Basic §6166(a) - Underpayment of non-deferred tax

This is a section 6166(a) regular election where the deferred tax tax is payable in a maximum of 10 equal installments over a maximum period of 14 years; interest only is paid for the first 4 years and, beginning on the fifth anniversary date, equal installments of the deferred tax, plus interest, are paid annually for 10 years, for a maximum deferral period of 14 years beyond the original return due date (determined without regard to any extensions of time to file).

Date of death is Dec-11-2009. Estimated non-deferred estate tax of $500,000 is paid on the return due date of Sep-11-2010 with the filing of Form 4768 to request an automatic 6-month extension of time to file the return. The return is filed on the extended due date of Mar-11-2011, when the balance of non-deferred tax of $238,607.87 is paid. Cincinnati Campus then sends a bill for interest of $4,800.39 computed from Sep-11-2010 through Apr-19-2011 on the late payment of non-deferred tax and related interest. The interest is paid Apr-19-2011.

Annual interest payments are timely made on the Sep-11-2011 and Sep-11-2012 anniversary dates. An IRS examination deficiency is determined and agreed on Jun-05-2013, which falls between the second and third anniversary dates and is when the estate makes the "catch-up" payment of the additional tax and interest due  On the fourth anniversary date of Sep-11-2014 the estate voluntarily pays $100,000 toward the deferred tax in addition to the interest billed by Cincinnati. The computation examples are carried out through the fifth anniversary date of Sep-11-2015, when the first installment of tax is due.The section 2058 state death tax deduction is zero.

NOTES

Interrelated computations are run with Inter-Est, a stand-alone Visual Basic program that is no longer available.  The Inter-Est computations are supplemented and complemented with separate Excel spreadsheet computations, which in many instances on this site also independently compute tax and interest.

The Inter-Est computations display a line for each interest period in Part 3 captioned “Qua. (4%)”. This is built into the display framework and does not change even though interest is actually being computed at 2% under current law. Although this fixed display language is a result of the program having been created many years ago when the special low interest rate in 6166 cases was 4%, computed interest is consistent with the law applicable for all interest periods.

This set of computations was run in 2010, when the IRS regular underpayment interest rate (the R% interest rate) was 4%. The 4% interest rate was used for all future interest period computations in the series including those in which the actual R% rate dropped to 3%. Since these projections are for illustration purposes only, the computations have not been adjusted to reflect the actual 3% interest rate beginning in 2011.

COMPUTATIONS

1.  Basic 6166(a) Inter-Est computation for the original return filed on the extended due date of Mar-11-2011. There was an underpayment of $238,607.87 of non-deferred tax on Sep-11-2010, which was paid with the filing of the return on Mar-11-2011. Interest is due on the unpaid balance of non-deferred tax at the time of filing and the estate expects a bill from Cincinnati Campus.

2.  Basic 6166(a) Inter-Est computation for Cincinnati Campus interest bill on Apr-19-2011 used by Cincinnati Campus to generate the bill for interest due on Apr-19-2011. Only the interest accrued on the unpaid portion of the non-deferred tax ($4,800.39) is due and payable on Apr-19-2011; interest accrued on the tax deferred under section 6166 at the time of filing ($13,516.52) is not payable until the first anniversary date of Sep-11-2011. Interest due on the non-deferred tax is not allowed as a deduction in this computation because it is for Campus billing purposes only, and IRS examination activity has not been completed.

3.  Basic 6166(a) Inter-Est computation for the first anniversary date of Sep-11-2011 Cincinnati Campus billing notice. The Inter-Est computation shows the amount due on the first anniversary date of Sep-11-2011 - interest of $27,387.41. Interest is not allowed as a deduction.

4.  Basic 6166(a) Inter-Est computation for the 2nd anniversary date of Sep-11-2012 Cincinnati Campus billing notice. The Inter-Est computation shows the amount due on the second anniversary date of Sep-11-2012 - interest of $27,463.16. Interest is not allowed as a deduction.

5. Basic 6166(a) Inter-Est Examination deficiency computation  and IRS Examination deficiency tax report for Jun-05-2013. The Inter-Est computation shows the amounts due on the agreed deficiency date of Jun-05-2013 - additional non-deferred tax of $101,960.41 and interest of $28,604.71, for a total "catch-up" payment of $130,565.12. Interest of $25,816.40 accrued on the deferred tax is not due (plus additional interest) until the next anniversary date. The IRS field examination report computation shows the line item changes that result in the deficiency. The gross estate, total deductions, total tax, and the value of the 6166 business interest are increased. Interrelated deductible interest on Federal estate tax is automatically computed in the Inter-Est computation ($17,395.93), but is entered in the tax report program as a hard number.

NOTE: The IRS examination computation resulted in a new figure of $1,880,853.55 for the total tax deferred under section 6166. The new annual installment is $188,085.36. It also included $6,822.45 of deductible interest accrued on the past-due amounts on the filing date as an additional section 2053 deduction included in the 6166(b)(6) adjusted gross estate computation, which slightly increases the percentage of tax eligible for deferral under section 6166.

6.  Basic 6166(a) Inter-Est computation for the 3rd anniversary date of Sep-11-2013 Cincinnati Campus billing notice. The Inter-Est computation shows the amount due on the third anniversary date of Sep-11-2013 - interest of $35,380.94. Interrelated interest of $17,395.93 is allowed as a deduction, but there is no change from the figure in the IRS deficiency computation because all payments since then have been timely and in the proper amounts.

7.  Basic 6166(a) Inter-Est computation for the 4th anniversary date of Sep-11-2014 Cincinnati Campus billing notice. The Inter-Est computation shows the amount due on the fourth anniversary date of Sep-11-2014 - interest of $35,380.95.Interrelated interest of $17,395.93 is allowed as a deduction, but there is no change from the figure in the IRS deficiency computation because all payments since then have been timely and in the proper amounts.

NOTE: The estate makes a voluntary payment of $100,000 on Sep-11-2014 in addition to paying the amount billed by Cincinnati, and designates the voluntary payment as deferred tax.

8.  Basic 6166(a) Inter-Est computation for the 5th anniversary date of Sep-11-2015 Cincinnati Campus billing notice. The Inter-Est computation shows the amount due on the fifth anniversary date of Sep-11-2015, when the first installment of tax is due - tax of $88,085.35 and interest of $33,499.83.Interrelated interest of $17,395.93 is allowed as a deduction, but there is no change from the figure in the IRS deficiency computation because all payments since then have been timely and in the proper amounts.

NOTE: The annual installment is $188,085.35. It is not affected by the voluntary payment of $100,000 in 2014. However, the annual installment payable in 2015 is reduced by the $100,000 voluntary payment, because the voluntary payment is treated as a prepayment of the tax payable in installments and is applied against those installments as they come due until it is exhausted.