Last Updated: 05 May 2014
Anecdotal evidence indicates that in 2008 and again in 2009 the IRS received about 650 estate tax returns with IRC section 6166 elections, while New York State received about 75 estate tax returns with New York section 6166 elections. Many of these estates filed concurrent Federal and New York section 6166 elections. It would appear, then, that although the New York filing threshold in 2007 and 2008 (a New York gross estate of $1,000,000) was lower than the threshold for filing Federal estate tax returns (a Federal gross estate of $2,000,000), about 12% of all Federal section 6166 elections filed in 2008 and 2009 were for New York estates.
The number of filings has dropped considerably since that period as the filing requirement threshold increased, but it should be safe to assume that the same general percentage applies to the number of returns currently being filed.
Several conclusions immediately come to mind when a Federal and state section 6166 deferral are running concurrently.
1. The allowable state death tax deduction is restricted by IRC section 2058 to the amount of state death tax that has been paid at the time a Federal return is filed.
2. All state interest - 100% - is deductible on the Federal estate tax return when paid or accrued, even if state interest is not deductible on the state estate tax return and even if the state has adopted the entire set of Federal statutes relating to IRC sections 2053, 6166, 6601(j), and 6621. See Reg. section 20.2053-1(a)(1)(iv), which provides the following regarding deductions that are allowable by the law of the jurisdiction:
As used in this subparagraph, the phrase "allowable by the law of the jurisdiction" means allowable by the law governing the administration of decedent's estates. The phrase has no reference to amounts allowable as deductions under a law which imposes a state death tax.
This applies to interest accrued on New York estate tax for estates of decedents dying before and after the April 1, 2014 effective date of section 999-a of Tax Law Article 26 Also see the similar California statutes effective for estates of decedents dying on or after January 1, 1999 through December 31, 2004.)
3. Revenue Procedure 81-27 provides that supplemental estate tax returns can be filed after, or at the same time as, an interest payment is made to claim that interest payment as a new deduction on Schedule J of the Federal estate tax return. The Federal and state annual interest payments are usually due on the same date. On occasion the IRS may accept a supplemental return that is filed simultaneously with a reduced Federal payment resulting from an interrelated state interest computation run through the upcoming payment date (which is known as an up-front interest deduction computation). NOTE: The payment tendered will be less than the amount billed by Cincinnati Campus (because of the new deduction in the estate's computation). If the IRS accepts the supplemental return, the 6166 billing account will be adjusted accordingly - but until such time, an underpayment equal to the difference between the amount billed by Cincinnati and the reduced amount calculated by the estate will exist on the estate account. An Estate Tax Attorney at Cincinnati will have to verify that the interrelated computation submitted by the estate is correct before the adjustments can be input. Best Procedure: Contact the Cincinnati person named on the annual billing notice and notify him or her that you intend to submit a reduced payment - an up-front deduction payment - with a supplemental return on the upcoming anniversary date, and ask if they can run the interrelated computation for you. Your supplemental return will generally not be accepted by the IRS until they have run their own computation to verify your numbers.
4. This procedure cannot be used if the Federal estate tax return is under examination by IRS or the case is still in Appeals or is in litigation status in United States Tax Court or other Federal courts, because the tax has not yet been finally determined. See B. Shapiro Estate, 111 F. 3rd 1010, Affirming an unpublished Tax Court opinion; CA-2 1997-1 USTC ¶60,267. IRS personnel sometimes refer to this as the "open TC 420" period during which supplemental return changes will generally not be addressed by Cincinnati Campus. An exception would be when a supplemental return filed before examination activity has been completed shows a tax increase, not a decrease. Cincinnati would assess the reported tax increase before sending the return forward to be associated with the examination case file.
5. IRC section 2058(b) extends the time for adjusting the state death tax deduction to the period of time for which extensions of time to pay under sections 6161 or 6166 are in effect.