CCA 200836027: Estate-tax interest during a section 6161 extension was nondeductible personal interest

Plain-English summary

An estate lacked liquid assets to pay its estate tax and received a hardship extension under section 6161 while it sold real property. Interest accrued during the extension, and the estate deducted that interest on its income tax return. Chief Counsel advised that section 163(h)(2)(E) makes estate-tax interest deductible during a section 6163 extension, but not during a section 6161 extension. Congress's earlier inclusion and later exclusion of section 6166 interest supported reading the exception according to its text. Because no other nonpersonal-interest exception applied on the stated facts, the section 6161 interest was nondeductible personal interest.

Ruling snapshot

• Question: Could an estate deduct interest that accrued on unpaid estate tax during a section 6161 payment extension?
• Outcome: Advice given, the interest was nondeductible personal interest
• Key authorities: IRC §§ 163(h)(2)(E), 6161, 6163, and 6166; Temp. Treas. Reg. § 1.163-9T(b)(1)(v)

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
Memorandum

Number: 200836027
Release Date: 9/5/2008
CC:ITA:B01:NJLee
POSTN-111097-08

UILC: 163.05-00

date: May 12, 2008

to: Nelson M. Blakely
Attorney (Estate Tax)
(Small Business/Self-Employed)

from: John P. Moriarty
Branch Chief, Branch 1
(Income Tax & Accounting)

Nancy J. Lee
General Attorney, Branch 1
(Income Tax & Accounting)

subject: --------------------------------------------------------------

This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.

ISSUE

Whether interest on the estate tax accrued during the period of extension for paying tax under § 6161 of the Internal Revenue Code is deductible under § 163.

CONCLUSIONS

Interest on the estate tax accrued during the period of extension for paying tax under § 6161 constitutes nondeductible, personal interest under § 163(h)(2).

FACTS

During the taxable year at issue, taxpayer (an estate) owed income and estate taxes but lacked liquid assets to pay the taxes. Instead, taxpayer held real property assets, which subsequently were sold to pay the taxes. In the meantime, under § 6161, taxpayer requested and was granted (due to economic hardship) an extension of time for paying the estate tax. During the period of extension for paying the estate tax, interest on the unpaid estate tax continued to accrue. Taxpayer filed its Form 1041, U.S. Income Tax Return for Estates and Trusts, which reflected the income tax due. Taxpayer claimed a deduction on the income tax return for the amount of interest due on the unpaid estate tax. Taxpayer later paid the estate tax and interest due pursuant to the extension under § 6161 (and did not claim a deduction on the estate tax return for the related interest).

LAW AND ANALYSIS

In general, § 163(a) provides that a deduction is allowed for interest paid or accrued within the taxable year on indebtedness. However, under § 163(h)(1), no deduction is allowed for personal interest paid or accrued during the taxable year. Only the six types of interest listed in § 163(h)(2)(A) through (F) qualify as deductible, non-personal interest.

Section 163(h)(2)(E) states that where an extension of time for payment of estate tax is in effect under § 6163, the interest payable on the estate tax during that period of extension is allowable as an income tax deduction.1 Other than interest payable on estate tax during a period of extension under § 6163, all interest with respect to other extensions of time for paying estate tax are considered personal interest for purposes of the income tax deduction (unless the interest qualifies as non-personal interest under § 163(h)(2)(A) through (C), relating to trade or business, investment, and passive activities).2

Taxpayer in this case was granted an extension of time for payment of estate tax. However, the extension was in effect under § 6161 – not § 6163. Therefore, the interest payable on taxpayer's estate tax during the period of extension is personal interest and not allowable as an income tax deduction.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

In a publication of the American Law Institute, Jeffrey N. Pennell suggested a question remained with respect to whether interest payable on estate tax during a period of extension under § 6161 would qualify as deductible, non-personal interest under § 163(h)(2)(E). Jeffrey N. Pennell, § 4, Interest and Late Filing or Payment Penalties, of Tax Payment Provisions and Equitable Apportionment, SM093 ALI-ABA 1097, 1107 (Jun. 17-22, 2007) (accessed via Westlaw). The plain language of the statute, along with Congress's prior inclusion and then exclusion of § 6166, indicates that no interest payable on the estate tax during a period of extension other than under § 6163, qualifies as deductible, non-personal interest under § 163(h)(2)(E).

This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.

Please call (202) 622-5020 if you have any further questions.

1 Prior to its amendment in 1997, § 163(h)(2)(E) included § 6166 and § 6166A interest. Section 503(b)(2) of P.L. 105-34, 111 Stat. 788, 852 (Aug. 5, 1997). In the same amendment, Congress added § 163(k), which explicitly states that interest payable on estate tax during the period of extension under § 6166 is not deductible under § 163. Note, however, the Temporary Income Tax Regulations have yet to delete references to § 6166 and § 6166A. Section 1.163-9T(b)(1)(v) (originally promulgated on Dec. 22, 1987, and corrected on Mar. 19, 2003).

2 Nothing in the facts indicates any other exception under § 163(h)(2) would apply in this case.