Interrelated Section 6163 Computations

Section 6163 computations are rarely encountered. However, if an estate is required to pay tax that was postponed under section 6163, several unusual consequences follow.

  • Section 6163 applies to reversionary or remainder interests that are incudible in a decedent's gross estate.
  • The interest being included in the gross estate cannot be a testamentary future interest created by the decedent himself. It can be a reversionary or a remainder interest interest being included as a result of preceding life tenant's death. Reg. 20.6163-1(a).
  • The postponed tax is due within 6 months after the date the preceding interest terminated.
  • Upon a showing of undue hardship, payment of the tax can be extended for a maximum of 3 years after its due date, or 3 1/2 years after termination of the preceding interest.
  • Interest accrues on the postponed tax from the date the prior estate tax return (or the decedent's estate tax return) was due until date of payment. There have been many cases where interest has accrued for 30 or 40 years, or longer.
  • A special 4% interest rate applied for the period ending June 30, 1975, after which regular underpayment interest rates apply. Daily compounding of interest began on January 1, 1983.

NOTE: Some years ago we had a telephone discussion with the Chief of Branch 4, Passthroughs and Special Industries, and others, in the Office of Chief Counsel about the amount of interest that is deductible when computing the postponed tax payable under section 6163. The unequivocal conclusion was as follows.

  • All interest due on the postponed tax is deductible on Schedule J of the estate tax return. This includes interest accrued for periods before 1979, the year of the Bahr decision and Revenue Ruling 79-252, which changed the IRS interpretation of the law so that interest on federal estate tax was thereafter allowable as an administration expense deduction on Schedule J of the estate tax return. The prior IRS interpretation of law had precluded such a deduction.
  • Our case involved a prior decedent's death in the 1950s. The intervening life tenant had just died, and the remainder of that trust was now distributable to the prior decedent's estate, and the postponed tax was now due. Interest that had accrued for some 50 years was deductible on the estate tax return when computing the postponed tax due. The interest far exceeded the tax on which it was based (it was some 37 times greater than the amount of tax).
  • The interest deduction reduced the tax to zero. 
  • The resulting interrelated computation could not solve - it continually looped from zero tax and zero interest, to a zero interest deduction and full tax, then a deduction for the full amount of interest and zero tax, and so on, back and forth.
  • In response to my question whether the estate first had to pay the interest in order to get the interest deduction (an ultimately pointless exercise), the answer was an unequivocal "no."
  • Because the estate did not have to pay any tax, a payment was not due.
  • Because of the passage of time and the section 2053 allowable deduction for all accrued interest, the postponed tax disappeared without any further action being required by the decedent's estate. 

NOTE THAT THE PARTIES INVOLVED IN THE REFERENCED TELEPHONE CONVERSATION HAVE RETIRED FROM THE IRS. ANY PERSON READING THIS PAGE MUST INDEPENDENTLY CHECK WITH THE IRS OFFICE OF CHIEF COUNSEL TO DETERMINE THEIR CURRENT POSITION ON THIS ISSUE.