Basic 6166(b)(10) Overpayment Minimum

Basic §6166(b)(10) - Overpayment of non-deferred tax with a reduced deferral election

This is a section 6166(b)(10) election for a qualifying lending and finance business. Pursuant to section 6166(b)(10)(A)(iii), the maximum number of installments is 5. 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 $1,250,000 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 election statement attached to the return shows that the actual non-deferred tax is $738,607.87 and the maximum tax eligible for deferral is $1,440,742.13. The annual installment would therefore be $288,148.43, for a total due on the return due date of $1,026,756.30, which yields an overpayment of $223,243.70 that was submitted with the Form 4768. The estate elects to defer only the unpaid balance of tax, or $1,217,498.43. The $223,243.70 overpayment of non-deferred tax on Sep-11-2010 is therefore treated as an additional payment of non-deferred tax.

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 the unpaid portion of the first installment), 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 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. The computation examples in this series are carried out through the fourth anniversary date of Sep-11-2014, when the fifth and final installment is due.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 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 2% (§6166(a) and §6166(b)(10)) or 45% of regular underpayment interest rates (§6166(b)(7) and §6166(b)(8)). 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.

4. Notes for all 6166(b)(7), 6166(b)(8), and 6166(b)(10) Overpayment Deferral Scenarios:

A.  Overpayment with minimum deferral election: The maximum amount of tax eligible for deferral at the time of filing is $1,440,742.13. The Inter-Est program computes the first installment due on the return due date at one-fifth of this amount ($288,148.43 in the 6166(b)(8) and 6166(b)(10) scenarios) or one-tenth of this amount ($144,074.21 in the 6166(b)(7) scenario) before considering any overpayment of non-deferred tax. In the minimum deferral election scenarios, the overpayment of non-deferred tax reduces the tax deferred under section 6166 for determining the amount of the second and subsequent installments, but the first installment is not affected. This causes an overpayment of the first installment on the return due date (which was paid on the 6-month extended filing date in these scenarios).

The overpayment of the first installment is applied as a prepayment credit against the second installment, reducing it to less than one-fifth or one-tenth of the deferred tax amount that would otherwise be the annual installment. The balance of the installment payments are at their proper levels. The sum of all installment payments equals the total amount of tax eligible for deferral under section 6166(b)(7), 6166(b)(8), or 6166(b)(10), as the case may be.

B.  Overpayment with maximum deferral election: The maximum amount of tax eligible for deferral at the time of filing is $1,440,742.13. The Inter-Est program computes the first installment due on the return due date at one-fifth of this amount ($288,148.43 in the 6166(b)(8) and 6166(b)(10) scenarios) or one-tenth of this amount ($144,074.21 in the 6166(b)(7) scenario) before considering the overpayment of non-deferred tax. In the maximum deferral election scenarios, the overpayment of non-deferred tax is treated as a prepayment of the tax deferred under section 6166 for determining the amount of the second and subsequent installments, but the first installment is not affected.

The overpayment of non-deferred tax is thus applied as a prepayment credit against the second installment due, not the first installment that was due on the return due date (which was paid on the 6-month extended filing date in these scenarios),  reducing it to less than one-fifth or one-tenth of the deferred tax amount that would otherwise be the annual installment. The balance of the installment payments are at their proper levels. The sum of all installment payments equals the total amount of tax eligible for deferral under section 6166(b)(7), 6166(b)(8), or 6166(b)(10), as the case may be.

COMPUTATIONS:

1.  Basic 6166(b)(10)Inter-Est computation for the original return filed on the extended due date of Mar-11-2011. There was an overpayment of non-deferred tax of $223,243.70 on Sep-11-2010 ($1,250,000 - $738,607.87 - $288,148.43). No tax or interest payments were due at the time of filing. While interest of  $8,718.82 was accrued on the tax deferred under section 6166, it will not be payable (plus additional interest) until the first anniversary date.

2. Basic 6166(b)(10) Inter-Est computation for first anniversary date of Sep-11-2011 Cincinnati Campus billing notice. The second installment is due. The annual installment is $243,499.69 (20% of $1,217,498.43, the tax elected to be deferred). However, the estate is credited with having paid a first installment of $288,148.43 on the return due date - an excess payment of $44,648.74. The installment payable on Sep-11-2011 reflects this prepayment credit and only the balance of $198,850.94 is payable - plus interest of $17,666.24.

3. Basic 6166(b)(10) Inter-Est computation for second anniversary date of Sep-11-2012 Cincinnati Campus billing notice. The third installment of $243,499.68 and interest of $13,924.64 is due and payable.

4. Basic 6166(b)(10) Inter-Est computation with a Jun-05-2013 IRS examination deficiency. The Inter-Est computation shows the IRS examination deficiency and amounts due on Jun-05-2013 to bring the account current - interest of $33,482.70 and past-due additional installment payments of $290,373.94, for a total "catch-up" payment of $323,856.64. The IRS field examination report shows the line item changes that result in the deficiency. Deductible interest of $16,472.71 from the separate Inter-Est computation is entered in the tax report program as a hard number deduction on the Form 886-A analogue for Schedule J. The gross estate, total deductions, total tax, and the value of the 6166 business interest are increased. Interest is allowed as a deduction.

NOTE: The IRS examination computation resulted in a new figure of $1,847,781.80 for the total tax deferred under section 6166. The new annual installment amount is $369,556.36. There was no deductible interest accrued on  the return filing date.

5. Basic 6166(b)(10) Inter-Est computation for third anniversary date of Sep-11-2013Cincinnati Campus billing notice.The Inter-Est computation shows that the recomputed 4th installment of $369,556.36 and interest of $13,903.81 is due on Sep-11-2013. Interest of $16,472.71 is allowed as a deduction in the computation, but there is no change from the IRS deficiency amount because all payments to date have been timely and in the proper amounts.

6. Basic 6166(b)(10) Inter-Est computation for fourth anniversary date of Sep-11-2014 Cincinnati Campus billing notice.The Inter-Est computation shows the recomputed 5th and final installment of $369,556.36 and interest of $6,951.91 is due. Interest of $16,472.71 is allowed as a deduction in the computation, but there is no change from the IRS deficiency amount because all payments to date have been timely and in the proper amounts.