Rev. Rul. 55-673

Advice has been requested whether the decision in the case of Carl Stephan et ux. v. Commissioner , 197 Fed.(2d) 712, will be followed in determining the additions to the tax under section 294(d)(1) of the Internal Revenue Code of 1939 with respect to a failure to file a declaration of estimated tax or a failure to pay installments of estimated tax declared.

Section 294(d)(1)(B) of the Code provides in part as follows:

Where a declaration of estimated tax has been made and filed within the time prescribed, or where a declaration of estimated tax has been made and filed after the time prescribed and the Commissioner has found that failure to make and file such declaration within the time prescribed was due to reasonable cause and not to willful neglect, in the case of a failure to pay an installment of the estimated tax within the time prescribed, unless such failure is shown to the satisfaction of the Commissioner to be due to reasonable cause and not to willful neglect, there shall be added to the tax 5 per centum of the unpaid amount of such installment, and in addition 1 per centum of such unpaid amount for each month (except the first) or fraction thereof during which such amount remains unpaid. In no event shall the aggregate addition to the tax under this subparagraph with respect to any installment due but unpaid, exceed 10 per centum of the unpaid portion of such installment.

Section 294(d)(1)(A) of the Code provides for like additions to the tax in the case of a failure to make and file a declaration of estimated tax within the time prescribed.

The taxpayers in the Stephan case asked the court to redetermine the additions to the tax, asserting that the one percent monthly additions to the tax, as provided by section 294(d)(1)(B), were not applicable after the date of filing of the final income tax return for the taxable year.

The Court decided in favor of the taxpayer and, referring to section 294(d)(1)(B) of the Code, stated:

We can see no reason why the word `unpaid' as used in subparagraph (B) should be given any different construction that the words `due but unpaid' used throughout the preceding subparagraph (A) and also in the final sentence of subparagraph (B). To say that an installment of the estimated tax remains unpaid presupposes a continuing duty to pay such installment. The declaration of estimated tax had served its function when the final return was filed. There was then no longer any uncertainty, and the tax should thereafter be paid on the basis of the final return rather than as estimated. It follows that installments of the estimated tax were then no longer due.

This decision is considered to be a fair and reasonable interpretation of section 294(d)(1) to the extent that it holds that estimated tax installments remain due and payable until the due date of the tax, on and after which date the tax imposed becomes due and payable on the basis of the final return rather than as estimated. Accordingly, the Stephan decision will be followed in computing additions to the tax under section 294(d)(1)(A) and (B) where, as in that case, the final return is filed on the due date (the date prescribed for the payment of the tax). However, in cases where the final return is filed before the due date without being accompanied by payment of the tax, the monthly additions for failure to file a timely declaration of estimated tax, or for nonpayment of the estimated tax continue to accrue, subject to the ten percent limitation, until the date prescribed for payment of the tax or the date the tax is paid, whichever is the earlier. If the tax is not paid on or before the due date (whether the final return is filed on, before or after that date), in lieu of the accrual from that date of additions for failure to file a timely declaration of estimated tax, or for nonpayment of estimated tax, additions accrue for nonpayment of the tax imposed as provided in section 294(a) and (b)