A corporation filed a 2008 income tax return reflecting a tax liability of “$0.00.” In the following year, the Corporation made no estimated income tax payments, based on Internal Revenue Code Section 6655(d)(1)(B) which provides that required annual installments can be as low as “100% of the tax shown on the return of the Corporation for the preceding taxable year” (i.e., $0)
The Code does go on to provide that this provision “shall not apply if…the corporation did not file a return for such preceding taxable year showing a liability for tax.” Both the IRS, and the District Court reviewing the issue, have concluded that since the corporation did not reflect any tax amount due in the preceding year, these limitations based on “tax shown on the return” and having a “liability for tax” do not apply. Since these limitations do not apply, a penalty of $94,671.53, plus interest was imposed by the IRS for failure to pay estimated taxes.
My first thought when I was reading this was that if the corporation had a one dollar tax liability in the preceding year it would have only had to pay one dollar estimated taxes to avoid penalties. Thus, there must be something wrong with the IRS’ interpretation of the statute if a one dollar difference in tax liability results in over $94,000 in tax penalties. Apparently, the taxpayer made a similar argument to the court, but the court was unpersuaded. It provided in its opinion that “[t]he fact that application of tax statutes sometimes presents harsh results does not negate the fact that the law must be enforced as written by Congress.”
Different rules apply for individual estimated taxes under Code Section 6655, since different statutory language applies. Further, that Code Section has an additional provision that explicitly provides that if the individual taxpayer had no tax liability in the preceding tax year he or she has no estimated tax payment obligations in the current year (Code Section 6654(e)(2)). Indeed, the presence of this exculpatory language in Code Section 6654, and its absence in Code Section 6655, may be supportive of the IRS and District Court position when there was no tax due in the preceding tax year. Nonetheless, this is a ridiculous result.
CAL PURE PISTACHIOS, INC. v. U.S., 115 AFTR 2d 2015-XXXX, (DC CA), 04/10/2015