Notice 2020-23 Covid-19 Automatic Extension of Time to Pay a Section 6166 Installment - Computation Example 1

NOTICE 2020-23 COVID-19 AUTOMATIC EXTENSION OF TIME TO PAY SECTION 6166 INSTALLMENTS

AND AMOUNTS DUE UNDER SECTION 6161 OR 6163 ELECTIONS

IRS Notice 2020-23, amplifying Notices 2020-20 and 2020-18, provided an automatic extension of time until July 15, 2020 to make a payment that was otherwise due on or after April 1, 2020 and before July 15, 2020 under a section 6166, 6161, or 6163 election. An estate does not have to take any affirmative action for this automatic extension to apply.

BASIC FACTS FOR EXAMPLES THAT APPLY NOTICE 2020-23 TO SECTION 6166 AND RELATED SECTION 6161 SITUATIONS
Aug-25-2011	Date of death
May-25-2012	Section 6075(a) estate tax return due date. The return was filed with a regular 14-year section 6166 election and payment of the estate tax not deferred (extended) under the section 6166 election. The estate made a maximum deferral election to obtain the result set out in Reg. 20.6166-1(i), example 1(i), should a deficiency result from an IRS examination of the return.
May-25-2013	First section 6166(f)(1) anniversary date when interest only was due. May-25 continued to be the interest-only anniversary due date in 2014, 2015, and 2016.
May-25-2017	Fifth anniversary date and section 6166(a)(3) first installment due date.
May-25-2018	Sixth anniversary date and second installment due date.
May-25-2019	Seventh anniversary date and third installment due date.
May-25-2020	Eighth anniversary date and fourth installment due date.
Jul-15-2020	Notice 2020-23 automatically extended due date for the installment payment otherwise due May-25-2020.
	The estate tax return did not report - any adjusted taxable gifts; gift tax payable; or state death tax deduction. Further, the IRS made no audit (examination) adjustments to the return as filed, and all anniversary date payments were made timely and in the proper amounts.

Notice 2020-23, Example 1: A straightforward simplified illustration of the Notice 2020-23 automatic extension of a section 6166 installment payment due date.

Notice 2020-23, Computation Example 1.1 - Simplified Computation:

The Section 6166(b)(6) Adjusted Gross Estate and Section 6166(a)(2) Ratio
94,500,000	Gross estate
8,175,000	Schedules J, K, and L deductions when the return was filed - IRC sections 2053 and 2054
86,325,000	Section 6166(b)(6) adjusted gross estate
71,250,000	Section 6166 closely held business value
0.825369	Section 6166(a)(2) ratio - maximum amount of tax which may be paid in installments carried to 6 decimal places per IRS Instructions.

Computation of Estate Tax and the Tax Extended Under the Section 6166 Election
94,500,000	Gross estate
8,175,000	Schedules J, K, and L deductions - IRC sections 2053 and 2054
2,000,000	Section 2055 charitable deduction
84,325,000	Section 2051 taxable estate
27,763,750	Section 2001(b) estate tax
0.825369	Section 6166(a)(2) ratio - maximum amount of tax which may be paid in installments (carried to 6 decimal places per IRS Instructions)
22,915,338.57	Tax extended under the section 6166(a) election
	NOTE: In section 6166 installment cases IRS will calculate tax and interest in dollars and cents even though the estate tax return reports all tax figures in whole dollar amounts.
4,848,411.43	Tax not extended and paid on the estate tax return due date
Section 6601(j) Allocation of Extended Tax Between the 2% Portion and 45% of Section 6621 Interest Rates Portion
476,000.00	Section 6601(j)(1)(A) portion of tax extended at 2% interest rate for a date of death in 2011
22,439,338.57	Section 6601(j)(1)(B) balance of tax extended at 45% of section 6621 interest rates

**The Annual Installment (10 Installments Elected by the Estate)**
Item	Deferred Tax Balance	Divisor	Equal Annual Installment Payable Over 10 Years
2% portion of deferred tax	476,000.00	10	47,600.00
45% of §6621 interest rate portion of deferred tax	22,439,338.57	10	2,243,933.86
Total installment due each year for 10 years beginning May-25-2017			2,291,533.86

**The Annual Installment Due May-25-2020 as Billed by IRS on Letter 249C**
Tax Due	Interest Due	Total Amount Due May-25-2020
$ 2,291,533.85	371,883.32	2,663,417.17

**The Annual Installment Paid Jul-15-2020 Pursuant to Notice 2020-23**
Tax Due	Interest Due	Total Amount Due Jul-15-2020
$ 2,291,533.85	371,883.32	2,663,417.17

Notice 2020-23 Computation Example 1, Comment 1: Notice 2020-23 provides that no interest will be charged on the installment extended to Jul-15-2020 from its regular installment due date falling on or after Apr-01-2020 and before Jul-15-2020. The example above shows that the interest due May-25-2020 remains the interest due on Jul-15-2020. This result occurs because the installment due May-25-2020 is a "Specified Payment" as defined in the Notice, and such Specified Payments do not draw interest if paid on Jul-15-2020.

Meanwhile, interest begins accruing on the unpaid balance of tax from May-26-2020 through the next installment due date of May-25-2021. The installment due May-25-2021 is not a "Specified Payment" described in the Notice because that payment due date is outside the Apr-01-2020 to Jul-14-2020 Specified Payment date range described in Notice 2020-23.

Notice 2020-23, Computation Example 1.2 - Detailed Computation:

**IRS Calculation of the Interest Due May-25-2020**
Item	Deferred Tax Balance	Interest Factor	Interest Due May-25-2020
2% portion of deferred tax	333,200.00	2.0234383%	6,742.10
45% of §6621 interest rate portion of deferred tax	15,707,536.99	2.3246243%	365,141.22
Total interest due			371,883.32

**IRS Calculation of the Deferred Tax Installment Due May-25-2020**
Item	Deferred Tax Balance	Annual Installment	Tax Due May-25-2020
2% portion of deferred tax	333,200.00	47,600.00	47,600.00
45% of §6621 interest rate balance of deferred tax	15,707,536.99	2,243,933.85	2,243,933.85
Total tax due			2,291,533.85

**IRS Calculation of the Next Deferred Tax Installment Due May-25-2021**
Item	Deferred Tax Balance	Annual Installment	Tax Due May-25-2021
2% portion of deferred tax	285,600.00	47,600.00	47,600.00
45% of §6621 interest rate balance of deferred tax	13,463,603.14	2,243,933.86	2,243,933.86
Total tax due			2,291,533.86

Notice 2020-23, Computation Example 1.3 - Computation of Base on Which Interest is Computed for the May-25-2021 Installment:Automatic Step Down in Deferred Tax Balances Will Occur Whether or Not Annual Installments Are Paid
Date	Item	Deferred Tax Balance	Annual Installment Due	Balance of Deferred Tax
May-25-2012	2% portion of deferred tax	476,000.00	- 0 -	476,000.00
	45% of §6621 interest rate balance of deferred tax	22,439,338.57	- 0 -	22,439,338.57
May-25-2017	2% portion of deferred tax	476,000.00	47,600.00	428,400.00
	45% of §6621 interest rate balance of deferred tax	22,439,338.57	2,243,933.86	20,195,404.71
May-25-2018	2% portion of deferred tax	428,400.00	47,600.00	380,800.00
	45% of §6621 interest rate balance of deferred tax	20,195,404.71	2,243,933.86	17,951,470.85
May-25-2019	2% portion of deferred tax	380,800.00	47,600.00	333,200.00
	45% of §6621 interest rate balance of deferred tax	17,951,470.85	2,243,933.85	15,707,537.00
May-25-2020	2% portion of deferred tax	333,200.00	47,600.00	285,600.00
	45% of §6621 interest rate balance of deferred tax	15,707,537.00	2,243,933.86	13,463,603.14
May-25-2021	2% portion of deferred tax	285,600.00	47,600.00	238,000.00
	45% of §6621 interest rate balance of deferred tax	13,463,603.14	2,243,933.86	11,219,669.28
and so on through May-25-2026

Notice 2020-23 Computation Example 1, Comment 2: If an annual installment is not paid when due, the computation base on which 2% and 45% of regular rate interest is computed is nevertheless reduced by the installment amounts the time for payment of which have passed. The interest calculated for the next year's installment will be based on the reduced deferred tax balances.

Meanwhile, the unpaid installment amount will begin drawing interest from its payment due date forward at regular section 6621 underpayment interest rates. It will no longer draw interest computed under section 6601(j). Consequently, the section 6621 interest will be a new deduction on Schedule J of the estate tax return; section 2053(c)(1)(D), which prohibits a deduction for interest computed under section 6601(j), will not be applicable to the section 6621 interest. See Rev. Rul. 89-32, 1989-1 C.B. 307.

If the estate had requested a section 6161 extension of time to pay the installment on Form 4768, the acceletration procedures of section 6166(g)(3) would not come into play. The section 6161 extension for the installment would run concurrently with the section 6166 extension. See Computation Example 3.

If the estate did not file Form 4768 to request a section 6161 extension of time to pay the installment, then the acceleration procedures under section 6166(g)(3) would commence. See Computation Example 2.