Section 6166(f) provides:
(f) Time for payment of interest
If the time for payment of any amount of tax has been extended under this section-
(1) Interest for first 5 years
Interest payable under section 6601 of any unpaid portion of such amount attributable to the first 5 years after the date prescribed by section 6151(a) for payment of the tax shall be paid annually.
(2) Interest for periods after first 5 years
Interest payable under section 6601 on any unpaid portion of such amount attributable to any period after the 5-year period referred to in paragraph (1) shall be paid annually at the same time as, and as a part of, each installment payment of the tax.
(3) Interest in the case of certain deficiencies
In the case of a deficiency to which subsection (e) applies which is assessed after the close of the 5-year period referred to in paragraph (1), interest attributable to such 5-year period, and interest assigned under paragraph (2) to any installment the date for payment of which has arrived on or before the date of the assessment of the deficiency, shall be paid upon notice and demand from the Secretary.
(4) Selection of shorter period
If the executor has selected a period shorter than 5 years under subsection (a)(3), such shorter period shall be substituted for 5 years in paragraphs (1), (2), and (3) of this subsection.
Regulation section 20.6166-1(f) provides:
(f) Rule for computing interest. Section 6601(j) provides a special 4 percent interest rate for the amount of tax (including deficiencies) which is to be paid in installments under section 6166. This special interest rate applies only to that amount of tax which is to be paid in installments and which does not exceed the limitation of section 6601(j)(2). Where payment of a greater amount of tax than is subject to section 6601(j)(2) is extended under section 6166, each installment is deemed to be comprised of both tax subject to the 4 percent interest rate and tax subject to the rate otherwise prescribed by section 6621. The percentage of any installment subject to the special 4 percent rate is equal to the percentage of the total tax payable in installments which is subject to the 4 percent rate. Where an election is made under the provisions of paragraphs (b) or (c) (1) of this section, the 4 percent rate applies from the date on which the estate tax was originally due to be paid. If only a protective election is made, section 6601(j) applies to the amount which is to be paid in installments, limited to the amount of any deficiency, from the due date for payment of estate tax. After the date upon which the section 6166 election is made final, section 6601(j) applies to the entire amount to be paid in installments.
IRM 18.104.22.168.6.13, which is applicable to Cincinnati Campus, provides
13. If property qualifies for installments, generally only interest on the unpaid balance is due on the first four anniversary dates after the due date of the return. The first tax payment along with interest payment is due on the 5th anniversary of the due date of the return. Generally the maximum amount of time for payment of deferred tax is 10 years. The executor may select a shorter period, in which case the deferment will be the period selected.
The first installment in a regular section 6166(a) election must be paid no later than 5 years after the return due date determined without regard to any extensions to time to file. Interest is also due on that date. The 5th anniversary date will be the 1st installment due date, unless the executor selects a shorter interest-only period. The author has seen cases where the first installment was elected to be paid on the 2nd or 3rd anniversary date rather than on the 5th anniversary date.
The word "generally" first appearing in IRM 22.214.171.124.6.13 reflects the possibility that an election other than one under section 6166(a) might be filed. Sections 6166(b)(7)(A)(ii), 6166(b)(8)(A)(ii), and 6166(b)(10)(A)(ii) provide that the executor "shall be treated as having selected under subsection (a)(3) the date prescribed by section 6151(a)" for payment of the first installment, meaning that section 6166(a) is the only type of section 6166 election in which there is an interest-only period before the first installment is due.
The second appearance of the word "generally" in the IRM reflects the possibility that an executor might elect to pay installments in fewer than 10 years. The author has seen cases where an estate has elected to pay the deferred tax in as few as 3 installments rather than 10 installments. Section 6166(a)(1) provides that an executor cannot elect to pay the tax extended under section 6166 in less than 2 installments. For a one-year extension of time to pay the tax, an executor would request an extension of time to pay under section 6161 on Form 4768, which means that whatever favorable interest rates might be available under a multi-year section 6166 extension of time to pay would not be available under a one-year 6161 extension of time to pay. The flip side is that 100% of the interest accrued under a section 6161 extension of time to pay would be allowable as a deduction on the estate tax return, while under a section 6166 election the only allowable interest deduction would be for whatever interest might accrue on past-due installment amounts or past-due non-deferred tax payments, which would not be interest defined in section 2053(c)(1)(D).