Basic Observations About Section 6166(a)
Section 6166(a) is the election most often made by estates. It is generally the only section 6166 election discussed in court opinions, legal articles, and on other web sites. However, as noted elsewhere on this site, there are 4 types of section 6166 elections available.
Section 6166(a) provides:
§6166. Extension of time for payment of estate tax where estate consists largely of interest in closely held business
(a) 5-year deferral; 10-year installment payment
(1) In general
If the value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.
The maximum amount of tax which may be paid in installments under this subsection shall be an amount which bears the same ratio to the tax imposed by section 2001 (reduced by the credits against such tax) as-
(A) the closely held business amount, bears to
(B) the amount of the adjusted gross estate.
(3) Date for payment of installments
If an election is made under paragraph (1), the first installment shall be paid on or before the date selected by the executor which is not more than 5 years after the date prescribed by section 6151(a) for payment of the tax, and each succeeding installment shall be paid on or before the date which is 1 year after the date prescribed by this paragraph for payment of the preceding installment.
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.
Section 6601(j) provides:
(j) 2-percent rate on certain portion of estate tax extended under section 6166
(1) In general
If the time for payment of an amount of tax imposed by chapter 11 is extended as provided in section 6166, then in lieu of the annual rate provided by subsection (a)-
(A) interest on the 2-percent portion of such amount shall be paid at the rate of 2 percent, and
(B) interest on so much of such amount as exceeds the 2-percent portion shall be paid at a rate equal to 45 percent of the annual rate provided by subsection (a).
For purposes of this subsection, the amount of any deficiency which is prorated to installments payable under section 6166 shall be treated as an amount of tax payable in installments under such section.
(2) 2-percent portion
For purposes of this subsection, the term "2-percent portion" means the lesser of-
(A)(i) the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were the sum of $1,000,000 and the applicable exclusion amount in effect under section 2010(c), reduced by
(ii) the applicable credit amount in effect under section 2010(c), or
(B) the amount of the tax imposed by chapter 11 which is extended as provided in section 6166.
(3) Inflation adjustment
In the case of estates of decedents dying in a calendar year after 1998, the $1,000,000 amount contained in paragraph (2)(A) shall be increased by an amount equal to-
(A) $1,000,000, multiplied by
(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting "calendar year 1997" for "calendar year 1992" in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a multiple of $10,000, such amount shall be rounded to the next lowest multiple of $10,000.
(4) Treatment of payments
If the amount of tax imposed by chapter 11 which is extended as provided in section 6166 exceeds the 2-percent portion, any payment of a portion of such amount shall, for purposes of computing interest for periods after such payment, be treated as reducing the 2-percent portion by an amount which bears the same ratio to the amount of such payment as the amount of the 2-percent portion (determined without regard to this paragraph) bears to the amount of the tax which is extended as provided in section 6166.
Section 6166(a) Computation Examples
§6166(a) Example 1
A Simple 6166(a) Election Without Any Adjustments
|May-31-2014||Date of death|
|10,500,000.00||Less: Total allowable section 2053 and section 2054 deductions|
|39,500,000.00||Section 6166(b)(6) adjusted gross estate|
|Feb-28-2015||Estate tax return due date and return filing date|
|39,500,000.00||Taxable estate (may or may not be the same as the adjusted gross estate)|
|13,664,000.00||Net estate tax|
|20,000,000.00||Estate tax value of closely held business, divided by|
|39,500,000.00||Section 6166(b)(6) adjusted gross estate, yields|
|50.6329%||§6166(a)(2) ratio, rounded to 6 decimal places|
|13,664,000.00||Net estate tax, times|
|50.6329%||§6166(a)(2) ratio, rounded to 6 decimal places, yields|
|6,918,479.46||Maximum amount of tax which may be paid in installments under §6166(a)|
|10||Number of installments elected by the estate|
|6,745,520.54||Tax not deferred under §6166 and paid with the return when filed|
|6,918,479.46||Maximum amount of tax which may be paid in installments under §6166(a)(1)|
|580,000.00||Portion of tax deferred at 2% interest rate|
|6,338,479.46||Portion of tax deferred at 45% of regular underpayment interest rates (45% of R%)|
|0.083833||§6601(j)(4) ratio of payments allocable to the 2% portion of deferred tax|
|0.916167||§6601(j)(4) ratio of payments allocable to the 45% of R% portion of deferred tax|
|1.000000||Total of allocation ratios|
The estate tax return was filed on the return due date. Estate tax of $6,745,520.54 was not deferred under section 6166 and was paid when the return was filed. The estate elected to pay the balance of tax, which was equal to the maximum amount of tax eligible for deferral, in 10 equal installments with the first installment due on the 5th anniversary date of Feb-28-2020. Interest only will be payable on the anniversary dates in 2016, 2017, 2018, and 2019. The first annual installment of $691,847.95 of tax, plus interest from Feb-28-2019, will be payable on Feb-28-2020. This will remain true for the next 9 installments, the last of which will be due on Feb-28-2029. The effective deferral period is 14 years, calculated from the return due date of Feb-28-2015 through the tenth and final installment due date of Feb-28-2029.
NOTE: The interest rates and 6601(j)(4) allocation ratios applicable for a section 6166(a) election are also applicable to an election made under section 6166(b)(10), the only differences being that in a (b)(10) election the first installment is due on the return due date, determined without regard to any extensions, and the maximum number of installments is 5, for an effective deferral period of 4 years; 20% of the deferred tax would be payable on each of the 5 installment due dates.