Section 6166(h) Example 1 - Deficiency generated entirely by a 6166 value increase where zero tax was originally assessed

 

Section 6166(h) - Example 1
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 (which in this example is also the §6166(b)(6) adjusted gross estate) 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.
  NOTE: With these figures the §6166(a)(2) ratio for the maximum amount of tax which may be paid in installments is 58.5434%, which equals zero tax payable in installments for the return as filed (58.5434% of $0.00 tax = $0.00 payable in installments).
Apr-26-2018 An IRS field examination is completed. The only changes are an increase in the value of the closely held business interest to $5,500,000 and a new Schedule J deduction for $10,794.24 deductible interest, which results in a deficiency of $856,442.30. 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 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.
  While 100% of the deficiency is attributable to the closely held business interest, §6166(a)(2) limits the portion of the deficiency that may be paid in installments to 72.1368% of the total. This methodology is explained in PLR 8846001.
This example illustrates that the §6166(a)(2) ratio determines the maximum amount of tax and the maximum amount of a deficiency that may be paid in installments, and only when the §6166(a)(2) ratio equals 1.000000 (100%) will 100% of a deficiency be eligible under a §6166(h) election to be paid in installments. This is in keeping with the principles outlined in PLR 8846001.

 

Section 6166(h) - Example 1

Report of Estate Tax Examination Changes
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 2,489,205.76
3a Tentative Taxable Estate as Corrected (Line 1 plus/minus Line 2) 7,613,605.76
    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 7,613,605.76
4 Adjusted taxable gifts 0.00 0.00
5 Total 5,124,400.00 7,613,605.76
6 Tentative Tax 1,995,560.00 2,991,242.30
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 2,991,242.30
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 0.00 865,442.30
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) 0.00 865,442.30
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 0.00 865,442.30
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) 0.00 865,442.30
24 Total Transfer Tax Previously Assessed 0.00
25 Total Transfer Tax Increase/Decrease (Line 23 - Line 24) 865,442.30
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) 865,442.30

 

Section 6166(h) - Example 1

Line Adjustment - Estate Tax
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 0.00 1,000,000.00
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 2,500,000.00 8,200,000.00
11 Schedule U - Qualified Conservation Easement Exclusion 0.00 0.00 0.00
12 Gross Estate less exclusion 5,700,000.00 2,500,000.00 8,200,000.00
13 Schedule J - Funeral and Administration Expenses 450,000.00 10,794.24 460,794.24
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 10,794.24 586,394.24
17 Allowable deductions from Schedules J and K 575,600.00 10,794.24 586,394.24
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 10,794.24 586,394.24
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 10,794.24 586,394.24
26 Tentative taxable estate 5,124,400.00 2,489,205.76 7,613,605.76

 

Section 6166(h) - Example 1

Form 886-A  -   EXPLANATION OF ITEMS
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

 

Section 6166(h) - Example 1

Form 886-A  -   EXPLANATION OF ITEMS
Schedule J - Funeral and Administrative Expenses
    Shown on Return/ As Previously Assessed As Corrected
  B-4(d)  Interest on Federal estate tax 0.00 10,794.24
       
       
  Total of these Items 0.00 10,794.24
  Shown on Return 0.00
  Change to Schedule 10,794.24

 

Section 6166(h) - Example 1
§6166(b)(6) Adjusted Gross Estate Computation
Gross estate   8,200,000.00
Schedule J - Funeral and Administrative Expenses    
  A. Funeral expenses 25,000.00  
  B. Administration expenses 435,794.24  
  Total Schedule J 460,794.24  
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 586,394.24  
Allowable amount of deductions 586,394.24  
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 586,394.24  
Adjustment for expenses incurred after the return was filed (10,794.24)  
Adjusted Schedules J, K, and L debts and expenses 575,600.00 575,600.00
Section 6166(b)(6) adjusted gross estate   7,624,400.00

 

Section 6166(h) - Example 1
§6166(a)(2) Ratio Computation
Section 6166 business value, divided by 5,500,000.00
Section 6166(b)(6) adjusted gross estate, yields 7,624,400.00
Section 6166(a)(2) ratio for the maximum amount of tax payable in installments 0.721368

 

Section 6166(h) - Example 1
§6166(a) Annual Installment
Portion of deficiency attributable to the closely held business interest, which is also the total amount of estate tax as corrected 865,442.30
Section 6166(a)(2) ratio expressed as a percentage 72.1368%
Maximum amount of deficiency that may be paid in installments 624,302.38
Number of installments selected 10
The annual installment, the first of which is due Nov-17-2021 62,430.24
Tax not deferred under section 6166 and due on the return due date 241,139.92

 

Section 6166(h) Example 1
§6166(a) Catch-Up Payment Due Apr-26-2018
Non-deferred tax due Nov-17-2016   241,139.92
Amounts due on the 1st anniversary date of Nov-17-2017    
Interest at R% on the non-deferred tax   7,341.04
Interest at 2% on the first $592,000 of deferred tax 11,954.88  
Interest at 45% of R% on the $32,302.39 balance of deferred tax 438.89 12,393.77
Additional amounts due on Apr-26-2018    
Additional interest at R% on the non-deferred tax   3,191.97
Interest at R% on the past-due interest of $12,393.77   261.23
Total catch-up payment due Apr-26-2018   264,327.93
Allowable interest deduction on Schedule J    
Interest at R% on the non-deferred tax 7,341.04  
Additional interest at R% on the non-deferred tax 3,191.97  
Interest at R% on the past-due interest of $12,393.77 261.23  
Allowable interest deduction 10,794.24  
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.