McNeely v. United States - Minnesota 6166 Computation 1

Estate of Donald McNeely v. United States  - Minnesota Section 6166 Computation 1

United States District Court
District of Minnesota
No. 0:12-cv-01973
June 12, 2014

Minnesota 6166 Computation 1, Comment 1:   The facts provided in the McNeely opinion do not break out the amount of estate tax deductions that were allowed on individual Schedules J, K, L, M, or O, or the amount of the allowable Minnesota state death tax deduction under section 2058. In this illustration we attribute 100% of the deductions to Schedules J and K and use a partial state death tax deduction of $750,000.

 

McNeely v. United States - Minnesota 6166 Computation 1
Actual Dates and Figures Given in the District Court Opinion
Mar-09-2009 Date of Death
Dec-08-2009 Form 4768 filing date
Jun-09-2010 Estate tax return and section 6166 election filing date
Dec-09-2014 First installment due date under the section 6166 election
2,492,088.00 Tax paid with Form 4768 filing that the estate estimated would not be deferred under the projected section 6166 election.
  Note: A few typos in the District Court opinion report this number as $2,494,088.
230,900,899.00 Gross estate reported on the return as filed
9,125,878.00 Net estate tax assessed by IRS.
512,226.41 Non-deferred tax calculated by IRS.
1,979,861.59 Overpayment of non-deferred tax calculated by IRS, which is to be applied against future installments of deferred tax as they come due ($2,492,088 payment less $512,226.41 tax not deferred per IRS = $1,979,861.59 overpayment of non-deferred tax per IRS, treated as a prepayment of deferred tax).
8,613,651.59 Total amount of tax deferred under section 6166 as calculated by IRS ($9,125,780.00 total tax less $512,226.41 tax not deferred under section 6166 = $8,613,651.59 tax payable in installments).
  Note: By creating an overpayment of non-deferred tax, the IRS granted an election to pay the maximum amount of tax eligible for deferral under section 6166(a)(2) in installments. The overpayment would be applied against the installments as they come due.
   861,365.16 Annual installment calculated by IRS.

 

Minnesota 6166 Computation 1, Comment 2:   Based on the facts given in the McNeely opinion, the section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments is fixed at 0.943871 ($8,613,651.59 total tax deferred under section 6166 divided by $9,125,878.00 total estate tax). This ratio will not change in our hypotheticals no matter how we allocate the allowable deductions among Schedules J, K, L, M, and O. (If we change the section 6166(b)(6) adjusted gross estate amount, we would also change the closely held business amount, and so on.)

 

McNeely v. United States - Minnesota 6166 Computation 1
Hypothetical Figures Extrapolated From Those Given in the District Court Opinion
23,779,728.89 The taxable estate that is required to yield a net estate tax of exactly $9,125,878.00. This figure is determined after a hypothetical section 2058 deduction for payment of Minnesota estate tax of $750,000 (tentative taxable estate of $24,529,728.89 less the section 2058 deduction of $750,000.00 = the taxable estate of $23,779,728.89), and is valid so long as page 1, Form 706 (September 2009) shows there is no:
 
  • Gift tax paid or payable on line 7;
  • Adjustment to the unified credit on line 10;
  • Credit for foreign death taxes on line 13;
  • Credit for tax on prior transfers on line 14; or,
  • Generation-Skipping Transfer tax on line 17.
206,371,170.11 Total deductions required to yield a tentative taxable estate of $24,529,728.89, given the conditions stated above. Generally, this figure would be the sum of deductions allowable under one or more of sections 2053  2054, 2055, 2056, and 2058. However, in this example the entire amount of the deductions is attributed to Schedules J and K because only section 2053 and 2054 deductions are allowable in determining the section 6166(b)(6) adjusted gross estate, and the hypothetical closely held business value is keyed to this figure in determining the section 6166(a)(2) ratio.
94.3871 % The section 6166(a)(2) ratio required to yield the deferred tax calculated by IRS under the conditions stated above. This ratio is a constant for the McNeely Estate with the facts as stated in the opinion. It is carried to 6 decimal places, rounded, by the IRS, as shown in the instructions for Form 706.
  The section 6166(b)(6) adjusted gross estate is a variable. The McNeely opinion does not state the total amount of the allowable section 2053 and 2054 deductions. Since the 6166(b)(6) adjusted gross estate is a variable, so too is the section 6166 qualifying business value, as they both must be adjusted in tandem so that the 6166 business value divided by the 6166(b)(6) adjusted gross estate yields a ratio of 94.3871%.
24,529,728.89 The indicated section 6166(b)(6) adjusted gross estate. The decedent was a Minnesota resident. In this example, $750,000 of Minnesota estate tax was paid with the filing of Form 4768, which is the section 2058 state death tax deduction at this point (the allowable state death tax deduction determines the overall estate tax but is not included in the 6166(b)(6) adjusted gross estate computation).
23,152,900.00 The section 6166 business value required to yield a 94.3871% qualifying ratio under section 6166(a)(2).

 

 

Minnesota 6166 Computation 1, Comment 3:   The hypothetical Form 706 tax computation summary is shown below.

 

McNeely v. United States - Minnesota 6166 Computation 1
2009 Form 706, Page 1  - Tax Computation
1 Total gross estate less exclusion 1 230,900,899.00
2 Tentative total allowable deductions 2 206,371,170.11
 3a Tentative taxable estate (before state death tax deduction) (subtract line 2 from line 1)  3a 24,529,728.89
   b State death tax deduction    b 750,000.00
   c Taxable estate (subtract line 3b from line 3a)    c 23,779,728.89
4 Adjusted taxable gifts 4 0.00
5 Add lines 3c and 4 5 23,779,728.89
6 Tentative tax on the amount on line 5 6 10,581,678.00
7 Total gift tax paid or payable 7 0.00
8 Gross estate tax (subtract line 7 from line 6) 8 10,581,678.00
9 Maximum unified credit (applicable credit amount) 9 1,455,800.00    
10 Adjustment to unified credit (applicable credit amount) 10 0.00
11 Allowable unified credit (applicable credit amount) (subtract line 10 from line 9) 11 1,455,800.00
12 Subtract line 11 from line 8 (but do not enter less than zero) 12 9,125,878.00
13 Credit for foreign death taxes (from Schedule P) 13 0.00    
14 Credit for tax on prior transfers (from Schedule Q) 14 0.00
15 Total credits (add lines 13 and 14) 15 0.00
16 Net estate tax (subtract line 15 from line 12) 16 9,125,878.00
17 Generation-skipping transfer taxes payable (from Schedule R, Part 2, line 10) 17 0.00
18 Total transfer taxes (add lines 16 and 17) 18 9,125,878.00
19 Prior payments. Explain in an attached schedule. 19 2,492,088.00
20 Balance due (or overpayment) 20 6,633,790.00

 

McNeely v. United States - Minnesota 6166 Computation 1
2009 Form 706, Page 3  - Recapitulation
Item No. Gross estate Alternate value   Value at date of death
1 Schedule A - Real Estate 1     12,500,000.00
2 Schedule B - Stocks and Bonds 2     27,000,000.00
3 Schedule C - Mortgages, Notes, and Cash 3     52,000,000.00
4 Schedule D - Insurance on the Decedent's Life 4     2,500,000.00
5 Schedule E - Jointly Owned Property 5     16,750,000.00
6 Schedule F - Other Miscellaneous Property 6     120,150,899.00
7 Schedule G - Transfers During Decedent's Life 7     0.00
8 Schedule H - Powers of Appointment 8     0.00
9 Schedule I - Annuities 9     0.00
10 Total gross estate (add items 1 through 9) 10     230,900,899.00
11 Schedule U - Qualified Conservation Easement Exclusion 11 0.00
12 Total gross estate less exclusion (subtract line 11 from line 10). 12 230,900,899.00
Item No. Deductions Amount
13 Schedule J - Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims 13 12,100,000.00
14 Schedule K - Debts of the Decedent 14 93,500,000.00
15 Schedule K - Mortgages and Liens 15 100,771,170.11
16 Total of items 13 through 15 16 206,371,170.11
17 Allowable amount of deductions from item 16 17 206,371,170.11
18 Schedule L - Net Losses During Administration 18 0.00
19 Schedule L - Expenses Incurred in Administering Property Not Subject to Claims 19 0.00
20 Schedule M - Bequests, etc., to Surviving Spouse 20 0.00
21 Schedule O - Charitable, Public, and Similar Gifts and Bequests 21 0.00
22 Tentative total allowable deductions (add lines 17 through 21) 22 206,371,170.11

 

McNeely v. United States - Minnesota 6166 Computation 1
Section 6166(b)(6) Adjusted Gross Estate Computation
Total gross estate less exclusion 230,900,899.00
Divided by: Total allowable sections 2053 and 2054 deductions 206,371,170.11
Section 6166(b)(6) adjusted gross estate 24,529,728.89

 

McNeely v. United States - Minnesota 6166 Computation 1
Section 6166(a)(2) Ratio for Maximum Amount of Tax Which May be Paid in Installments
Section 6166 business value 23,152,900.00
Divided by: Section 6166(b)(6) adjusted gross estate 24,529,728.89
Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments .943871

 

McNeely v. United States - Minnesota 6166 Computation 1
Section 6166(a)(2) Amount of Tax Which May be Paid in Installments and the Annual Installment
Net estate tax 9,125,878.00
Times: Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments .943871
Amount of tax which may be paid in installments 8,613,651.59
Annual installment 861,365.16

See IRS Form 4349 [computer generated] for Minnesota 6166 Computation 1.

Minnesota 6166 Computation 1, Comment 4:   The District Court opinion makes no reference to a Minnesota estate tax return or a Minnesota section 6166 election. In this example we assume that a Minnesota section 6166 election was filed timely.

 

McNeely v. United States - Minnesota 6166 Computation 1
Minnesota Estate Tax and Minnesota Section 6166 Computation
Form M706 (2009)
Estates of Residents of Minnesota
1 Tentative Minnesota estate tax before deductions (from page 4 of instructions) 3,391,556.62
2 Gross value of all real and tangible property located in other states 2,500,000.00
3 Federal gross estate (from line 1, Form 706) 230,900,899.00
4 Ratio of property in other states to total gross estate (divide line 2 by line 3 and round to 5 decimal places) 0.01083
5 Multiply line 1 by line 4 36,730.56
6 Minnesota estate tax (subtract line 5 from line 1) 3,354,826.06
Estates of Non-Residents of Minnesota
7 Tentative Minnesota estate tax before deductions (from page 5 of instructions) 0.00
8 Gross value of all real and tangible property in Minnesota 0.00
9 Federal gross estate (from line 1, Form 706) 230,900,899.00
10 Ratio of property in Minnesota to total gross estate (divide line 8 by line 9 and round to 5 decimal places) 0.00000
11 Minnesota estate tax (multiply line 7 by line 10) 0.00
All Estates
12 Total payments, including any extension payments, made prior to filing this return 750,000.00
13 If line 6 or line 11 is more than line 12, subtract line 12 from line 6 or line 11 2,604,826.06
14 Penalties (from instructions, page 5) 0.00
15 Interest, if any 0.00
16 Amount due. Add lines 13, 14, and 15. 2,604,826.06
17 Refund. Subtract the amounts on lines 6, 11, 14, and 15 from line 12 0.00

 

 Minnesota 6166 Computation 1, Comment 5:   In this example $2,500,000 of property included in the Federal gross estate was not located in Minnesota but was located ("sitused") in another state.

 

McNeely v. United States - Minnesota 6166 Computation 1
Minnesota Estate Tax and Minnesota Section 6166 Computation
Tentative Minnesota Estate Tax Computation Table on Page 4, Form M706 Instructions (2009)
1 Tentative Federal taxable estate before state death tax deduction (from line 3a, Form 706) 24,529,728.89
2 Adjusted taxable gifts (from line 4, Form 706) 0.00
3 Add steps 1 and 2 24,529,728.89
4 Table A amount based on step 3 13,132,150.89
5 Enter step 3 or $17,184,000, whichever is less 17,184,000.00
6 Subtract $10,000,000 from step 5 amount (if zero or less, enter zero) 7,184,000.00
7 Multiply step 6 by 5% 359,200.00
8 Add step 4 and step 7 13,491,350.89
9 Total gift tax paid or payable (from line 7, Form 706) 0.00
10 Subtract step 9 from step 8 13,491,350.89
11 Maximum unified credit 345,800.00
12 Adjustment to unified credit (from line 10, Form 706) 0.00
13 Allowable unified credit (subtract step 12 from step 11) 345,800.00
14 Subtract step 13 from step 10 (if zero or less, enter zero) 13,145,550.89
15 Tentative Federal taxable estate before state death tax deduction (from line 3a, Form 706) 24,529,728.89
16 Minimum amount 60,000.00
17 Adjusted taxable estate (subtract step 16 from step 15) 24,469,728.89
18 Table B amount based on step 17 3,391,556.62
19 Enter the lesser of step 14 or step 18, and enter this result on line 1 of Form M706 3,391,556.62

 

McNeely v. United States - Minnesota 6166 Computation 1
Minnesota Estate Tax and Minnesota Section 6166 Computation
Minnesota Section 6166 Deferred Tax Computation
1 Total Minnesota estate tax 3,354,826.06
2 Federal §6166(a)(2) ratio for the maximum amount of tax which may be paid in installments .943871
3 Minnesota estate tax which may be paid in installments 3,166,523.03
4 Number of Federal §6166 installments selected 10
5 Minnesota annual installment 316,652.30
Minnesota Overpayment of Non-Deferred Tax
6 Total Minnesota estate tax 3,354,826.06
7 Less: Minnesota estate tax which may be paid in installments 3,166,523.03
8 Minnesota tax not deferred and due on the return due date 188,303.03
9 Minnesota estate tax paid on the return due date 750,000.00
10 Overpayment of non-deferred tax, to be credited against Minnesota installments as they come due 561,696.97

 

Minnesota 6166 Computation 1, Comment 6:   For an illustration showing how the overpayment of non-deferred tax is applied against installments as they come due, see the Estate's Calculation of the Application of the Prepayment Credit in PLR 8846001 Computation Illustration 3.