009, and September 15, 2009. Y made installment 
payments of $10,000, $10,000, and $20,000, respectively, on April 
15, 2009, June 15, 2009, and September 15, 2009. 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
    (ii)(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 (ii)(A)(1) = $41,750
    (3) Tax determined under this paragraph (g)(4), Example 2 
(ii)(A)(2) divided by 12 multiplied by 7 (the number of months in 
the short taxable year) = $24,354
    (4) 100% of this paragraph (g)(4), Example 2 (ii)(A)(3) = 
$24,354
    (5) 33.33% of this paragraph (g)(4), Example 2 (ii)(A)(4) = $ 
8,117
    (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, 2009.
    (iii)(A) To determine whether the required installments made on 
or before June 15, 2009, 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 (iii)(A)(1) = 
$41,750
    (3) Tax determined under this paragraph (g)(4), Example 2 
(iii)(A)(2) divided by 12 multiplied by 7 (the number of months in 
the short taxable year) = $24,354
    (4) 100% of this paragraph (g)(4), Example 2 (iii)(A)(3) = 
$24,354
    (5) 66.67% of this paragraph (g)(4), Example 2 (iii)(A)(4) less 
$8,117 (amount due with first installment) = $8,120
    (B) Because the total amount of estimated tax available to apply 
towards the amount due for the second installment ($11,883 ($10,000 
paid on the second installment date plus $1,883 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, 2009.
    (iv)(A) Pursuant to paragraph (c) and (d) of this section, the 
final required installment is due by September 15, 2009, and the 
applicable percentage due for the final required installment is 
100%. To determine whether the installment payments made on or 
before September 15, 2009, 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 (iv)(A)(1) = $76,850
    (3) Tax determined under this paragraph (g)(4), Example 2 
(iv)(A)(2) divided by 12 multiplied by 7 (the number of months in 
the short taxable year) = $44,829
    (4) 100% of this paragraph (g)(4), Example 2 (iv)(A)(3) = 
$44,829
    (5) 100% of this paragraph (g)(4), Example 2 (iv)(A)(4) less 
$16,237 (amount due with first and second installment) = $28,592
    (B) Because the total amount of estimated tax available to apply 
towards the amount due for the final installment ($23,763 ($20,000 
that is timely paid on the third installment date plus $3,763 
overpayment of the second installment)) does not exceed the

[[Page 44365]]

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) 
does not apply and an addition to tax will be imposed for the final 
installment due on September 15, 2009, unless another exception (for 
example, see section 6655(e)(3)) applies with respect to these 
installments.

    (h) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.


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) Accounting method changes. A taxpayer that changes its method 
of accounting with the consent of the Commissioner for the current 
taxable year must use the new method of accounting (as of the beginning 
of the taxable year) in the determination of taxable income for 
annualization periods ending on or after the date the related section 
481(a) adjustment is treated as arising. See Sec.  1.6655-
2(f)(3)(ii)(C) for the date a section 481(a) adjustment is treated as 
arising. If the change in method of accounting does not result in a 
section 481(a) adjustment, the taxpayer may choose to use the new 
method of accounting (as of the beginning of the taxable year) in the 
determination of taxable income for all annualization periods during 
the year of change or only those annualization periods ending on or 
after the date the Form 3115 ``Application for Change in Accounting 
Method'' was filed with the national office of the Internal Revenue 
Service. This paragraph (b) only applies to the extent a taxpayer 
changes a method of accounting for the taxable year with the consent of 
the Commissioner. Therefore, a taxpayer may be subject to a section 
6655 addition to tax for an underpayment of estimated tax if an 
underpayment results from a change in a method of accounting the 
taxpayer anticipates making for the taxable year but for which the 
consent of the Commissioner is not subsequently received.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. Accounting method used in computing taxable income 
for the taxable year. Corporation ABC, a calendar year taxpayer, 
uses an accrual method of accounting and the annualization method 
under section 6655(e)(2)(A)(i) to calculate all of its 2008 required 
installments. ABC receives advance payments each taxable year with 
respect to agreements for the sale of goods properly includible in 
ABC's inventory. The advance payments received by ABC qualify for 
deferral under Sec.  1.451-5(c). Although ABC is eligible to defer 
the advance payments in accordance with Sec.  1.451-5(c), ABC's 
method of accounting with respect to the advance payments is to 
include the advance payments in income when received and ABC does 
not change its accounting method for advance payments for the 2008 
taxable year. ABC must use its current method of recognizing advance 
payments as income in the year received for purposes of computing 
its 2008 required installments.
    Example 2. Change of accounting method. Corporation ABC, a 
calendar year taxpayer, uses an accrual method of accounting and the 
annualization method under section 6655(e)(2)(A)(i) to calculate all 
of its 2008 required installments. On June 15, 2008, ABC files a 
Form 3115 requesting permission to change its method of accounting 
for future litigation reserves for the tax year ending December 31, 
2008. On February 15, 2009, ABC receives consent from the 
Commissioner to make the change for the tax year ending December 31, 
2008. The change results in a positive section 481(a) adjustment of 
$100,000. Under the provisions of Sec.  1.6655-2(f)(3)(ii) ABC 
chooses to treat the section 481(a) adjustment as arising on the 
date the Form 3115 is filed with the national office of the Internal 
Revenue Service. Therefore, ABC is required to use the new method of 
accounting (as of the beginning of the year) in the determination of 
taxable income for annualization periods ending on or after June 15, 
2008.

    (d) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

0
Par. 13. 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, 2009, in 
the amount of $10,000. On January 4, 2010, X filed an application 
for adjustment of overpayment of estimated income tax for 2009 in 
the amount of $20,000.
    (ii) On February 16, 2010, the Internal Revenue Service, in 
response to the application, refunded $20,000 to X. On March 15, 
2010, X filed its 2009 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, 2009, 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. Sec.  1.6655-1 through 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) Effective/applicability date: This section applies to taxable 
years beginning after September 6, 2007.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 14. The authority citation for part 301 continues to read in part 
as follows:


[[Page 44366]]


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


Sec.  301.6154-1  [Removed].

0
Par. 15. Section 301.6154-1 is removed.
0
Par. 16. 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) Effective/applicability date: This section applies to taxable 
years beginning after September 6, 2007.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 17. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec.  602.101  [Amended].

0
Par. 18. Section 602.101, paragraph (b) is amended by removing the 
entries for Sec. Sec.  1.6154-2, 1.6154-3, 1.6154-5, 1.6655-1, 1.6655-
2, 1.6655-3 and 1.6655-7.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: July 17, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-14946 Filed 8-6-07; 8:45 am]
BILLING CODE 4830-01-P