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Section 6166(h) - Example 2 Example 1 Modified - Non-§6166 Asset Values Increased by $1,400,000 |
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| Feb-17-2016 | Date of death | |
| Nov-17-2016 | Estate tax return due date and the return filing date. The return reports a taxable estate of $5,124,400 and zero estate tax due. A closely held business is included in the gross estate at a value of $3,000,000, but neither a §6166 election nor a protective §6166 election is filed with the return. (See Example 1.) | |
| Apr-26-2018 | An IRS field examination is completed. The value of the closely held business interest is increased by $2,500,000, Schedule B assets (non-6166) are increased by $1,400,000, and a new Schedule J deduction of $24,652.73 deductible interest is added. The deficiency is $1,419,898.91. 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) as of that date. | |
| The estate is not subject to any accuracy-related penalty under §6662. | ||
| 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. | ||
| additional interest at R% on the unpaid non-deferred tax, calculated from Nov-17-2017 through Apr-26-2018. | ||
| additional interest at R% on the unpaid R% interest accrued on the non-deferred tax, calculated from Nov-17-2017 through Apr-26-2018. | ||
| THIS EXAMPLE HAS SEVERAL COMPLICATING FACTORS | ||
| 1 | The taxable estate on the original return was $5,124,400, which is $325,600 below the 2016 applicable exclusion amount of $5,450,000. The first $325,600 of an increase in taxable value will not generate any deficiency. | |
| 2 | The §6166(a)(2) ratio for determining the maximum amount of tax eligible for payment in installments on the original return was 58.5434%, but nothing was deferrable because the tax was zero. As soon as a deficiency results, even from an increase in non-§6166 asset values, tax would have been deferrable had a protective election been filed. | |
| 3 | Interest is interrelated with the Federal estate tax. | |
| 4 | The deficiency must be allocated between the amount attributable to the increase in the closely held business value (if any) and the amount(s) attributable to increases in other asset values or decreases in estate tax deductions or credits, which combine to generate the deficiency. | |
| 5 | Two computations could be run - one with just the adjustment to the §6166 closely held business value, and another without the §6166 adjustment but with all of the other adjustments. The results could be compared. However, the sum of those two "deficiencies" does not equal the actual deficiency because the first $325,600 increase in taxable value in each computation does not generate any tax; this must occur only once. Furthermore, the sum of the respective Schedule J interest deduction amounts does not match the figure in the actual deficiency computation. Convoluted computations are required to reconcile the deficiency attributable to this $325,600 gap in taxable asset value. | |
| 6 | The most equitable method of determining the amount of the deficiency attributable to the closely held business seems to be to apportion the deficiency between the increase in value of the closely held business and the increase in value of the other estate assets. This also implicitly apportions the interest deduction. | |
| 7 | In Example 1 the deficiency was $865,442.30, all of which was attributable to the closely held business interest, 72.1368% of which qualified for the §6166(h) election after application of the §6166(a)(2) limitation. In Example 2 the deficiency is $1,419,898.91, the §6166(a)(2) ratio for the maximum amount of tax payable in installments is 60.9459%, and the maximum amount of tax eligible for payment in installments is $865,370.17. | |
| 8 | The portion of the deficiency attributable to the increase in the value of the closely held business is $910,191.61. The amount of the deficiency eligible for payment in installments is capped by §6166(a)(2) at $865,370.17. | |
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Section 6166(h) - Example 2 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 | 5,124,400.00 | ||||
| 2 | Increase/Decrease in Tentative Taxable Estate | 3,875,347.27 | ||||
| 3a | Tentative Taxable Estate as Corrected (Line 1 plus/minus Line 2) | 8,999,747.27 | ||||
| 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) | 5,124,400.00 | 8,999,747.27 | |||
| 4 | Adjusted taxable gifts | 0.00 | 0.00 | |||
| 5 | Total | 5,124,400.00 | 8,999,747.27 | |||
| 6 | Tentative Tax | 1,995,560.00 | 3,545,698.91 | |||
| 7 | Aggregate Gift Tax Payable (After Dec. 31, 1976) | 0.00 | 0.00 | |||
| 8 | Tax Before Unified Credit (Line 6 - Line 7) | 1,995,560.00 | 3,545,698.91 | |||
| 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 | 0.00 | 1,419,898.91 | |||
| 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) | 0.00 | 1,419,898.91 | |||
| 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 | 0.00 | 1,419,898.91 | |||
| 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) | 0.00 | 1,419,898.91 | |||
| 24 | Total Transfer Tax Previously Assessed | 0.00 | ||||
| 25 | Total Transfer Tax Increase/Decrease (Line 23 - Line 24) | 0.00 | ||||
| 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) | 1,419,898.91 | ||||
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Section 6166(h) - Example 2 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 | 1,000,000.00 | 1,400,000.00 | 2,400,000.00 |
| 3 | Schedule C - Mortgages, Notes, and Cash | 500,000.00 | 0.00 | 500,000.00 |
| 4 | Schedule D - Life Insurance | 1,200,000.00 | 0.00 | 1,200,000.00 |
| 5 | Schedule E - Jointly Owned Property | 0.00 | 0.00 | 0.00 |
| 6 | Schedule F - Other Miscellaneous Property | 3,000,000.00 | 2,500,000.00 | 5,500,000.00 |
| 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 | 5,700,000.00 | 3,900,000.00 | 9,600,000.00 |
| 11 | Schedule U - Qualified Conservation Easement Exclusion | 0.00 | 0.00 | 0.00 |
| 12 | Gross Estate less exclusion | 5,700,000.00 | 3,900,000.00 | 9,600,000.00 |
| 13 | Schedule J - Funeral and Administration Expenses | 450,000.00 | 24,652.73 | 474,652.73 |
| 14 | Schedule K - Debts of Decedent | 125,600.00 | 0.00 | 125,600.00 |
| 15 | Schedule K - Mortgages | 0.00 | 0.00 | 0.00 |
| 16 | Total of Schedules J and K | 575,600.00 | 24,652.73 | 600,252.73 |
| 17 | Allowable deductions from Schedules J and K | 575,600.00 | 24,652.73 | 600,252.73 |
| 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 | 575,600.00 | 24,652.73 | 600,252.73 |
| 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 | 575,600.00 | 24,652.73 | 600,252.73 |
| 26 | Tentative taxable estate | 5,124,400.00 | 3,875,347.27 | 8,999,747.27 |
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Section 6166(h) - Example 2 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 | 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 2 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 | 3,000,000.00 | 5,500,000.00 |
| Total of these Items | 3,000.000.00 | 5,500,000.00 | |
| Shown on Return | 3,000.000.00 | ||
| Change to Schedule | 2,500,000.00 | ||
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Section 6166(h) - Example 2 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-4(d) Interest on Federal estate tax | 0.00 | 24,652.73 | |
| Total of these Items | 0.00 | 24,652.73 | |
| Shown on Return | 0.00 | ||
| Change to Schedule | 24,652.73 | ||
| 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 2
§6166(b)(6) Adjusted Gross Estate Computation
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| Gross estate | 9,600,000.00 | |||||
| Schedule J - Funeral and Administrative Expenses | ||||||
| A. | Funeral expenses | 25,000.00 | ||||
| B. | Administration expenses | 449,652.73 | ||||
| Total Schedule J | 474,652.73 | |||||
| Schedule K - Debts of Decedent | 125,600.00 | |||||
| Schedule K - Mortgages and Liens | 0.00 | |||||
| Total Schedule K | 125,600.00 | |||||
| Total Schedules J and K debts and expenses | 600,252.73 | |||||
| Allowable amount of deductions | 600,252.73 | |||||
| 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 | 600,252.73 | |||||
| Adjustment for expenses incurred after the return was filed | (24,652.73) | |||||
| Adjusted Schedules J, K, and L debts and expenses | 575,600.00 | 575,600.00 | ||||
| Section 6166(b)(6) adjusted gross estate | 9,024,400.00 | |||||
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Section 6166(h) - Example 2
§6166(a)(2) Ratio Computation
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| Section 6166 business value, divided by | 5,500,000.00 | |||
| Section 6166(b)(6) adjusted gross estate, yields | 9,024,400.00 | |||
| Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments | 0.609459 | |||
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Section 6166(h) - Example 2
§6166(a)(2) Maximum Amount of Tax Eligible For Payable in Installments
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| Total deficiency | 1,419,898.91 |
| Section 6166(a)(2) ratio expressed as a percentage | 60.9459% |
| Maximum amount of deficiency which may be paid in installments (aka "the cap") | 865,370.17 |
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Apportionment of the Deficiency to the Closely Held Business Value
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| 1,400,000 | Increase in value of non-§6166 assets | |||
| 2,500,000 | Increase in value of §6166 assets | |||
| 3,900,000 | Total increase in asset values | |||
| Apportionment | ||||
| 1,400,000 | x | 1,419,898.91 | = | 509,707.30 |
| 3,900,000 | ||||
| 2,500,000 | x | 1,419,898.91 | = | 910,191.61 |
| 3,900,000 | ||||
| 1,419,898.91 | ||||
| Portion of the Deficiency Payable in Installments | ||||
| 1. §6166(a)(2) maximum amount of tax which may be paid in installments | 865,370.17 | |||
| 2. Portion of the deficiency attributable to the closely held business | 910,191.61 | |||
| Maximum amount of tax which may be paid in installments under the §6166(h) election (the lesser of Line 1 or Line 2) | 865,370.17 | |||
| NOTE: This is the "Short Method" of calculating the apportionment of the deficiency to the closely held business interest. It ignores the effects of the interrelated interest deduction. A "Long Method" calculation would yield $912,026.79 for the portion of the deficiency attributable to the closely held business interest. (See Section 6166(h) Example 3 for an illustration of the Long Method.) In this example the distinction is moot because the §6166(a)(2) ratio limits the amount of tax which may be paid in installments to a lesser number in any event. |
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Section 6166(h) Example 2
§6166(a) Catch-Up Payment Due Apr-26-2018
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| Non-deferred tax due Nov-17-2016 | 554,528.74 | |
| Amounts due on the 1st anniversary date of Nov-17-2017 | ||
| Interest at R% on the non-deferred tax | 16,881.56 | |
| Interest at 2% on the first $592,000 of deferred tax | 11,954.88 | |
| Interest at 45% of R% on the $273,370.17 balance of deferred tax | 3,714.22 | 15,669.10 |
| Additional amounts due on Apr-26-2018 | ||
| Additional interest at R% on the non-deferred tax | 7,340.29 | |
| Interest at R% on the past-due interest of $16,881.56 | 223.46 | |
| Interest at R% on the past-due interest on deferred tax of $15,669.10 | 207.41 | |
| Total catch-up payment due Apr-26-2018 | 594,850.56 | |
| Allowable interest deduction on Schedule J | ||
| Interest at R% on the non-deferred tax | 16,881.56 | |
| Additional interest at R% on the non-deferred tax | 7,340.29 | |
| Interest at R% on the past-due interest of $16,881.56 | 223.46 | |
| Interest at R% on the past-due interest on deferred tax of $15,669.10 | 207.41 | |
| Allowable interest deduction | 24,652.73 | |
| 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. | ||