Technical Compliance With Estimated Tax Payments Is Enough
FSA 1997-57
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsestimated tax, payment, failure of
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-5784 (3 original pages)
- Tax Analysts Electronic Citation2000 TNT 170-48
Date: July 22, 1997
Refer Reply to: CC:DOM:FS
IT&A:JLTrevey
TO:
Kentucky-Tennessee District Counsel
Attention: Nancy W. Hale
CC:SER:KYS:NAS
FROM:
Assistant Chief Counsel (Field Service)
CC:DOM:FS
SUBJECT:
* * * and * * *
Request for Field Service Advice Regarding
Addition to Tax for Failure to Pay Estimated Taxes
TL-N-3150-97
[1] We are writing in response to your request dated April 24, 1997, for field service advice regarding the above-styled case. On the facts provided to us, we believe that the taxpayers are in technical compliance with the requirements of I.R.C. section 6654. Accordingly, except as discussed below, we do not believe that the taxpayers are liable for an addition to tax for failure to make estimated income tax payments.
DISCLOSURE LIMITATIONS
[2] Field Service Advice constitutes return information subject to I.R.C. section 6103. Field Service Advice contains confidential information subject to attorney-client and deliberative process privileges and if prepared in contemplation of litigation, subject to the attorney work product privilege. Accordingly, the Examination, Appeals, or Counsel recipient of this document may provide it only to those persons whose official tax administration duties with respect to this case require such disclosure. In no event may this document be provided to Examination, Appeals, Counsel or other persons beyond those specifically indicated in this statement. Field Service Advice may not be disclosed to taxpayers or their representatives.
[3] Field Service Advice is not binding on Examination or Appeals and is not a final case determination. Such advice is advisory and does not resolve Service position on an issue or provide the basis for closing a case. The determination of the Service in the case is to be made through the exercise of the independent judgment of the Field office with jurisdiction over the case.
ISSUE
[4] Whether the "safe harbor" provision of I.R.C. section 6654(g)(1) applies in a situation in which an employee who is the sole shareholder of an S corporation receives one salary payment near the end of the year and causes to be withheld from that payment an amount greater than 110 percent of his prior year's income tax liability.
FACTS
[5] The facts that you provide indicate that taxpayer * * *, * * *, the * * * percent shareholder of a Subchapter S corporation, is also an employee of the corporation. In his capacity as an employee, he received one salary payment of $ * * * for the entire year on * * *. The taxpayer caused income tax, FICA and Medicare payments totaling $ * * * to be withheld from this single salary payment. The income tax withheld ($ * * *) was the taxpayers' only payment of tax prior to filing their * * * return. On * * *, * * * and * * * [the * * *] filed their * * * income tax return, declaring a total * * * tax liability of $ * * * and paying a balance due of $* * *.
[6] The * * * income tax liability was $ * * *. Thus, the $* * * withheld from * * *'s salary on * * *, constituted more than 110 percent of their * * * tax liability.
ANALYSIS
[7] Section 3402 of the Internal Revenue Code requires every employer making payment of wages to deduct and withhold taxes upon those wages 1 in accordance with procedures and tables prescribed by the Secretary. I.R.C. section 3402(a)(1). The employer shall apply those procedures and tables during such periods as the Secretary may prescribe. Section 3402(a)(1)(A). However, notwithstanding the foregoing, the Code provides that the "payroll period" forming the basis of the withholding computation may be as long as one year. Section 3401(b). Other than the one-year maximum implied by section 3401(b), we know of no provision in the Code imposing upon employers a maximum payroll period duration. Thus, subject only to the possible constraints of state law and federal labor statutes; an employer may choose how often it pays its employees.
[8] Generally, taxes withheld on wages are deemed to be payments of estimated tax spread equally among the various estimated tax due dates for the taxable year. Section 6654(g)(1). However, if a taxpayer can establish the date or dates that an employer actually withheld tax on the taxpayer's wages, then the amounts withheld are deemed payments of estimated tax on the actual withholding dates. Id. This election is the taxpayer's. Unless the taxpayer exercises this election, the government does not have the authority to treat the payment of estimated tax as occurring other than ratably throughout the taxable year. Because the * * * did not make this election, the withholding on * * *'s salary must be treated as occurring ratably throughout the taxable year.
[9] For married taxpayers filing a joint return, the amount of the annual estimated tax payment required by section 6654 is the lesser of (1) 90 percent of the tax shown on the return for the taxable year in question, or (2) 110 percent of the tax shown on the taxpayers' return for the preceding taxable year if the taxpayers' adjusted gross income for the preceding taxable year exceeded $150,000. Section 6654(d)(1). On their * * * tax return, the * * * declared a tax liability of $* * *. Applying the 110 percent formula of section 6654(d)(1) to their * * * tax liability yields a required * * * estimated tax payment of $ * * *. The $* * * withheld from * * *'s salary exceeded this amount. Accordingly, the * * * paid more than the annual payment required by section 6654(d)(1).
[10] In your memorandum, you acknowledged that the * * * technically met the requirements for the "safe harbor" provision of section 6654(d)(1). Your principal question was whether a special rule exists enabling the Service to deny an employee in control of the employer the benefits of sections 6654(d)(1) and 6654(g)(1). We know of no such authority. The Code and regulations contain no special exception for employees who control their employers, nor have we found any rulings or other Service pronouncements to that effect. Accordingly, we conclude on the facts provided to us that while * * *'s salary arrangement is an extreme manipulation of the Code, it does not subject the * * * to an addition to tax under section 6654.
[11] If you have questions, please contact John Trevey at (202) 622-7920.
By: Clifford M. Harbourt
Senior Technician Reviewer
Field Service Division
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsestimated tax, payment, failure of
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-5784 (3 original pages)
- Tax Analysts Electronic Citation2000 TNT 170-48
