Interest on deferral of estate taxes.

• Author: Rhine, David S.
• Position: Brief Article

Estate taxes can hit a closely held business very heavily. Sec. 6166 allows for the deferral/installment payment of estate taxes to the extent attributable to the decedent's interest in a closely held business. Prior to the Taxpayer Relief Act of 1997 (TRA '97), the interest on the deferral was itself deductible in arriving at the ultimate estate tax. Rev. Rul. 80-250 outlined the IRS's position; estimated interest could not be deducted at the time the return was filed and supplementary returns had to be prepared (see Rev. Proc. 81-27). One of the most mindless exercises in the estate tax area has been the recomputation of estate tax each time an interest payment is made.

The TRA '97 changed all this. Under Sec. 6601 (j)(1)(B), interest on the deferral was made nondeductible and was generally set at 45% of what would have been the deductible rate (to avoid any negative effect to taxpayers). Sort of. New estates have no choice; they must accept the new scheme. This "opportunity" is also offered to existing estates until Dec. 31, 1998. An executor and his advisers should think carefully before taking up the offer.

Previously, when interest was paid, it was allowed as an...