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Section 6166(h) - Example 3
Tax is Assessed on the Original Return
A Deficiency Results From Increases to §6166 Assets and Non-§6166 Assets and
a Net Decrease in Total Schedule J and Schedule K Deductions
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| Feb-17-2016 | Date of death | |
| Nov-17-2016 | The estate tax return is timely filed. It reports a taxable estate of $15,108,600 and estate tax of $3,863,440 which is paid in full. A closely held business is included in the gross estate at a value of $4,000,000 (26.4750% of the adjusted gross estate). Neither a §6166 election nor a protective §6166 election is filed with the return. | |
| Apr-26-2018 | An IRS field examination is completed. There are six adjustments to the return. | |
| • Schedule B non-§6166 asset values increase by $1,400,000. | ||
| • Schedule E non-§6166 asset values increase by $1,875,000. | ||
| • Schedule F closely held business value increases by $5,000,000. | ||
| • Schedule J attorney fees increase by $200,000 | ||
| • Schedule J administration expenses increase by $133,396.89 for interest accrued on Federal estate tax through the catch-up payment date of Apr-26-2018. | ||
| • Schedule K deductions decrease by $1,000,000 | ||
| The estate is not subject to any accuracy-related penalty under §6662. | ||
| The Estate agrees to the proposed deficiency by signing a waiver, Form 890. The Estate also files a §6166(h) election for the deficiency with the examining IRS Estate Tax Attorney and submits a catch-up payment to the Attorney to bring the account current under the §6166(a) election (made via the §6166(h) election). | ||
| The 1st anniversary date under the §6166(a) election was Nov-17-2017, when interest only was due (the 1st installment of tax will be due Nov-17-2021). | ||
| The catch-up payments due on Apr-26-2018 are: | ||
| the non-deferred tax, plus interest at R% thereon calculated from the return due date of Nov-17-2016 to Apr-26-2018; | ||
| the special-rate interest on deferred tax that would have been due on the 1st anniversary date of Nov-17-2017; and, | ||
| interest at R% on the unpaid special-rate interest due on the 1st anniversary date, calculated from the §6166(a) interest payment due date of Nov-17-2017 through Apr-26-2018. | ||
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Section 6166(h) - Example 3 Report of Estate Tax Examination Changes
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| Form 1273 | ||||||
| Estate of: Decedent SSN: 999-99-9999V D/D: Feb-17-2016 | ||||||
| 1 | Tentative Taxable Estate Shown on Return or Previously Adjusted | 15,108,600.00 | ||||
| 2 | Increase/Decrease in Tentative Taxable Estate | 8,941,603.11 | ||||
| 3a | Tentative Taxable Estate as Corrected (Line 1 plus/minus Line 2) | 24,050,203.11 | ||||
| Shown on Return/ As Previously Assessed | As Corrected | |||||
| 3b | State Death Tax Deduction | 0.00 | 0.00 | |||
| 3c | Taxable Estate as Corrected (Line 3a - Line 3b) | 15,108,600.00 | 24,050,203.11 | |||
| 4 | Adjusted taxable gifts | 0.00 | 0.00 | |||
| 5 | Total | 15,108,600.00 | 24,050,203.11 | |||
| 6 | Tentative Tax | 5,989,240.00 | 9,565,881.24 | |||
| 7 | Aggregate Gift Tax Payable (After Dec. 31, 1976) | 0.00 | 0.00 | |||
| 8 | Tax Before Unified Credit (Line 6 - Line 7) | 5,989,240.00 | 9,565,881.24 | |||
| 9a | Basic Exclusion Amount | 5,450,000.00 | 5,450,000.00 | |||
| 9b | Deceased Spousal Unused Exclusion (DSUE) | 0.00 | 0.00 | |||
| 9c | Applicable Exclusion Amount (Line 9a + Line 9b) | 5,450,000.00 | 5,450,000.00 | |||
| 9d | Applicable Credit Amount (From Table A, using Line 9c) | 2,125,800.00 | 2,125,800.00 | |||
| 10 | Adjustment to Unified Credit | 0.00 | 0.00 | |||
| 11 | Allowable Applicable Credit Amount | 2,125,800.00 | 2,125,800.00 | |||
| 12 | Tax Before SDTC (Line 8 - Line 11)*Cannot be < 0 | 3,863,440.00 | 7,440,081.24 | |||
| 13 | State Death Tax Credit | 0.00 | 0.00 | |||
| Tentatively Allowed | ||||||
| Submit Evidence by | ||||||
| 14 | Net Tax Post State Death Tax Credit (Line 12 - Line 13) | 3,863,440.00 | 7,440,081.24 | |||
| 15 | Gift Tax Credit (Pre-1977 Gifts) | 0.00 | 0.00 | |||
| 16 | Foreign Death Tax Credit (Statutory) | 0.00 | 0.00 | |||
| 17 | Prior Transfer Credit | 0.00 | 0.00 | |||
| 18 | Foreign Death Tax Credit (Treaty)/Canadian Marital Credit | 0.00 | 0.00 | |||
| 19 | Total Credits (Sum of Lines 15 through 18) | 0.00 | 0.00 | |||
| 20 | Net Estate Tax Payable | 3,863,440.00 | 7,440,081.24 | |||
| 21 | Generation-Skipping Transfer Taxes (Schedule R, Part 2, Line 12) | 0.00 | 0.00 | |||
| 22 | Increased Estate Tax (Section 4980A, Schedule S) | 0.00 | 0.00 | |||
| 23 | Total Federal Estate Tax (Sum of Lines 20 through 22) | 3,863,440.00 | 7,440,081.24 | |||
| 24 | Total Transfer Tax Previously Assessed | 3,863,440.00 | ||||
| 25 | Total Transfer Tax Increase/Decrease (Line 23 - Line 24) | 3,576,641.24 | ||||
| 26 | Penalties Previously Assessed - Code(s) | 0.00 | ||||
| 27 | Penalties as Corrected - Code(s) | 0.00 | ||||
| 28 | Net Penalties Increase/Decrease (Line 27 - Line 28) | 0.00 | ||||
| 29 | Net Tax and Penalties Payable Increase/Decrease (Line 25 + Line 28) | 3,576,641.24 |
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Section 6166(h) - Example 3 Line Adjustment - Estate Tax
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| Form 6180 | ||||
| Estate of: Decedent SSN: 999-99-9999V D/D: Feb-17-2016 | ||||
| Shown on Return/ As Previously Assessed | Change | As Corrected | ||
| 1 | Schedule A - Real Estate | 0.00 | 0.00 | 0.00 |
| 2 | Schedule B - Stocks and Bonds | 4,000,000.00 | 1,400,000.00 | 5,400,000.00 |
| 3 | Schedule C - Mortgages, Notes, and Cash | 2,750,000.00 | 0.00 | 2,750,000.00 |
| 4 | Schedule D - Life Insurance | 1,200,000.00 | 0.00 | 1,200,000.00 |
| 5 | Schedule E - Jointly Owned Property | 1,250,000.00 | 1,875,000.00 | 3,125,000.00 |
| 6 | Schedule F - Other Miscellaneous Property | 10,000,000.00 | 5,000,000.00 | 15,000,000.00 |
| 7 | Schedule G - Transfers During Decedent's Life | 0.00 | 0.00 | 0.00 |
| 8 | Schedule H - Powers of Appointment | 0.00 | 0.00 | 0.00 |
| 9 | Schedule I - Annuities | 0.00 | 0.00 | 0.00 |
| 10 | Gross estate | 19,200,000.00 | 8,275,000.00 | 27,745,000.00 |
| 11 | Schedule U - Qualified Conservation Easement Exclusion | 0.00 | 0.00 | 0.00 |
| 12 | Gross Estate less exclusion | 19,200,000.00 | 8,275,000.00 | 27,475,000.00 |
| 13 | Schedule J - Funeral and Administration Expenses | 1,235,000.00 | 333,396.89 | 1,568,396.89 |
| 14 | Schedule K - Debts of Decedent | 2,856,400.00 | (1,000,000.00) | 1,856,400.00 |
| 15 | Schedule K - Mortgages | 0.00 | 0.00 | 0.00 |
| 16 | Total of Schedules J and K | 4,091,400.00 | (666,603.11) | 3,424,796.89 |
| 17 | Allowable deductions from Schedules J and K | 4,091,400.00 | (666,603.11) | 3,424,796.89 |
| 18 | Schedule L - Net Losses During Administration | 0.00 | 0.00 | 0.00 |
| 19 | Schedule L - Expenses on Property Not Subject to Claims | 0.00 | 0.00 | 0.00 |
| 20 | Total - Lines 17, 18, and 19 | 4,091,400.00 | (666,603.11) | 3,424,796.89 |
| 21 | Schedule M - Marital Deduction | 0.00 | 0.00 | 0.00 |
| 22 | Schedule O - Charitable Deduction | 0.00 | 0.00 | 0.00 |
| 23 | ESOP Deduction | 0.00 | 0.00 | 0.00 |
| 24 | Schedule T - QFOBI Deduction | 0.00 | 0.00 | 0.00 |
| 25 | Total allowable deductions | 4,091,400.00 | (666,603.11) | 3,424,796.89 |
| 26 | Tentative taxable estate | 15,108,600.00 | 8,941,603.11 | 24,050,203.11 |
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Section 6166(h) - Example 3 Form 886-A - EXPLANATION OF ITEMS
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| Schedule B - Stocks and Bonds | |||
| Shown on Return/ As Previously Assessed | As Corrected | ||
| 3 | Value of publicly-traded stock in Business D | 275,000.00 | 500,000.00 |
| 6 | Value of publicly-traded stock in Business G | 400,000.00 | 600,000.00 |
| 14 | Value of publicly-traded stock in Business X | 325,000.00 | 550,000.00 |
| 16 | Additional asset discovered after the return was filed | 0.00 | 750,000.00 |
| Total of these Items | 1,000,000.00 | 2,400,000.00 | |
| Shown on Return | 1,000.000.00 | ||
| Change to Schedule | 1,400,000.00 | ||
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Section 6166(h) - Example 3 Form 886-A - EXPLANATION OF ITEMS
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| Schedule E - Jointly Owned Property | |||
| Shown on Return/ As Previously Assessed | As Corrected | ||
| 1 | Real estate parcel A - jointly owned with BCD | 350,000.00 | 725,000.00 |
| 2 | Real estate parcel B - jointly owned with BCD | 275,000.00 | 500,000.00 |
| 4 | Real estate parcel D - jointly owned with FGH | 625,000.00 | 1,200,000.00 |
| 5 | Real estate parcel E - jointly owned with KLM | 0.00 | 700,000.00 |
| Total of these Items | 1,250,000.00 | 3,125,000.00 | |
| Shown on Return | 1,250.000.00 | ||
| Change to Schedule | 1,875,000.00 | ||
| The changes to this Schedule result from adjustments to the appraised values of each parcel and the resolution of legal issues regarding the percentage of the total value of each parcel which is includible in the gross estate based on the decedent's contributions. | |||
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Section 6166(h) - Example 3 Form 886-A - EXPLANATION OF ITEMS
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| Schedule F - Other Miscellaneous Property | |||
| Shown on Return/ As Previously Assessed | As Corrected | ||
| 1 | Section 6166 business interest | 4,000,000.00 | 9,000,000.00 |
| Total of these Items | 4,000.000.00 | 9,000,000.00 | |
| Shown on Return | 4,000.000.00 | ||
| Change to Schedule | 5,000,000.00 | ||
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Section 6166(h) - Example 3 Form 886-A - EXPLANATION OF ITEMS
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| Schedule J - Funeral and Administrative Expenses | |||
| Shown on Return/ As Previously Assessed | As Corrected | ||
| B-2 Attorney fees | 300,000.00 | 500,000.00 | |
| B-4(d) Interest on Federal estate tax | 0.00 | 133,396.89 | |
| Total of these Items | 300,000.00 | 633,396.89 | |
| Shown on Return | 300,000.00 | ||
| Change to Schedule | 333,396.89 | ||
| Section 2053(c)(1)(D) prohibits a deduction for interest accrued on tax deferred under §6166. In this example, the total interest accrued on the catch-up payment date of Apr-26-2018 is $47,157.16, of which $24,652.73 is R% interest accrued on past-due amounts; the balance is non-deductible interest accrued on tax deferred under §6166 ($15,669.10 accrued through Nov-17-2017, after which it was past-due, and $6,835.33 accrued from Nov-17-2017 through the catch-up payment date of Apr-26-2018). | |||
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Section 6166(h) - Example 3 Form 886-A - EXPLANATION OF ITEMS
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| Schedule K - Debts of Decedent | |||
| Shown on Return/ As Previously Assessed | As Corrected | ||
| 4 | Environmental claims | 2,000,000.00 | 1,000,000.00 |
| 2,000,000.00 | 1,000,000.00 | ||
| Shown on Return | 2,000,000.00 | ||
| Change to Schedule | (1,000,000.00) | ||
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Section 6166(h) - Example 3
§6166(b)(6) Adjusted Gross Estate Computation
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| Gross estate | 27,475,000.00 | |||||
| Schedule J - Funeral and Administrative Expenses | ||||||
| A. | Funeral expenses | 25,000.00 | ||||
| B. | Administration expenses | 1,543,396.89 | ||||
| Total Schedule J | 1,568,396.89 | |||||
| Schedule K - Debts of Decedent | 1,856,400.00 | |||||
| Schedule K - Mortgages and Liens | 0.00 | |||||
| Total Schedule K | 1,856,400.00 | |||||
| Total Schedules J and K debts and expenses | 3,424,796.89 | |||||
| Allowable amount of deductions | 3,424,796.89 | |||||
| Schedule L - Net Losses | 0.00 | |||||
| Schedule L - Expenses on property not subject to claims | 0.00 | |||||
| Total Schedules J, K, and L debts and expenses | 3,424,796.89 | |||||
| Adjustment for expenses incurred after the return was filed | (133,396.89) | |||||
| Adjusted Schedules J, K, and L debts and expenses | 3,291,400.00 | 3,291,400.00 | ||||
| Section 6166(b)(6) adjusted gross estate | 24,183,600.00 | |||||
| The increase in attorney fees is not subtracted in determining the adjusted gross estate even though they relate to services performed after the return was filed (the same would be true for increases in executors' commissions and accounting fees). These administration expenses are estimates at the time the return is filed and are not finalized until the examination is completed and the L-627 estate tax closing letter is issued. The examination adjustments to these fees are treated as relating back to the original return filing date. (However, any such fees related to preparation and filing of a supplemental return are not treated as relating back to the original return and are subtracted when calculating the §6166(b)(6) adjusted gross estate.) | ||||||
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Section 6166(h) - Example 3
§6166(a)(2) Ratio Computation
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| Section 6166 business value, divided by | 9,000,000.00 | |||
| Section 6166(b)(6) adjusted gross estate, yields | 24,183,600.00 | |||
| Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments | .372153 | |||
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Section 6166(h) - Example 3
§6166(a)(2) Maximum Amount of Tax Which May be Paid in Installments
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| Total deficiency | 3,576,641.23 |
| Section 6166(a)(2) ratio expressed as a percentage | 37.2153% |
| Maximum amount of deficiency which may be paid in installments (aka "the cap") | 1,331,057.76 |
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Apportionment of the Deficiency to the Closely Held Business Value
(The Long Method)
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| Changes to the Taxable Estate | ||||
| 1,400,000.00 | Increase in value of Schedule B non-§6166 assets | |||
| 1,875,000.00 | Increase in value of Schedule E non-§6166 assets | |||
| 5,000,000.00 | Increase in value of Schedule F closely held business | |||
| (200,000.00) | Decrease for Schedule J Attorney fee increase | |||
| (133,396.89) | Decrease for Schedule J interest deduction as a new item | |||
| 1,000,000.00 | Increase for Schedule K reduction | |||
| 8,941,603.11 | Net increase in the Taxable Estate | |||
| Determining the Numerators For the Apportionment Fractions | ||||
| This step requires running a separate interrelated computationwith only the non-§6166 adjustments; the interrelated interest deduction amount from the stand-alone §6166 computation is of paramount importance. Because the other deficiency adjustments are not being considered, the §6166(b)(6) adjusted gross estate will differ from that shown in the actual deficiency computation. | ||||
| The §6166 Deficiency Fraction Numerator | ||||
| 5,000,000.00 | Increase in value of Schedule F closely held business | |||
| (663.55) | Decrease for Schedule J interest deduction as a new item in the stand-alone computation only (computation not shown). | |||
| 4,999,336.45 | Net increase attributable to the closely held business value adjustment | |||
| The Non-§6166 Deficiency Fraction Numerator | ||||
| 1,400,000.00 | Increase in value of Schedule B non-§6166 assets | |||
| 1,875,000.00 | Increase in value of Schedule E non-§6166 assets | |||
| (200,000.00) | Decrease for Schedule J Attorney fee increase | |||
| (132,733.34) | Decrease for Schedule J interest deduction as a new item, adjusted to reflect the amount allocated to the §6166 Numerator from above | |||
| 1,000,000.00 | Increase for Schedule K reduction | |||
| 3,942,266.66 | Net increase attributable to the non-§6166 adjustments | |||
| Apportionment | ||||
| 3,942,266.66 | x | 3,576,641.24 | = | 1,576,906.66 |
| 8,941,603.11 | ||||
| 4,999,336.45 | x | 3,576,641.24 | = | 1,999,734.58 |
| 8,941,603.11 | ||||
| 3,576,641.24 | ||||
| Portion of the Deficiency Payable in Installments | ||||
| 1. §6166(a)(2) maximum amount of tax which may be paid in installments | 1,331,057.76 | |||
| 2. Amount of the deficiency apportioned to the closely held business | 1,999,734.58 | |||
| Maximum amount of tax which may be paid in installments under the §6166(h) election - the lesser of Line 1 or Line 2. | 1,331,057.76 | |||
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Section 6166(h) Example 3
§6166(a) Catch-Up Payment Due Apr-26-2018
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| Estate tax due | 7,440,081.24 | |
| Estate tax paid | 3,863,440.00 | |
| Deficiency | 3,576,641.23 | |
| Portion of deficiency deferred under the §6166(h) election | 1,331,057.76 | |
| Non-deferred tax due on the original return due date of Nov-17-2016 | 2,245,583.47 | |
| Amounts due on the 1st anniversary date of Nov-17-2017 | ||
| Interest at R% on the non-deferred tax | 91,608.09 | |
| Interest at 2% on the first $592,000 of deferred tax | 11,954.88 | |
| Interest at 45% of R% on the $739,057.76 balance of deferred tax | 13,418.69 | 25,373.57 |
| Additional amounts due on Apr-26-2018 | ||
| Additional interest at R% on the non-deferred tax | 39,719.64 | |
| Interest at R% on the past-due interest on non-deferred tax of $91,608.09 | 1,620.35 | |
| Interest at R% on the past-due interest on deferred tax of $25,373.57 | 448.41 | |
| Total catch-up payment due Apr-26-2018 | 2,404,353.93 | |
| Allowable interest deduction on Schedule J | ||
| Interest at R% on the non-deferred tax | 91,608.09 | |
| Additional interest at R% on the non-deferred tax | 39,719.64 | |
| Interest at R% on the past-due interest of $91,608.09 | 1,620.35 | |
| Interest at R% on the past-due interest on deferred tax of $25,373.57 | 448.41 | |
| Allowable interest deduction | 133,396.89 | |
| NOTE: R% interest means the regular underpayment interest rate(s) in effect during each interest computation period, which can vary from period to period or within a single period. Interest rates are set quarterly pursuant to §6621. | ||