Basic 6166(b)(7) Underpayment

Basic §6166(b)(7) - Underpayment of non-deferred tax

This is a section 6166(b)(7) family attribution election with a maximum of 10 installments. The first installment is due on the estate tax 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. The 6166(b)(7) election statement attached to the return shows the total deferred tax is $1,440,742.13 and the non-deferred tax is $738,607.87, and the balance of non-deferred tax of $238,607.87 and the first installment of $144,074.21 is paid (total tax payment of $382,682.08). Cincinnati Campus then sends a bill for interest of $7,698.93 computed from Sep-11-2010 through Apr-19-2011 on the late payments of non-deferred tax and the first installment of deferred tax and related interest. The interest is paid Apr-19-2011.

NOTE: The first installment in a 6166(b)(7), 6166(b)(8), or 6166(b)(10) election is due on the return due date determined without regard to any extensions of time to file. However, if the first installment is not paid until the extended return filing date 6 months later, the IRS will treat the late payment of the first installment as though an extension of time for its payment had been granted under section 6161 so that only regular underpayment rate interest for 6 months computed on the amount of the first installment will be due on the return filing date (plus any additional portion of the first installment remaining unpaid), and a penalty for late payment of the first installment will not be assessed.Under Rev. Rul. 76–51, 1976–1 CB 382 (which amplified Rev. Rul. 74-499), an estate is deemed to have filed an extension of time to pay the first installment under IRC section 6166 if the return is timely filed within the time period of an approved extension of time to file the return.

Annual interest and tax installment payments are timely made on the Sep-11-2011 and Sep-11-2012 anniversary dates. An IRS examination deficiency is assessed on Jun-05-2013, which falls between the second and third anniversary dates. The computation examples in this series are carried out through the fifth anniversary date of Sep-11-2015.The section 2058 state death tax deduction is zero.

NOTES:

1. Interrelated computations are run with Inter-Est, a stand-alone Visual Basic program that was available until the summer of 2014, when the Inter-Est web site was deactivated. The Inter-Est program is no longer available to the public. The Inter-Est computations on this site are supplemented and complemented with separate Excel spreadsheet computations, which in many instances also independently compute tax and interest.

2. 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 45% of the IRS regular underpayment interest rate (the R% interest rate) under current law for the entire amount of tax deferred under section 6166(b)(7). (The Inter-Est display framework also splits the deferred tax into two portions whether or not all of the tax is drawing interest at 45% of R% rates.) 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. However, the user is responsible for updating the interest tables for all periods after the date of the most recent release (Release 127f is dated February 27, 2013).

3. 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(b)(7)Inter-Est computation for the original return filed on the extended due date of Mar-11-2011. There was an underpayment of non-deferred tax on Sep-11-2010. The balance of the non-deferred tax ($238,607.87) and the first installment of deferred tax ($144,074.21) was paid at this time (total payment of $382,682.08). Interest was due on the unpaid balance of non-deferred tax and the first installment of deferred tax at the time of filing, and the estate expects a bill from Cincinnati Campus.

2.  Basic 6166(b)(7) 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 and the first installment is due and payable on Apr-19-2011 ($7,698.93); interest accrued on the tax deferred under section 6166 at the time of filing ($14,144.21) is not payable until the first anniversary date of Sep-11-2011. Interest due on the non-deferred tax and first installment is not allowed as a deduction in the computation because this is a Campus billing computation and IRS examination activity has not been completed.

3.  Basic 6166(b)(7) 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 second anniversary date of Sep-11-2011 - the second tax installment of $144,072.22 and interest of $23,550.76. Interest is not allowed as a deduction.

4.  Basic 6166(b)(7) 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 - the third tax installment of $144,072.22 and interest of $20,991.88. Interest is not allowed as a deduction.

5. Basic 6166(b)(7) 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 - three past-due increased installment payments totaling $131,145.50 and past-due increased non-deferred tax of $99,521.58, for total past-due tax of $230,667.08, and interest of $35,209.11, for a total "catch-up" payment due of $265,876.19. (Interest of $17,422.25 accrued on the balance of 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 of $536,673.21. 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 ($29,392.86), but is entered in the tax report program as a hard number.

NOTE: The IRS examination computation resulted in a new figure of $1,877,893.75 for the total tax deferred under section 6166. The new annual installment is $187,789.38. It also includes $10,535.49 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. This slightly increases the percentage of tax eligible for deferral under section 6166.

6.  Basic 6166(b)(7) 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 -the recomputed fourth tax installment of $187,789.37 and interest of $23,875.11. Interest of $29,392.86 is allowed as a deduction, but there is no change from the IRS deficiency amount because all payments since then have been timely and in the proper amounts.

7.  Basic 6166(b)(7) 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 -the recomputed fourth tax installment of $187,789.38 and interest of $20,464.37. Interest of $29,392.86 is allowed as a deduction, but there is no change from the IRS deficiency amount because all payments since then have been timely and in the proper amounts.

8.  Basic 6166(b)(7) 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 -the recomputed fifth tax installment of $187,789.38 and interest of $17,053.65. Interest of $29,392.86 is allowed as a deduction, but there is no change from the IRS deficiency amount because all payments since then have been timely and in the proper amounts.