Rev. Rul. 86-38

1986-1 C.B. 296, 1986-11 I.R.B. 22.

STATE DEATH TAX PAID IN INSTALLMENTS

Published: March 17, 1986

Section 2011.-Credit for State Death Taxes 26 CFR 20.2011-1: Credit for State death taxes.

  State death tax paid in installments. When an estate elects to pay the federal estate tax in installments and also elects to pay state death taxes in annual installments over a period longer than four years from the date of the filing of the federal estate tax return, the exception described in section

2011(c)(2) of the Code is applicable. State death taxes paid by the estate more than four years after the filing of the federal estate tax return are not eligible for the credit described in section 2011 when none of the exceptions described in section 2011 when none of the exceptions described in sections

2011(c) (1) through (3) are applicable.

ISSUE

  To what extent is a credit for state death tax allowable under section 2011 of the Internal Revenue Code if the state death tax is paid in installments over a period of more than four years where (1) the estate elects to pay the federal tax liability in ten annual installments, or (2) the estate does not elect to pay the federal estate tax liability in installments.

FACTS

  A, a resident of State S, died in 1984 leaving a gross estate composed of stock of X Corporation and miscellaneous personal property. The value of A's interest in X Corporation exceeded 35 percent of A's adjusted gross estate. A's interest in X qualified as an interest in a closely held business as defined in section 6166(b)(1) of the Code. The estate could, therefore, elect to pay in ten annual installments that portion of the federal estate tax attributable to the interest in a closely held business.

  A similar provision under the law of S permitted A's estate to elect to pay in ten annual installments that portion f the state death tax attributable to an interest in a closely held business. Deferred payments and installment payments plus interest are required to be made under state law in the manner provided n section 6166 of the Code as in effect on A's date of death.

  Situation 1.

  In Situation 1, the representative of A's estate made a timely election under section 6166 of the Code to pay part of the federal estate tax in ten equal annual installments and made a similar election under state law to pay part of the state death tax in ten annual installments. The representative of the estate timely paid in a single day the nondeferred portion of the federal estate tax, the first installment of the deferred estate tax, the nondeffered portion of the state death tax, and the first installment of the deferred state death tax. When the federal estate tax return was filed, the estate claimed as a credit under section 2011 of the Code the total amount of the state death tax liability, including the state death tax paid and the state death tax the estate expected to pay in installments over the next nine years.

  Situation 2.

  In Situation 2, the representative of the estate made a timely election under state law to pay part of the state death tax in ten annual installments. A similar election with respect to the federal estate tax was not made by the estate because the federal estate tax liability was substantially lower than the state death tax. Thus, the estate paid the federal estate tax in full.

  When it filed the federal estate tax return, however, the estate claimed as a credit under section 2011 of the Code the total amount of the state death tax liability that the estate expected to pay.

LAW AND ANALYSIS

  Section 6166(a)(1) of the Code provides that if the value of an interest in closely held business that is included in determining the decedent's gross estate exceeds 35 percent of the adjusted gross estate, as defined in section

6166(b)(6), the executor may elect to pay part or all of the tax imposed by section 2001 in two or more (but not exceeding 10) equal installments.

  Section 2011 of the Code provides that, within the limitations of section

2011(b), the tax imposed by section 2001 shall be credited with the amount of any estate, inheritance, legacy or suCHession taxes actually paid to any state.

  Section 2011(c) generally provides that the credit allowed for state taxes described above shall include 'only such taxes as were actually paid and credit therefor claimed within 4 years' after the filing of the estate tax return.

(Emphasis added.)

  Section 2011(c)(1) through (3) contain exceptions to the four- year limitation on the period within which an estate may claim a credit for state taxes actually paid: (1) if a petition for redetermination of a deficiency has been filed with the Tax Court, before the expiration of 60 days after the decision of the Tax Court becomes final; (1) before the date of the expiration of the period of an extension granted under section 6161 or 6166 for payment of the tax shown on the return, or of a deficiency; or (3) if a claim for credit or refund of an overpayment of federal estate taxes has been filed within the time prescribed in section 6511 of the code, before the expiration of 60 days from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of any part of such claim, or before the expiration of 60 days after a decision by any court of competent jurisdiction becomes final with respect to a timely suit instituted upon such claim, whichever is later. ACHording to section 2011(c), a refund based on the state death tax credit may (despite the provisions of sections 6511 and 6512) be made if the claim for the credit is filed within the prescribed period.

  Section 6511(a) of the Code provides that a claim for credit or refund of an overpayment of any tax for which the taxpayer is required to file a return must be filed by the taxpayer within 3 years from the time the tax was paid, whichever period expires later . The provision of section 2011(c) provide a special 4-year period, or other extended period, as an alternative to the 2- year and 3-year periods described in section 6511(a) for credits and refunds.

  In Rev. Proc. 81-27, 1981-2 C.B. 548, the Service set forth the procedure to be followed by an estate when installment payments due under section 6166 of the Code are recomputed because of a reduction in the estate tax liability caused by the deduction in interest paid on the estate tax due.

  In Situation 1, the estate elected to pay the federal estate tax in ten annual installments. ACHordingly, the exception described in section 2011(c)(2) is applicable, and the estate may qualify for the section 2011 credit for state death taxes paid for the period ending before the date of the expiration of the

10-year period elected for paying the federal estate tax. However, when the estate tax return if filed, only the stated death taxes actually paid qualify for the section 2011 credit on the estate tax return. A recomputation procedure like the one described in Rev. proc. 81-27 may be used to recompute the total remaining estate tax liability whenever the estate submits certification of payment of additional state death tax. The recomputation would take into aCHount the section 2011 credit that may be allowed for any state death tax installment paid by the estate. After all state death taxes have been paid, a claim for refund may be made, if necessary, for an overpayment of tax but only after the federal estate tax liability has been paid in full.

  In Situation 2, because the estate did not elect to extend the time to pay the federal estate tax, the extension of time within which to claim a refund based on the credit for state death taxes actually paid, described in section

2011(c)(2), is not applicable. Because none of the other extensions described in section 2011(c) apply, only installments paid to the state for death taxes within four years of the filing of the estate tax return can qualify for the credit described in section 2011 of the Code. ACHordingly, when the estate files the estate tax return, only the state death taxes paid as of that time may be taken into aCHount for a credit under section 2011. Certification of additional payments or installments made relating to the state death taxes during the four year period may be submitted for recomputation of the federal estate tax liability. A subsequent claim for a refund upon a payment of each state installment may be made within the four year period.

  Any death tax installments paid to State S in Situation 2 after expiration of the four-year period described in section 2011(c) of the Code cannot be allowed as a credit against the federal estate tax liability of the estate. Because the tax was paid when the federal estate tax return was filed and none of the exceptions described in section 2011(c) are applicable, only state death taxes paid within four years of the filing of the federal estate tax return can qualify for the credit described in section 2011.

HOLDINGS

  Situation 1.

  When the estate elects the application of section 6166 of the Code to pay the federal estate tax, and also elects under the state law to pay state death taxes in annual installments over a period longer than four years from the date of the filing of the federal estate tax return, the exception described in section 2011(c)(2) is applicable.

  Situation 2.

  State death taxes paid by the estate within four years of the filing of the federal estate tax return and the payment of the federal tax are eligible for the credit described in section 2011 of the Code. State death taxes paid by the estate more than four years after the filing of the federal estate tax return are not eligible for the credit described in section 2011 when none of th exceptions described in section 2011(c)(1) through (3) are applicable.

Rev. Rul. 86-38, 1986-1 C.B. 296, 1986-11 I.R.B. 22.