(h) - Section 6166(h) - Election on a Deficiency
Section 6166(h) - Example 4  (Based on CCA 201302037)
Tax Assessed on the Original Return is Fully Paid
A Deficiency Results From Increases to Non - §6166 Assets Only
Feb-17-2016Date of death
Nov-17-2016The estate tax return is timely filed. It reports a taxable estate of $11,124,400 and estate tax of $2,269,760.00, which is paid in full. A closely held business is included in the gross estate at a value of $5,000,000 (44.9462 % of the adjusted gross estate). Neither a §6166 election nor a protective §6166 election is filed with the return.
Apr-26-2018An IRS field examination is completed. There are 5 adjustments to the return.
 •  Schedule A non-§6166 asset values increase by $1,100,000.
 •  Schedule B non-§6166 asset values increase by $900,000.
 •  Schedule C non-§6166 asset values increase by $1,000,000.
 •  Schedule J attorney fees increase by $150,000.
 •  Schedule J  administration expenses increase by $65,931.48 for interest accrued on Federal estate tax through the catch-up payment date of Apr-26-2018.
 •  The closely held business value remains unchanged at $5,000,000, which is 35.7797% of the adjusted gross estate as corrected on examination.

Comment 1:   This example illustrates the 2-step analysis required in a §6166(h) computation. First, the gross amount of the deficiency that may be paid in installments pursuant to §6166(a)(2) must be determined. Second, the portion of the deficiency attributable to the §6166 closely held business adjustments, if any, must be determined. The §6166(h) election would be applicable to the lesser of these two amounts.

Section 6166(h) - Example 4  (Based on CCA 201302037)

Report of Estate Tax Examination Changes
Form 1273
Estate of:    Decedent                                        SSN: 999-99-9999V                                D/D: Feb-17-2016
1Tentative Taxable Estate Shown on Return or Previously Adjusted11,124,400.00
2Increase/Decrease in Tentative Taxable Estate2,784,068.52
3aTentative Taxable Estate as Corrected (Line 1 plus/minus Line 2)13,908,468.52
  Shown on Return/ As Previously AssessedAs Corrected
3bState Death Tax Deduction0.000.00
3cTaxable Estate as Corrected (Line 3a - Line 3b)11,124,400.0013,908,468.52
4Adjusted taxable gifts0.000.00
5Total11,124,400.0013,908,468.52
6Tentative Tax4,395,560.005,509,187.41
7Aggregate Gift Tax Payable (After Dec. 31, 1976)0.000.00
8Tax Before Unified Credit (Line 6 - Line 7)4,395,560.005,509,187.41
9aBasic Exclusion Amount5,450,000.005,450,000.00
9bDeceased Spousal Unused Exclusion (DSUE)0.000.00
9cApplicable Exclusion Amount (Line 9a + Line 9b)5,450,000.005,450,000.00
9dApplicable Credit Amount (From Table A, using Line 9c)2,125,800.002,125,800.00
10Adjustment to Unified Credit0.000.00
11Allowable Applicable Credit Amount2,125,800.002,125,800.00
12Tax Before SDTC (Line 8 - Line 11)*Cannot be < 02,269,760.003,383,387.41
13State Death Tax Credit0.000.00
 Tentatively Allowed  
 Submit Evidence by  
14Net Tax Post State Death Tax Credit (Line 12 - Line 13)2,269,760.003,383,387.41
15Gift Tax Credit (Pre-1977 Gifts)0.000.00
16Foreign Death Tax Credit (Statutory)0.000.00
17Prior Transfer Credit0.000.00
18Foreign Death Tax Credit (Treaty)/Canadian Marital Credit0.000.00
19Total Credits (Sum of Lines 15 through 18)0.000.00
20Net Estate Tax Payable2,269,760.003,383,387.41
21Generation-Skipping Transfer Taxes (Schedule R, Part 2, Line 12)0.000.00
22Increased Estate Tax (Section 4980A, Schedule S)0.000.00
23Total Federal Estate Tax (Sum of Lines 20 through 22)2,269,760.003,383,387.41
24Total Transfer Tax Previously Assessed2,269,760.00
25Total Transfer Tax Increase/Decrease (Line 23 - Line 24)1,113,627.41
26Penalties Previously Assessed - Code(s)0.00
27Penalties as Corrected - Code(s)0.00
28Net Penalties Increase/Decrease (Line 27 - Line 28)0.00
29Net Tax and Penalties Payable Increase/Decrease (Line 25 + Line 28)1,113,627.41

Section 6166(h) - Example 4  (Based on CCA 201302037)

Line Adjustment - Estate Tax
Form 6180
Estate of:    Decedent                                        SSN: 999-99-9999V                                D/D: Feb-17-2016
 Shown on Return/ As Previously AssessedChangeAs Corrected
1Schedule A - Real Estate4,000,000.001,100,000.005,100,000.00
2Schedule B - Stocks and Bonds1,000,000.00900,000.001,900,000.00
3Schedule C - Mortgages, Notes, and Cash500,000.001,000,000.001,500,000.00
4Schedule D - Life Insurance1,200,000.000.001,200,000.00
5Schedule E - Jointly Owned Property0.000.000.00
6Schedule F - Other Miscellaneous Property5,000,000.000.005,000,000.00
7Schedule G - Transfers During Decedent's Life0.000.000.00
8Schedule H - Powers of Appointment0.000.000.00
9Schedule I - Annuities0.000.000.00
10Gross estate11,700,000.003,000,000.0014,700,000.00
11Schedule U - Qualified Conservation Easement Exclusion0.000.000.00
12Gross Estate less exclusion11,700,000.003,000,000.0014,700,000.00
13Schedule J - Funeral and Administration Expenses450,000.00215,931.48665,931.48
14Schedule K - Debts of Decedent125,600.000.00125,600.00
15Schedule K - Mortgages0.000.000.00
16Total of Schedules J and K575,600.00215,931.48791,531.48
17Allowable deductions from Schedules J and K575,600.00215,931.48791,531.48
18Schedule L - Net Losses During Administration0.000.000.00
19Schedule L - Expenses on Property Not Subject to Claims0.000.000.00
20Total - Lines 17, 18, and 19575,600.00215,931.48791,531.48
21Schedule M - Marital Deduction0.000.000.00
22Schedule O - Charitable Deduction0.000.000.00
23ESOP Deduction0.000.000.00
24Schedule T - QFOBI Deduction0.000.000.00
25Total allowable deductions575,600.00215,931.48791,531.48
26Tentative taxable estate11,124,400.002,784,068.5213,908,468.52

Section 6166(h) - Example 4  (Based on CCA 201302037)

Form 886-A  -   EXPLANATION OF ITEMS

Schedule A - Real Estate  Shown on Return/ As Previously AssessedAs Corrected1Real estate parcel A350,000.00425,000.002Real estate parcel C275,000.00400,000.004Real estate parcel D225,000.00725,000.005Real estate parcel G0.00400,000.00 Total of these Items850,000.001,950,000.00 Shown on Return850.000.00 Change to Schedule1,100,000.00
 

Section 6166(h) - Example 4  (Based on CCA 201302037)

Form 886-A  -   EXPLANATION OF ITEMS
Schedule B - Stocks and Bonds
  Shown on Return/ As Previously AssessedAs Corrected
3Value of publicly-traded stock in Business A175,000.00280,000.00
6Value of publicly-traded stock in Business D200,000.00220,000.00
14Value of publicly-traded stock in Business H25,000.0050,000.00
16Additional asset discovered after the return was filed0.00750,000.00
 Total of these Items400,000.001,300,000.00
 Shown on Return400,000.00
 Change to Schedule900,000.00

Section 6166(h) - Example 4  (Based on CCA 201302037)

Form 886-A  -   EXPLANATION OF ITEMS
Schedule C - Mortgages, Notes and Cash
  Shown on Return/ As Previously AssessedAs Corrected
1Receivable from MNO Corporation0.001,000,000.00
    
    
 Total of these Items0.001,000,000.00
 Shown on Return0.00
 Change to Schedule1,000,000.00

Section 6166(h) - Example 4  (Based on CCA 201302037)

Form 886-A  -   EXPLANATION OF ITEMS
Schedule J - Funeral and Administrative Expenses
  Shown on Return/ As Previously AssessedAs Corrected
 B-2  Attorney fees150,000.00300,000.00
 B-4(d)  Interest on Federal estate tax0.0065,931.48
    
 Total of these Items150,000.00365,931.48
 Shown on Return150,000.00
 Change to Schedule215,931.48
Section 6166(h) - Example 4  (Based on CCA 201302037)
§6166(b)(6) Adjusted Gross Estate Computation
Gross estate 14,700,000.00
Schedule J - Funeral and Administrative Expenses665,931.48 
Schedule K - Debts of Decedent125,600.00 
Schedule K - Mortgages and Liens0.00 
Total Schedules J and K debts and expenses791,531.48 
Allowable amount of deductions791,531.48 
Schedule L - Net Losses0.00 
Schedule L - Expenses on property not subject to claims0.00 
Total Schedules J, K, and L debts and expenses791,531.48 
Adjustment for expenses incurred after the return was filed(65,931.48) 
Adjusted Schedules J, K, and L debts and expenses725,600.00725,600.00
Section 6166(b)(6) adjusted gross estate 13,974,400.00
The return was filed on the return due date; an extension of time to file had not been requested. Any interest on Federal estate tax allowable as a Schedule J deduction therefore accrued for periods occurring after the date the return was filed and cannot be included in the §6166(b)(6) adjusted gross estate computation.
Section 6166(h) - Example 4  (Based on CCA 201302037)
§6166(a)(2) Ratio Computation
Section 6166 business value5,000,000.00
Section 6166(b)(6) adjusted gross estate13,974,400.00
Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments.357797
Section 6166(h) - Example 4  (Based on CCA 201302037)
§6166(a)(2) Maximum Amount of Tax Which May be Paid in Installments
Total deficiency1,113,627.41
Section 6166(a)(2) ratio expressed as a percentage35.7797%
Maximum amount of deficiency which may be paid in installments (aka "the cap")398,452.55
Section 6166(h) - Example 4  (Based on CCA 201302037)
Apportionment of the Deficiency to the Closely Held Business Value
Changes to the Taxable Estate
1,100,000.00Increase in value of Schedule A non-§6166 assets
900,000.00Increase in value of Schedule B non-§6166 assets
1,000,000.00Increase in value of Schedule C non-§6166 assets
(150,000.00)Decrease for Schedule J Attorney fee increase
(65,931.48)Decrease for Schedule J interest deduction as a new item
2,784,068.52Net increase in the Taxable Estate
The §6166 Deficiency Fraction Numerator
0.00Increase in value of Schedule F closely held business
0.00Decrease for Schedule J interest deduction as a new item in the §6166 stand-alone computation only (computation not shown).
0.00Net increase in the taxable estate attributable to the closely held business value adjustment
The Non-§6166 Deficiency Fraction Numerator
1,100,000.00Increase in value of Schedule A non-§6166 assets
900,000.00Increase in value of Schedule B non-§6166 assets
1,000,000.00Increase in value of Schedule C non-§6166 assets
(150,000.00)Decrease for Schedule J Attorney fee increase
(65,931.48)Decrease for Schedule J interest deduction as a new item, adjusted to reflect the amount allocated to the §6166 Numerator from above
2,784,068.52Net increase in the taxable estate attributable to the non-§6166 adjustments
Apportionment
Apportionment of Deficiency to the non-§6166 adjustments
2,784,068.52x1,113,627.41=1,113,627.41
2,784,068.52
Apportionment of Deficiency to the §6166 adjustments
0.00x1,113,627.41=0.00
2,784,068.52
Total amount apportioned1,113,627.41
Portion of the Deficiency Payable in Installments
1.  §6166(a)(2) maximum amount of deficiency which may be paid in installments398,452.54
2.  Amount of the deficiency apportioned to the closely held business adjustments0.00
Maximum amount of deficiency which may be paid in installments under the §6166(h) election - the lesser of Line 1 or Line 2.0.00

Comment 2:   Apportioning the deficiency in this fashion seems to be the best method of doing so. Running separate stand-alone computations with and without the §6166 adjustments would be proper only when one of the two amounts  - total non-§6166 changes or total §6166 changes - is zero, as here; otherwise, the sum of the two independently obtained deficiency amounts will not equal the gross deficiency amount because the §6166(b)(6) adjusted gross estate will not be the same in each computation.

Section 6166(h) - Example 4  (Based on CCA 201302037) - Reconciliations

Finally determined estate tax3,383,387.41
Section 6166(a)(2) ratio - maximum amount of tax payable in installments (carried to 6 decimal places pursuant to the current Instructions for Form 706)35.7797%
Maximum amount of tax that could have been deferred under §61661,210,565.86
Portion of the §6166(a)(2) Maximum Amount Not Eligible For the §6166(h) Election
Tax originally assessed for which neither a §6166 election nor a protective §6166 election was filed2,269,760.00
Section 6166(a)(2) ratio - maximum amount of orginally assessed tax that could have been payable in installments35.7797%
Portion of the originally assessed tax that could have been deferred with a §6166 election, but which does not qualify for the §6166(h) election812,113.32
Portion of the Deficiency That is Eligible For the §6166(h) Election
Deficiency1,113,627.41
Section 6166(a)(2) ratio - maximum amount of tax payable in installments 35.7797%
Maximum amount of the deficiency that could have been payable in installments, but is not398,452.54
Reconciliation
Portion of the originally assessed tax that is not eligible for a §6166(h) election812,113.32
Portion of the deficiency that could have been eligible for a §6166(h) election, but is not398,452.54
The maximum amount of tax that could have been deferred under §6166 but none of which is eligible1,210,565.86