The Annual Installment

The basic premise for determining the amount of an annual installment is relatively straightforward:

Divide the total amount of tax deferred under section 6166 by the number of installments that were selected for its payment (a minimum of 2 to a maximum of 10).

Example:

Variation:

However, IRS audit adjustments, interim payments, and other factors can make the determination of the annual installment more difficult and, in some cases, counterintuitive. It is important to distinguish between

• The annual installment, and
• The amount of the annual installment currently payable.

In many cases prepayment credits resulting from interim payments or supplemental return computations will generate two different numbers.

Code 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.

(2) Limitation

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.

Reg. §20.6166-1(e)(2) provides:

(2) Determination of date for payment of first installment. The executor may defer payment of tax (but not interest) for any period up to 5 years from the date determined under section 6151(a) for payment of the estate tax. The date chosen for payment of the first installment of tax is not required to be on an annual anniversary of the original due date of the tax; however, it must be the date within any month which corresponds to the day of the month determined under section 6151(a).

Example:

Variation 1:

Variation 2:

Note that in all section 6166(b)(7), (b)(8), or (b)(10) elections the first installment is due on the original return due date determined without regard to any extensions of time to file. In the section 6166 notice of election filed with the return, an executor could elect to shorten the deferral period from the applicable maximum number of installments to a minimum of 2 installments.

Annual Installment Computation Examples