Last Updated: 09 December 2014
2014 New York Estate Tax Law and Section 6166 - Notes and Comments
Nov-14-2014 - The New York State Department of Taxation and Finance released the Form ET-706 for estates of decedents dying on or after April 1, 2014.
Aug-25-2014 - The New York State Department of Taxation and Finance released TSB-M-14(6)M, which shows how tax is to be computed for the estate of a decedent dying on or after April 1, 2014. It does not mention section 6166.
Our continuing analysis of the New York tax law effective for estates of decedents dying on or after April 1, 2014 has identified some of the consequences for interrelated Federal and New York section 6166 computations. These comments will of course be modified and supplemented as we set up and run sample interrelated computations under varying scenarios. Tax computation software must be modified to reflect the new law in general, and especially for New York section 6166 (i.e., Tax Law Article 26, section 997) computations, which now have been brought more closely in line with their Federal counterparts.
Some initial observations with regard to section 6166 computations follow.
Gifts made within 3 years of date of death.
- Federal requirement: Sections 6166(k)(5) and 2035(c)(2) require a secondary computation to qualify an estate for the section 6166 election if property was transferred within 3 years of date of death. The section 6166(a)(1) requirement that the estate tax value of the 6166 business interest exceed 35% of the adjusted gross estate must be met under both qualifying computations (section 6166(a)(1) and sections 6166(k)(5) and 2035(c)(2)) before the estate is eligible for the 6166 election.
- New York requirement: Tax Law section 999-a incorporates Federal sections 2035 and 6166 in New York law. For estates of decedents dying on or after April 1,2014, transfers of property within 3 years of death will be included in a New York resident's gross estate, but there are exceptions or exclusions that will often result in numbers different from those used in determining the amount of Federal adjusted taxable gifts reported on the Federal estate tax return. Tax Law section 954 provides:
§ 954. Resident's New York gross estate. (a) General.-- The New York gross estate of a deceased resident means his or her federal gross estate as defined in the internal revenue code (whether or not a federal estate tax return is required to be filed) modified as follows:
(1) Reduced by the value of real or tangible personal property having an actual situs outside New York state.
(2) Increased by the amount determined under section nine hundred fifty-seven of this part (relating to limited powers of appointment created prior to September first, nineteen hundred thirty.)
(3) Increased by the amount of any taxable gift under section 2503 of the internal revenue code not otherwise included in the decedent's federal gross estate, made during the three year period ending on the decedent's date of death, but not including any gift made: (1) when the decedent was not a resident of New York state; (2) before April first, two thousand fourteen; or (3) on or after January first, two thousand nineteen.
It is therefore possible that an estate which might otherwise qualify for the New York section 997 election would fail to qualify for the Federal section 6166 election because of failing to exceed the 35% threshold in the secondary 6166(k)(5) computation. The reverse situation might also occur if some of the assets qualifying for the Federal 6166 election are not sitused in New York, but that remains to be seen. In any event, section 997(e) provides:
(e) Election. The election under this section shall not be allowed unless a similar election was made and allowed with respect to the federal estate tax return required to be filed under the provisions of the internal revenue code. If such election was made for the purposes of the federal estate tax, the time for making the election under this article shall be the same as is required under the federal estate tax. Where no federal estate tax return is required to be filed, the election with respect to the tax imposed under this article shall be made no later than the date prescribed for the filing of the return under this article (including extensions thereof) or any time thereafter as the commissioner of taxation and finance may by regulation prescribe.
Section 2053(c)(1)(D) and New York interest as an estate tax deduction
We are well aware that section 2053(c)(1)(D) prohibits a deduction for interest accrued on tax deferred under section 6166 for Federal estate tax purposes. Tax Law section 999-a incorporates section 2053 (and 2053(c)(1)(D)) in New York law for estates of decedents dying on or after April 1, 2014. The result is that, while 100% of the interest accrued on New York estate tax might be deductible on Schedule J of the Federal estate tax return, none of the interest accrued on the New York tax deferred under section 997 would be deductible on the New York estate tax return. This, of course, would affect the section 2058 state death tax deduction and 2053 interest deduction on the Federal return.
Tax Law section 955(a) provides:
§ 955. Resident's New York taxable estate. (a) General.--The taxable estate of a New York resident shall be his or her New York gross estate, minus the deductions allowable for determining his or her federal taxable estate under the internal revenue code (whether or not a federal estate tax return is required to be filed), except to the extent that such deductions relate to real or tangible personal property sitused outside New York state.
This means that interest on New York tax deferred under Tax Law section 997 is not allowable as a deduction when calculating the New York estate tax.
Meanwhile, Tax Law section 961(a) provides:
§ 961. Effect of federal determination. (a) General.-- A final federal determination as to
(1) the inclusion in the federal gross estate of any item of property or interest in property,
(2) the allowance of any item claimed as a deduction from the federal gross estate, or
(3) the value or amount of any such item, shall also determine the same issue for purposes of the tax under this article unless such final federal determination is shown by a preponderance of the evidence to be erroneous
This seems to mean that, if all interest accrued on New York estate tax is allowed as a deduction on the Federal estate tax return pursuant to Reg. section 20.2053-1(a)(1), it is included in the total Federal deductions to be allowed as deductions when calculating New York estate tax. For estates of decedents dying before April 1, 2014, the New York estate tax return and Form ET-415 did not have a line for subtracting the amount of any New York interest accrued on New York tax deferred under section 997 that was allowed as a deduction on the Federal estate tax return, which resulted in 100% of the New York interest being incorporated as a deduction in the calculation of New York estate tax.
Reducing the Federal deductions (for New York tax purposes only) by the amount of New York interest accrued on New York tax deferred under section 997 will cause the New York estate tax to increase. This would increase the total interest accrued on New York estate tax and the deduction for New York interest on Schedule J of the Federal estate tax return. But any New York interest accrued on late payments of (nondeductible) interest or tax would remain deductible on the New York return.
Note that section 954(b)(3) provides:
(3) For effect of federal estate tax determinations, see section nine hundred sixty-one of this article.