Basic §6166(b)(10) - Underpayment of non-deferred tax

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 $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 and the first installment of $288,148.43 is paid (total tax payment of $526,756.30). Cincinnati Campus then sends a bill for interest of $10,597.46 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 return is filed on the extended return filing due date 6 months later, the IRS will treat the late payment of the first installment as though an extension of time to pay had been granted under section 6161. Only regular underpayment rate interest computed on the first installment from the return due date to the date of payment 6 months later will be payable on the return filing date, 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 installments of tax and interest are timely paid 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. The estate makes the "catch-up" payment of the additional tax and interest due on Jun-05-2013 rather than wait for a bill to be sent from Cincinnati. 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%, interest computed for any range of dates applicable to federal estate tax is consistent with the law applicable for those periods. For those who downloaded Inter-Est when it was available and continue to use it, the user is responsible for updating the interest tables for all periods after the date of the most recent release (Release 127f - the final release - 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. They are correct for a hypothetical series of projections run in 2010.

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 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 ($288,148.43) was paid at this time (total tax payment of $526,756.30). 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)(10) 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 ($10,597.46); interest accrued on the tax deferred under section 6166 at the time of filing ($13,156.41) 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.  Basic6166(b)(10) 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 $288,148.42 and interest of $21,909.93. Interest is not allowed as a deduction.

4.  Basic6166(b)(10) 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 $288,148.43 and interest of $16,477.89. Interest is not allowed as a deduction.

5. Basic6166(b)(10) 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 $260,534.60 and past-due increased non-deferred tax of $97,105.60, for total past-due tax of $357,640.20 and interest of $41,723.67 (interest of $10,295.34 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. 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 ($41,266.79), but is entered in the tax report program as a hard number.

NOTE: The IRS examination computation resulted in a new figure of $1,874,966.46 for the total tax deferred under section 6166. It also includes $14,237.26 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. The mathematical consequence is to slightly increase the percentage of tax eligible for deferral under section 6166.

6.  Basic6166(b)(10) 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 $374,993.30 and interest of $14,109.61. Interest of $41,266.79 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.  Basic6166(b)(10) Inter-Est computation for the 4th and final 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 fifth and final tax installment of $374,993.29 and interest of $7,054.80. Interest of $41,266.79 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.