Section 6166(f) - Example 1

Comment 1: Cincinnati Campus will calculate the deferred tax in dollars and cents even though the executor might have used rounded whole dollar amounts on the estate tax return. Interest is uniformly calculated in dollars and cents.

Comment 2:  The executor can select any month for payment of the first installment. However, the day within that month must be the same as the date on which the estate tax return was due, which in this example is day 10. It must also not be more than 5 years after the return due date determined without regard to any extensions of time to file. Commercial estate tax return preparation programs should automatically prevent this error from occurring in the notice of election.

Comment 3:  Even though the executor selected August as the month in which the first installment shall be paid, section 6166(f) requires that interest payable in the period before the first installment is due must be paid annually from the date on which the estate tax was required to be paid under section 6151(a). Section 6151(a) provides:

 

(a) General rule

Except as otherwise provided in this subchapter, when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).

 

The estate tax return is due 9 months after the date of death pursuant to section 6075(a). Section 6166(f)(1) provides:

 

(1) Interest for first 5 years

Interest payable under section 6601 of any unpaid portion of such amount attributable to the first 5 years after the date prescribed by section 6151(a) for payment of the tax shall be paid annually.

 

When an executor selects a first installment due date that is shorter than 5 years after the return due date, section 6166(f)(2) provides:

 

(2) Interest for periods after first 5 years

Interest payable under section 6601 on any unpaid portion of such amount attributable to any period after the 5-year period referred to in paragraph (1) shall be paid annually at the same time as, and as a part of, each installment payment of the tax.

 

Section 6166(f)(4) provides:

 

(4) Selection of shorter period

If the executor has selected a period shorter than 5 years under subsection (a)(3), such shorter period shall be substituted for 5 years in paragraphs (1), (2), and (3) of this subsection.

 

As a result, interest on the tax deferred under section 6166 is due annually on January 10 each year until the time for payment of the first installment, which is August 10, 2021. Interest is payable at the same time and as part of each installment, and each installment and interest payment will be due annually on August 10 from 2021 through 2030.

 

Comment 4: Under the estate's notice of election, there are two mandatory payments that must be made in the year 2021: The regular interest payment on January 10, and the first installment payment on its modified due date of August 10. The estate's election thus creates a short period in 2021 between both payments. It also precludes what would have been a fourth interest-only payment in 2024; instead, the second installment (including interest) will then be due. Failure to timely submit either payment in 2021 would begin the acceleration process under section 6166(g)(3).

Comment 5: Interest through 2030 was computed using the regular underpayment interest rate of 4% that was current at the time these computations were run. Interest on the portion of tax in excess of the 2% amount is therefore computed at 45% of 4%, or 1.8%, compounded daily.

Comment 6: This example assumes that there were no IRS field examination adjustments that would change the numbers, and that all payments were timely and in the proper amounts.