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A Discussion of the Text of IRC § 6161(b)(2) and Accompanying RegulationsIRC § 6161(b)(2) is a straightforward section of the Internal Revenue Code, which states that "[u]nder regulations prescribed by the Secretary [of the Treasury], the Secretary may, for reasonable cause, extend the time for the payment of any deficiency of [an estate] tax . . . for a reasonable period not to exceed 4 years from the date otherwise fixed for the payment of the deficiency." An estate requesting an extension under IRC § 6161(b)(2) should do so by filing Form 4768 with the IRS; Part III of this form provides an estate the opportunity to explain why the IRS should grant an extension of time to pay the tax deficiency.
The Meaning of "Reasonable Cause"To the authors' knowledge, no regulations or published cases discuss the "reasonable cause" standard set forth in IRC § 6161(b)(2). The meaning of this standard, however, is illuminated by 26 C.F.R. § 20.6161-1. This regulation relates to IRC § 6161(a), the statutory section of the IRC that addresses potential extensions of the payment of federal estate taxes that are set forth by an executor on an estate tax return (rather than taxes that are assessed by the IRS in an audit). Although 26 C.F.R. § 20.6161-1 does not state that it applies to IRC § 6161(b)(2), this regulation provides persuasive authority in that it addresses a standard of law used elsewhere in IRC § 6161. The regulation provides the following examples of scenarios that can give rise to a finding of "reasonable cause" under certain provisions of IRC § 6161:
Other LimitationsA potential extension of time under IRC § 6161(b) is not without other limitations. Regardless of whether reasonable cause for an extension under IRC § 6161(b)(2) exists, IRC § 6161(b)(3) prohibits an extension if the deficiency is because of negligence, intentional disregard of rules and regulations, or fraud with the intent to evade tax. Tax practitioners and clients who wish to potentially employ an extension available under IRC § 6161(b), therefore, must analyze the positions taken by an estate when filing the estate tax return and during any subsequent audit to ensure that such positions are being made carefully and with an effort to minimize the risk that any assessed deficiency is because of negligence, fraud, or the intentional disregard of rules and regulations.
Built-in Protections for the IRSThe IRC includes other statutes designed to protect the IRS in the event that an extension under IRC § 6161 is granted to an estate. IRC § 6165 authorizes the IRS to condition granting an IRC § 6161 extension on receiving a bond from an estate. Section 301.7101-1 of 26 C.F.R. sets forth a non-exhaustive list of the forms of bonds that can be provided by an estate in exchange for an extension under IRC § 6161. This list of permissible bonds includes the grant of a security interest in various types of estate property (such as real estate, personal property, stocks, and bonds) and having a company or individual agree to serve as a surety. The amount of this bond, however, may not exceed twice the amount of the deficiency for which the extension is being granted.In addition to providing the IRS the right to demand a bond in return for an extension, the IRC also preserves the right of the IRS to bring a collection action against an estate throughout the term of an extension. IRC § 6503(d) suspends the statute of limitations for the collection of estate tax for the term of an extension granted under IRC § 6161, thereby allowing the IRS to bring a timely action against an estate in the event that a deficiency is not paid in accordance with the terms of an extension.
The Costs and Benefits of Employing IRC § 6161(b)(2)The most obvious benefit of employing an extension available under IRC § 6161(b)(2) is providing an estate additional time to pay an assessed deficiency (and in the current economic climate, providing the assets of an estate the opportunity to recover some or all of their date of death values). The IRS, however, requires that an estate pay interest to the IRS throughout the term of an extension obtained under IRC § 6161(b)(2); the interest rate is a variable rate established in IRC § 6621 and is defined as the federal short-term rate (established on a quarterly basis by the Secretary of the Treasury) plus three percentage points. Fortunately, any interest paid by an estate under an extension granted under IRC § 6161(b)(2) may be tax deductible as an administrative expense under IRC § 2053, potentially resulting in a reduced effective interest rate. In addition, the ongoing administrative and legal fees involved in monitoring such an extension also are likely to be tax deductible under IRC § 2053. If these expenses are incurred, ongoing deductions may be taken throughout the term of the extension, resulting in tax refunds being due to an estate on the filing of amended estate tax returns claiming the additional deductions.
ConclusionIRC § 6161(b)(2) can be an extremely useful tool for an executor of an estate, particularly if the date of death values of the assets owned by a decedent are substantially greater than the asset values as of the time of an audit and the asset values are projected to increase over the four-year period immediately following the audit. The required showing of "reasonable cause" of why an extension should be granted appears to be relatively minimal, given the examples and language set forth in the regulations related to IRC § 6161. Finally, although such an extension will result in an estate paying interest on an assessed deficiency, any interest paid by an estate (as well as the expenses of monitoring the extension) may be deductible as an administrative expense under IRC § 2053, resulting in a reduced effective interest rate that will be paid by the estate. The obtainable extensions and corresponding low net carrying costs available under IRC § 6161(b)(2) result in this provision of the tax code being a useful tool in difficult economic times. Return To Issue Index