CCA 200848072: Interest on section 6166 deferred estate tax is not deductible

Plain-English summary

Chief Counsel advised that IRC § 2053(c)(1)(D) bars a deduction for interest on estate tax deferred under IRC § 6166. The attached Rev. Proc. 98-15 explained a transition election for estates of people who died before January 1, 1998. Those estates could elect reduced interest rates for later installments, but had to give up both estate-tax and income-tax deductions for the deferred-tax interest. The election had to be made before January 1, 1999, by a signed letter containing specified estate and installment information, and it was irrevocable. Estates of people who died after December 31, 1997, received the new rates and nondeductibility treatment automatically.

Ruling snapshot

• Question: May an estate deduct interest paid on estate tax deferred under IRC § 6166?
• Outcome: Advice given. The interest is not deductible, with Rev. Proc. 98-15 supplying transitional election procedures for certain pre-1998 estates.
• Key authorities: IRC §§ 163, 2053, 6166, 6601, and 6621; Rev. Proc. 98-15.

Full text (IRS public release)

ID: CCA-820145-08 Number: 200848072
Office: --------------
Release Date: 11/28/2008

UILC: 6166.00-00

From: ----------------
Sent: Wednesday, August 20, 2008 2:51PM
To: -------------------
Cc:
Subject: FW: Westlaw Results: Rev. Proc. 98-15 ----------

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See IRC 2053(c)(1)(D), which says taxpayers cannot deduct the section 6166 interest. I’ve also attached the rev. proc. from Westlaw that tells how to make the election to deduct if the decedent died in ’98. Let me know if you have any more questions.

Best Regards,
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Attachment

Rev. Proc. 98-15, 1998-4 I.R.B. 25, 1998-1 C.B. 374, 1998 WL 6591 (IRS RPR)

Internal Revenue Service (I.R.S.)

Revenue Procedure
UNDERPAYMENT INTEREST; INTEREST EXPENSE DEDUCTION; ESTATES

Released: January 12, 1998
Published: January 26, 1998

26 CFR 301.6601-1: Interest on underpayments.

Section 163.-Interest, 26 CFR 1.163-1: Interest deduction in general.

Section 2053.-Expenses, Indebtedness, and Taxes, 26 CFR 20.2053-1 Expenses, indebtedness and taxes in general

Section 6166.-Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business, 26 CFR 20.6166-1 Election of alternate extension of time for payment of estate tax where estate consists largely of interest in a closely held business.

(Also Part I, § 6601.)

Underpayment interest; interest expense deduction; estates. Procedures are provided for estates of decedents dying before January 1, 1998, to elect, under section 503(d)(2) of the Taxpayer Relief Act of 1997, to reduce the Rev. Proc. 98-15, 1998-4 I.R.B. 25, 1998-1 C.B. 374, 1998 WL 6591 Page 2 (IRS RPR) rate of interest on estate taxes deferred under section 6166 of the Code and forgo the deduction for interest paid on the deferred estate taxes under sections 2053 and 163(h) of the Code

SECTION 1. PURPOSE
This revenue procedure provides procedures for estates of decedents dying before January 1, 1998, to make an election under § 503(d)(2) of the Taxpayer Relief Act of 1997, Pub.L. No. 105-34, 111 Stat. 788 (the “Act”). This § 503(d)(2) election allows an estate to reduce the rate of interest on estate taxes deferred under § 6166 of the Internal Revenue Code and forgo the deduction for interest paid on the deferred estate taxes under §§ 2053 and 163(h).

SECTION 2. BACKGROUND
.01 Deferral of Estate Taxes
(1) Section 6166 provides an election to extend the time for payment of estate tax where greater than 35 percent of the value of the adjusted gross estate consists of one or more interests in a closely held business. Only the estate of a decedent who, at the date of death, was a United States citizen or resident is eligible to make a § 6166 election. (2) If an estate makes a § 6166 election, the estate tax may be paid in up to ten installments, with the first payment of tax due not more than five years after the date prescribed for payment of the tax. However, interest on the estate tax is not deferred. Under § 6166(1), the interest must be paid annually. (3) Section 6601(a) imposes underpayment interest at the § 6621 underpayment rate, which for estates is the federal short-term rate plus 3 percentage points. However, § 6601(1) prior to as amendment by the Act, imposed a reduced interest rate of 4-percent on a portion (the “4 percent portion”) of the estate tax deferred under § 6166. The 4-percent portion is the lesser of (1) $345,800 reduced by the amount of the credit allowable under § 2010(a) (prior to amendment by § 501(a) of the Act), or (ii) the amount of deferred estate tax. The 4 percent rate continues to apply to estates of decedents dying before January 1, 1998, (the effective date of § 503 of the Act) unless such an estate properly makes the § 503(d)(2) election in the manner discussed below.

.02 Changes Made by the Act
(1) Reduced interest rates.
(a) In general. Section 503(a)(1) of the Act amends § 6601(j) to provide a 2-percent interest rate on the “2-percent portion” (defined below) of deferred estate tax. The interest rate on deferred estate tax in excess of the 2-percent portion is 45 percent of the underpayment rate determined under § 6621.
(b) 2-percent portion. Section 503(a)(2) of the Act provides that the 2-percent portion is an amount of deferred estate tax not exceeding the lesser of (i) the tentative tax under § 2001(c) computed on $1,000,000 plus the § 2010(c) (as amended by § 501(a) of the Act) applicable exclusion amount, reduced by the § 2010(c) applicable credit amount, or (ii) the amount of the deferred estate tax.
(2) Elimination of interest deduction. Section 503(b) of the Act amends §§ 163 and 2053 to eliminate both the income tax and the estate tax deductions for interest paid on § 6166 deferred estate tax. (3) Effective dates. Pursuant to § 503(d)(1) of the Act, the amendments described in this section 2.02 generally apply in estates of decedents dying after December 31, 1997. However § 503(d)(2) provides that any © 2008 Thomson Reuters/West. No Claim to Orig. US Gov. Works.
 Rev. Proc. 98-15, 1998-4 I.R.B. 25, 1998-1 C.B. 374, 1998 WL 6591 Page 3 (IRS RPR) estate of a decedent dying before January 1, 1998, that has made a § 6166 election may elect to have the reduced interest rates and nondeductibility amendments (but not the 2-percent portion) contained in § 503 apply to installments due after the effective date of the election. The election must be made before January 1, 1999, in a manner prescribed by the Secretary and, once made, is irrevocable.

SECTION 3. SCOPE
This revenue procedure applies to estates of decedents dying before January 1, 1998, that properly elect under § 6166 to defer payment of estate taxes, and that wish to elect to apply the new reduced interest rates of § 6601(j), as amended, and forgo the estate tax and income tax deductions for interest paid on deferred estate tax. The new rates and the nondeductibility provision apply automatically in the case of estates of decedents dying after December 31, 1997.

SECTION 4. PROCEDURE
.01 Making a § 503(d)(2) Election. After August 5, 1997, but before January 1, 1999, an estate may make a § 503(d)(2) election by writing a letter to the Service Center where the next installment of estate tax or interest is due. If an estate of a decedent dying before January 1, 1998, has not filed an estate tax return as of January 26, 1998, the letter may be attached to the estate tax return. No § 503(d)(2) election may be made before a § 6166 election is made. The letter must include the following information. (1) the decedent's name; (2) the estate's EIN; (3) a statement that the letter is an election under § 503(d)(2) of the Taxpayer Relief Act of 1997; and (4) the due date of the installment of estate tax or interest for which the election is to be effective. The letter must be signed and dated by the executor. Once made, the § 503(d)(2) election cannot be modified or revoked.

.02 Effective Date of the § 503(d)(2) Election. Generally, a § 503(d)(2) election is effective beginning with the first installment of estate tax or interest due on or after the date the election is filed with the appropriate Service Center. However, a § 503(d)(2) election made by April 27, 1998, will be effective beginning with any installment, designated by the executor, due after August 5, 1997, and on or before April 27, 1998. Any assessment that was proper when made, but that becomes excessive as a result of the election, will be abated. Future installments due will be calculated and any overpayment of an installment of either tax or interest will be applied to the next installment in accordance with § 6403.

SECTION 5 PAPERWORK REDUCTION ACT
The collections of information contained in this revenue procedure have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545- 1585.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are contained in SECTION 4 of this revenue procedure. This information is required to verify © 2008 Thomson Reuters/West. No Claim to Orig. US Gov. Works.
 Rev. Proc. 98-15, 1998-4 I.R.B. 25, 1998-1 C.B. 374, 1998 WL 6591 Page 4 (IRS RPR) that estates are electing under § 503(d)(2) of the Taxpayer Relief Act of 1997 to apply the reduced interest rates of § 6601(j), as amended, to deferred estate taxes. The likely respondents are estates.

The estimated total annual recordkeeping burden will be 3,300 hours.

The estimated annual burden per respondent will vary from 15 minutes to 45 minutes, depending on individual circumstances, with an estimated average of 30 minutes.

The estimated number of respondents is 6,600.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this revenue procedure is Brendan P. O'Hara of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure contact Brendan P. O'Hara at (202) 622-4910 (not a toll-free call).

Rev. Proc. 98-15, 1998-4 I.R.B. 25, 1998-1 C.B. 374, 1998 WL 6591 (IRS RPR) END OF DOCUMENT

© 2008 Thomson Reuters/West. No Claim to Orig. US Gov. Works.