Section 6601(j)(4) provides:
(4) Treatment of payments
If the amount of tax imposed by chapter 11 which is extended as provided in section 6166 exceeds the 2percent portion, any payment of a portion of such amount shall, for purposes of computing interest for periods after such payment, be treated as reducing the 2percent portion by an amount which bears the same ratio to the amount of such payment as the amount of the 2percent portion (determined without regard to this paragraph) bears to the amount of the tax which is extended as provided in section 6166.
Section 6601(j) Example 3, Comment 1: The purpose of §6601(j)(4) is to determine the 2% and 45% of R% amounts of tax on which interest is to be computed, and to properly allocate payments to both such portions of the deferred tax. This affects only §6166(a) or §6166(b)(10) elections, since they are the only elections with a 2% interest component. For §6166(b)(7) and §6166(b)(7) elections, the 2% portion of deferred tax is treated as zero and all payments are allocated solely to the 45% of R% portion of deferred tax; i.e. the entire balance of deferred tax. See sections 6166(b)(7)(A)(iii) and 6166(b)(8)(A)(iii), each of which provides: (iii) for purposes of applying section 6601(j), the 2percent portion (as defined in such section) shall be treated as being zero. 
Section 6601(j) Example 3
§6601(j)(4) 2% Allocation Examples
§6166(b)(10) Installment Payments from Example 2


The factors for the §6601(j)(4) 2% and 45% of R% tax allocations should be carried out to 6 decimal places. IRS uses 9 decimal place interest factors for all interest computations pursuant to Rev. Proc. 9517, but the same rule is not used for determining the section 6601(j)(4) ratios.  
In this example the annual installment tax payments equal the amounts due and are timely paid on each installment due date.  
Determine the §6601(j)(4) 2% and 45% of R% Factors  
2% portion of deferred tax  592,000.00  =  0.130467  The 2% portion of any tax payment  
Total amount of deferred tax  4,537,541.57  
45% of R% portion of deferred tax  3,945,541.57  =  0.869533  The 45% of R% portion of any tax payment (or, 1  0.130467124 = 0.869533876)  
Total amount of deferred tax  4,537,541.57 
Apply the §6601(j)(4) Factors to the Payments Received  
Feb102017  Feb102018  Feb102019  Feb102020  Feb102021  
Payment received  907,508.31  974,404.20  957,680.22  940,945.90  924,237.46 
Interest included in the payment  0.00  66,895.88  50,171.91  33,437.58  16,729.15 
Tax portion of the payment  907,508.31  907,508.32  907,508.31  907,508.32  907,508.31 
2% §6601(j)(4) factor  0.130467  0.130467  0.130467  0.130467  0.130467 
2% portion of payment  118,400.00  118,400.00  118,400.00  118,400.00  118,400.00 
45% of R% §6601(j)(4) factor  0.869533  0.869533  0.869533  0.869533  0.869533 
45% of R% portion of payment  789,108.31  789,108.32  789,108.31  789,108.32  789,108.31 
Determine the Annual Installment Interest Computation Base After Applying §6601(j)(4)  
Return Due Date  1st Anniversary Date  2nd Anniversary Date  3rd Anniversary Date  4th and Final Anniversary Date  
Feb102017  Feb102018  Feb102019  Feb102020  Feb102021  
2% Deferred Tax base on which 2% interest is computed  592,000.00  473,600.00  355,200.00  236,800.00  118,400.00 
Fraction due  1/5  1/4  1/3  1/2  1/1 
2% iInstallment due  118,400.00  118,400.00  118,400.00  118,400.00  118,400.00 
45% of R% Deferred Tax base on which 45% of R% interest is computed  3,945,541.57  3,156,433.26  2,367,324.94  1,578,216.63  789,108.31 
Fraction due  1/5  1/4  1/3  1/2  1/1 
45% of R% installment due  789,108.31  789,108.32  789,108.31  789,108.32  789,108.31 
Total tax portion of installment due  907,508.31  907,508.32  907,508.31  907,508.32  907,508.31 
Total interest due  computed from the preceding anniversary date to the current anniversary date  0.00  66,895.88  50,171.91  33,437.58  16,729.15 
Total installment payment due  907,508.31  974,404.20  957,680.22  940,945.90  924,237.46 
Section 6601(j) Example 3, Comment 2: The stepdown in amounts on which 2% and 45% of R% interest is computed occurs on every tax installment anniversary date whether or not any payments have been received. This process is required for computing interest on deferred tax that will be due on the next installment due date. If an installment is not paid when due (e.g. the time for payment is extended under §6161), interest on the unpaid installment will be computed at the regular underpayment interest (R%) rates from the payment due date forward until paid; the §6601(j) rules will no longer apply to that pastdue installment. See Rev. Rul. 8932, 19891 C.B. 307. 
Section 6601(j) Example 3, Comment 3: The §6601(j)(4) fraction remains constant over the life of the §6166(b)(10) payout even though the unpaid balance of deferred tax decreases each year. The numerator and denominator of the fraction use the figures first determined when the §6166 election was filed, and as modified by any examination (audit) adjustments made when the election was finally accepted by the IRS. They do not change until there is a subsequent change in the total estate tax or in the closely held business value at the time immediately before the decedent's death. 
Section 6601(j) Example 3, Comment 4: Any overpayments of interest would also be applied between the 2% and 45% of R% portions of deferred tax pursuant to §6601(j)(4). However, in this example there are no excess tax payments or interest overpayment credits to be applied against the deferred tax base on which interest is to be computed, and the §6601(j)(4) computations are straightforward. 