The Original Estate Tax Return
A valid section 6166 election election can be made only on a timely filed estate tax return. Section 6166(d) provides
Any election under subsection (a) shall be made not later than the time prescribed by section 6075(a) for filing the return of tax imposed by section 2001 (including extensions thereof), and shall be made in such manner as the Secretary shall by regulations prescribe. If an election under subsection (a) is made, the provisions of this subtitle shall apply as though the Secretary were extending the time for payment of the tax.
A section 6166 election is made by attaching to a timely filed return a notice of election setting forth the information specified in Reg. section 20.6166-1(b):
b) Time and manner of election. The election provided under section 6166(a) is made by attaching to a timely filed estate tax return a notice of election containing the following information:
(1) The decedent's name and taxpayer identification number as they appear on the estate tax return;
(2) The amount of tax which is to be paid in installments;
(3) The date selected for payment of the first installment;
(4) The number of annual installments, including the first installment, in which the tax is to be paid;
(5) The properties shown on the estate tax return which constitute the closely held business interest (identified by schedule and item number); and
(6) The facts which formed the basis for the executor's conclusion that the estate qualifies for payment of the estate tax in installments.
In the absence of a statement in the notice of election as to the amount of tax to be paid in installments, the date selected for payment of the first installment, or the number of installments, the election is presumed to be for the maximum amount so payable and for payment thereof in 10 equal installments, the first of which is due on the date which is 5 years after the date prescribed in section 6151(a) for payment of estate tax.
Points to Consider
1. The Return Filing Due Date
The original estate tax return due date is 9 months after the date of the decedent’s death whether or not that date falls on a Saturday or Sunday or a legal holiday. Section 6075(a). See The Return Due Date For Interest Computation Purposes for more detailed information about the specific date on which the return must be filed.
Section 6081(a) provides for a maximum 6-month extension of time to file the estate tax return. An extension of time to file is requested on IRS Form 4768, which must be filed by the 9-month regular due date for filing the estate tax return. A 6-month filing extension is often requested by more complex estates making section 6166 elections because not all of the valuation information will have been been received by the regular 9-month filing due date.
Section 6081(a) provides:
§6081. Extension of time for filing returns
(a) General rule
The Secretary may grant a reasonable extension of time for filing any return, declaration, statement, or other document required by this title or by regulations. Except in the case of taxpayers who are abroad, no such extension shall be for more than 6 months.
The IRS has granted a maximum filing extension of 12 months when the “taxpayers” have been out of the country, but the rules for this exception are strict. If just one of several executors is out of the country on the return due date, a 12-month extension will not be granted – the maximum extension will still be 6 months. Only when all of the executors are out of the country on the return due date will it be possible to obtain a 12-month extension of time to file.
2. Incomplete Return on the Return Due Date
This is where estates get into trouble. For a variety of reasons an estate may find that it lacks sufficient information to enable it to accurately prepare an estate tax return for filing purposes by the extended return due date. Up to this point it is not really relevant who is at fault for allowing this situation to occur –responsibility generally only becomes important when a return is not timely filed and a section 6166 election is denied, and sections 6651(a)(1) and 6651(a)(2) penalties have been assessed.
Whereas section 6651 penalties for failure to file a return timely can be abated upon a showing of reasonable cause, the section 6166(d) requirement that a section 6166 election shall be made not later than the extended return due date is iron clad – there is no reasonable cause exception for a late-filed 6166 election.
The difference between the statutory requirement of section 6166(d) and the regulatory requirements of Reg. section 20.6166-1(b) is that the doctrine of substantial compliance applies only to the Regulation – it does not apply to the statute. The statutory requirement of a timely filed return controls. It is possible that an estate might substantially comply with the requirements for a 6166 election statement but, because the return was filed late, nevertheless fail to qualify for a section 6166 election. See Estate of Wallace R. Woodbury v. Commissioner, T.C. Memo 2014-66; 2014 Tax Ct. Memo LEXIS 64; 107 T.C.M. (CCH) 1350 (return was filed 2 ½ years late; that the 6166 election statement did not substantially comply with the Regulatory requirements was moot because, even had the Regulatory requirements been satisfied, the late filing per se precluded a section 6166 election).
With this in mind, what can an estate do to timely file a return and preserve a section 6166 election when it is missing essential data and cannot prepare a complete return?
1: An estate must timely file a return with the best information it has on hand, even if the return is otherwise incomplete.
2: If valuation information is not available so that the section 6166(b)(6) adjusted gross estate can not be computed, and the amounts of deferred and non-deferred tax - even the total tax itself - can not be computed, to preserve the option of a section 6166 election the return must still be filed by the return due date. In this event the estate must file a Protective Section 6166 Election with the return. Regulation 20.6166-1(d) provides:
(d) Protective election. A protective election may be made to defer payment of any portion of tax remaining unpaid at the time values are finally determined (or agreed to following examination of a return) and any deficiencies attributable to the closely held business interest (within the meaning of paragraph (c)(3) of this section). Extension of tax payments pursuant to this election is contingent upon final values meeting the requirements of section 6166. A protective election does not, however, extend the time for payment of any amount of tax. Rules for such extensions are contained in sections 6161, 6163, and 6166A. A protective election is made by filing a notice of election with a timely filed estate tax return stating that the election is being made. Within 60 days after values are finally determined (or agreed to following examination of a return), a final notice of election which sets forth the information required under paragraph (b) of this section must be filed with the Internal Revenue Service office where the original estate tax return was filed. That notice of final election is to be accompanied by payment of any amount of previously unpaid tax and interest, the date for payment of which has arrived as determined under paragraphs (e) and (f) of this section, plus any amount of unpaid tax and interest which is not attributable to the closely held business interest and which is not eligible for further extension (or currently extended) under another section (other than section 6166A).
Within 60 days of the date the final appraisal values have been determined, an estate could then perfect its Protective Section 6166 Election by filing its notice of final election with IRS and paying any past-due amounts that might be shown in its computation.
If an IRS audit (examination) of the estate tax return occurs before final values have been determined, the valuation issues could be resolved during the audit and a final section 6166 election could be filed with the examining IRS Estate Tax Attorney at the conclusion of the audit. It could also be filed with the IRS service center (Kansas City since Jul-01-2019, formerly Cincinnati Campus) within 60 days after the estate receives notice and demand for payment of the deficiency determined at the conclusion of the IRS field audit.