Rev. Proc. 81-27

Section 1. Purpose

The purpose of this revenue procedure is to set forth the procedure to be followed by an estate when installment payments due under sections 6166 or 6166A of the Internal Revenue Code are recomputed because of a reduction in the estate tax caused by the payment of interest on the tax due.

Sec. 2. Background

.01 Estates that have elected to pay estate tax in installments under section 6166 or 6166A of the Code may, under certain circumstances, deduct the amount of interest accruing on the installment payments as an expense of administration under section 2053(a)(2). See Estate of Bahr v. Commissioner, 68 T.C. 74 (1977), acq. 1978-1 C.B. 1; Rev. Rul. 78-125, 1978-1 C.B. 292.

.02 Rev. Rul. 80-250, 1980-2 C.B. 278, holds that such interest is deductible only when accrued. When the interest becomes deductible and the estate claims the deduction, the estate tax is recomputed. Installments due will be computed accordingly.

.03 Claims for refund are not allowed until the underlying tax is paid in full. Claims for abatement are barred by section 6404(b) of the Code.

Sec. 3. Procedure

.01 An executor of an estate that deducts interest on an estate tax return after it is filed may file supplemental information on a Form 706, U.S. Estate Tax Return, as provided in section 20.6081-1(c) of the Estate Tax Regulations. The Form 706 should have the words "Supplemental Information" placed on the top.

.02 The supplemental Form 706 can be filed with the annual installment payment or be filed at a later date. However, the supplemental Form 706 cannot be filed before the payment of the interest for which the deduction is claimed.

.03 The supplemental Form 706 will not be considered a claim for refund or abatement. However, if the Service and the estate's representative agree to the amount of the overassessment as shown on the supplemental Form 706, or as adjusted by the Service, the amount of the overassessment will be abated. Thus, both the unpaid tax liability and the amount of interest accrued thereon will be reduced. Future installments due will be recalculated and any overpayment of an installment of either tax or interest will be applied to the next installment in accordance with section 6403 of the Code.

.04 If the final total of the installment payments made exceeds the estate tax liability, a claim for refund or credit can be filed. Such claim must be filed on Form 843, Claim, within the applicable period of limitations set forth in section 6511 of the Code.

Sec. 4. Effective Date

This revenue procedure is effective July 6, 1981, the date of its publication. However, estates may file supplemental Forms 706 with respect to interest payments made prior to that date.