California 6166 Cases and Supplemental Estate Tax Returns

California adopted Internal Revenue Code section 6166 and related Code provisions for estates of decedents dying on or after January 1, 1999 and before January 1, 2005. California did not decouple its estate tax from the phaseout of the section 2011 credit for state death tax. The California estate tax therefore expired for estates of decedents dying on and after January 1, 2005. The California State Controller's Office published a summary of the laws and regulations regarding its estate tax that explains these points in greater detail. The applicable California underpayment interest rates follow the IRS underpayment rates with interest compounding for periods after December 31, 2000. Likewise, the amount of California 2% Tax is computed in the same manner as it is for Federal purposes, but with different numbers because it is based on the IRC section 2011 state death tax credit computation.

A number of states provide for deferred tax payments when a Federal 6166 deferral is in effect. By adopting the entire set of Federal statutes regarding section 6166, California provides three interest rates in 6166(a) and (b)(10) deferral cases, unlike New York, which, although it also has a statute permitting a section 6166 deferral of state tax, provides for only two interest rates on its deferred tax. Other states, such as North Carolina and Minnesota, do not provide any special interest rates at all and simply charge their regular underpayment interest rates on the deferred tax.

For estates of California decedents dying in 1999 through 2004, the full amount of interest on California estate tax is deductible on the Federal estate tax return whether or not it is deductible on the California return. See Reg. 20.2053-1. Revenue Procedure 81-27 provides that a supplemental estate tax return can be filed to claim a deduction for additional state interest paid.

The American Taxpayer Relief Act of 2012 made the current estate tax regime permanent. The former section 2011 credit for state death tax will not return and, unless there is a change in California law, the California estate tax will not return.