Tax Type
Corporation Income Tax
Description
The courts have refused to allow the addition to tax under I.R.C. § 6655 to be adjusted
Topic
Constitutional Provisions
Penalties and Interest
Date Issued
12-03-2004
December 3, 2004
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ********:
This will reply to your letter in which you request a refund for your client, ***** (the "Taxpayer") for the adjustment to Form 500C for the 1998 taxable year.
FACTS
An amended return for taxable year 1998 was filed on behalf of the Taxpayer. The amended return reflected a reduction in Virginia taxable income and in the addition to tax calculated on Form 500C. The Department accepted the amended return but disallowed the adjustment to the 500C addition to tax as it was properly computed on the original return. The taxpayer is asking that the reduction to the Form 500C addition to tax, as indicated on the amended tax return, be allowed and the refund be granted.
DETERMINATION
Corporations that underpay their estimated tax during the taxable year are subject to an addition to tax calculated by applying the applicable interest rate to the amount of the underpayment. Under Va. Code § 58.1-504 the amount of the underpayment is defined as:
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- [T]he amount of the underpayment shall be the excess of:
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- 1. The amount of the installment which would be required to be paid if the estimated tax were equal to ninety percent of the tax shown on the return for the taxable year or, if no return was filed, ninety percent of the tax for such year, over
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- 2. The amount, if any, of the installment paid on or before the last date prescribed for payment.
The statute also provides a safe harbor allowing a corporation to avoid the addition to the tax by paying the "tax shown on the return of the corporation for the preceding taxable year, if a return showing a liability for the tax was filed by the corporation for the preceding taxable year and such preceding year was a taxable year of twelve months."
Note that in both imposing the addition to tax and granting a safe harbor, the General Assembly specifically referred to the "tax shown on the return" rather than the actual tax liability or simply "the tax" for the taxable year. In fact, the portion of the statute imposing the addition to tax does mention the "tax for such year" but only for the purpose of computing the addition to tax when no return was filed. The fact that the General Assembly used different terminology for different situations strongly supports the conclusion that different results were intended. The Taxpayer would have us ignore the words "shown on the return" as mere surplusage and calculate the addition to tax based on the "tax for such year" whether the tax is shown on the original return, an amended return, or is calculated by the Department in the absence of a return or even upon an audit. However, we are not permitted to ignore words in a statute.
If we were to permit the addition to tax for 1998 to be adjusted for a subsequent amended return, then logic would compel us to similarly adjust the addition to tax on the 1999 return if the Taxpayer relied on the safe harbor and based 1999 estimated tax payments on the amount shown on the original 1998 return.
The language in Va. Code § 58.1-504 is strikingly similar to the language of I.R.C. § 6655. The courts have refused to allow the addition to tax under I.R.C. § 6655 to be adjusted to conform to an amended return. One court explained the rationale for this policy as follows:
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- Moreover, the interpretation proposed by the taxpayer would flout the legislative purposes of affording the taxpayer a predictable and easily determined method to avoid penalty for underpayment of estimated taxes required during a tax year .... The safe harbor provisions in § 6655 reflect Congress's concern that taxpayers may find it difficult to estimate precisely what their income for the year will be. Thus, the definition of the term "underpayment" under § 6655 b itself provided, during the period here in question, for a 20% margin of error in estimating the tax that will ultimately be shown due on the return for the year in question. In addition, § 6655 d 1, the safe harbor provision, permits taxpayers to avoid [any] possibility of incurring a penalty for underestimating the income for the year by basing estimate tax payments simply on the amounts shown on the prior year's returns.
This objective of the safe harbor provision - to provide a predictable escape from any possible penalty liability - 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. Evans Cooperage Co., Inc. v. United States, 712 F2d 199, 83-2 USTC 1 9544 (CA5, 1983) (citations omitted).
Therefore, I must deny your request for a refund of the addition to tax. The Code of Virginia section cited is available online in the Tax Policy Library section of the Department of Taxation web site, located at www.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Policy Development at *****.
- Moreover, the interpretation proposed by the taxpayer would flout the legislative purposes of affording the taxpayer a predictable and easily determined method to avoid penalty for underpayment of estimated taxes required during a tax year .... The safe harbor provisions in § 6655 reflect Congress's concern that taxpayers may find it difficult to estimate precisely what their income for the year will be. Thus, the definition of the term "underpayment" under § 6655 b itself provided, during the period here in question, for a 20% margin of error in estimating the tax that will ultimately be shown due on the return for the year in question. In addition, § 6655 d 1, the safe harbor provision, permits taxpayers to avoid [any] possibility of incurring a penalty for underestimating the income for the year by basing estimate tax payments simply on the amounts shown on the prior year's returns.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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PD44321
Rulings of the Tax Commissioner