News Letter 1

This is the first copy of my newsletter. I plan to send out a newsletter to users of Inter-Est every 3 to 6 months. The purpose of the newsletter is to keep you informed as to developments in the area of interrelated estate tax computations. The items covered will include new features which have been added to Inter-Est and new problems which have been discovered but not yet solved.

Inter-Est goes Commercial!!!

Version 1.00 of Inter-Est will be available in September, 1990. This will not be greatly different from the current Version 0.98, but it represents the end of the initial development period for Inter-Est and the start of a more stable maintenance period.

Starting in December, 1990, Inter-Est will be offered as a full commercial package with full support and maintenance available.

Events requiring modifications

Several event occurred in the last eight months that required changes to Inter-Est. These events were:

TAM 8947005

A Credit for State Death Tax is generally allowable only for State Death Taxes actually paid. If the State Death Tax is not paid when the Federal Estate Tax Return is due, but is paid at some later date, the Credit will be allowed as of the date actually paid, but the allowance of the Credit does not relate back to the due date. The interest that accrued on the Credit Amount before the credit was allowable is called restricted interest and will not be abated. See Tech. Advice Memo. 8947005, August 22, 1989.

This Technical Advice memorandum was made public in December, 1989. This caused some concern of the part of IRS Estate Tax Attorneys because they did not have the capability of computing the restricted interest in all cases. This Memorandum has also caused concern on the part of some practitioners because it might obviate the advantages of using the §6166 election.

At present, we do not know if the various IRS Districts will apply the TAM with full force and vigor. There is a good chance that many Districts will let this problem slide for a while. If your local IRS District will assert the position of the TAM, you need to contact me for an update.

Revenue Reconciliation Act of 1989

This act made several changes which affected the estate tax computation. The most extensive change was the rewrite of the accuracy related penalties.

Several other changes were made, such as the repeal of the ESOP deduction for decedent's dying after 12/19/89.

More Complex Computations

With the addition of restricted interest and other small changes, it seems that the computations that we try to compute are getting more complex every year.

This has required a modification of the convergence algorithms used. As I improve the convergence algorithms used by Inter-Est, users keep trying to do more and more complex computations. I will try to keep up with the demand, but I do not believe that the definitive solution has been found yet.

Interest on Underpayment after Overpayment

IRM 31(59)3.3, Interest on Underpayments, has been brought to my attention. The Manual provision provides that in cases where a general deficiency of tax is assessed after a refund is issued for the same tax liability, if interest interest was allowed on the refund, you should compute interest on the deficiency at the underpayment rate from the due date of the tax liability.

Inter-Est computes the net outstanding balance and charges interest on this balance. This is not correct per the Manual. You should be able to make a correct computation using Inter-Est, but you will have to enter the payments in a n artificial way. I have not made any special changes to allow Inter-Est to make this computation for you automatically yet.

New Features to Inter-Est

The following features have been added to Inter-Est since the beginning of the year. This list of changes is an abbreviated version of the list of current changes in Appendix F of the Inter-Est manual.

Restricted Interest Feature Added

A restricted interest routine has been inserted. The new input provisions are:

Flag - In Federal Interest Section - Do you want Restricted interest computation, yes or no.
Flag - In State Interest Section - Use Restricted interest option for this State interest computation or not, yes or no. The prompt for this flag will not appear unless you have selected the Federal flag.
Amount - In Federal - For each period enter a fixed dollar amount that will draw interest for that period.

FOR THIS COMPUTATION TO WORK CORRECTLY, you must input the same number of periods for the federal interest computation and each state interest computation where this option is selected. The date for each period should also be the same. You might have to introduce some dummy interest periods to accomplish this.

The computation is done this way:

For each period the sum of the input fixed dollar amount for that period and the computed state amounts are added to the Federal AMOUNT DRAWING INTEREST.

The computed state amount is computed in a very simple way:

The actual State Death Tax Credit used for the State is taken. This amount is computed in the following manner:

If option 'a' is selected for the state interest flag (State Death Tax Credit Controls), the ratio computed for that purpose is used. If you indicate that the state is the only state, all of the allowable State Death Tax Credit is used. If you indicate that there is another state, you are requested to input a GROSS ESTATE for the State. The ratio used is the input STATE GROSS divided by the FEDERAL GROSS.

If option 'b' is selected for the state interest flag (Fixed Dollar Amount Controls), the amount used to limit the Total APPLIED TO BALANCE column will be the fixed dollar amount.

If any other option is selected, you will be asked for the STATE GROSS at a prompt after the Restricted Interest Question. Then this option is treated like a. above.

This method will require you to enter the STATE GROSS ESTATE at an extra prompt at times, but should allow the computation to be completed correctly where there is more than one state with tax drawing restricted interest.

For each period, the APPLIED TO BALANCE amount for the period was subtracted from the amount computed above (but not less than zero). This is then entered in the column for the computed amount for that state.

The Fixed Dollar amounts input in the Federal Interest Section are different from the input items for penalty, etc. in one respect. They are not cumulative. If you had a fixed dollar amount of $10,000 to be treated as an amount drawing restricted interest in all periods you must enter that amount for all periods, not just once. Also note that there is a prompt for a fixed dollar amount for the last period. This should not be used often.

If it is a Sec. 6166 computation, this amount will be added to the Federal AMOUNT DRAWING INTEREST for the appropriate type, 4% Qualified, Other Qualified, or Non-Qualified Amounts. To make this allocation, the following input items are checked:

The Elect 4% Amount Only Flag.

The Second Principal Payment Flag

The Input for Number of Tax Installment Periods Elected.

The program computes the unused amount that could qualify for 4%, and the unused qualified amount. Of the total amount drawing restricted interest, the amount to be allocated to Qualified is computed as follows:

Take the qualifying percentage and multiply by the amount drawing restricted interest.

Add the results of 1. to the unused qualified amount.

Limit 2. to the amount drawing restricted interest. This amount will be the total amount allocated to qualified.

Take the smaller of 3. or the unused amount that could qualify for the 4% amount. This amount will be the total amount allocated to 4% qualified.

If the election to extend the amount qualifying for 4% only was made, limit the total amount allocated to qualified to 4.

Based upon the count of the number of times the second Principal Payment Flag was set compute the percent of qualified still being extended and limit the amount allocated to qualified and qualified at 4% to that percentage. For example, if you had elected 10 periods of tax payments, and the Principal Payment Flag had been used twice to this point, the amounts qualifying for extension would be reduced by 20%.

The remainder of the amount drawing restricted interest will be allocated to the non-qualified AMOUNT DRAWING INTEREST.

This provision has several possible problems that have not been considered in full yet:

The restricted interest provisions are ignored in the computation of estimated future interest. This should be correct.
The restricted interest provisions are ignored in the computation of amounts entitled to Interest Free Periods.
Some provision might need to be added to adjust the number of selected interest periods so the number of periods used for Federal and State interest periods will match automatically.

New Print Toggle Added

The HitKey toggle which was turned on using the F5 key has been removed.

A new toggle using F5 has been inserted in its place. The new toggle allows you to select between a NORMAL printout and a SHORT printout. At present, the only difference is in the printout of interest, but some additional differences will be added. In addition to the regular places that you can change a toggle, this toggle can be changed from the final prompt that asks you if you wish to have the printout go to the Screen, Printer, or a File. When the toggle is changed at this final prompt, it is only changed for than one run only.

AutoAllocate Flag Renamed

The AutoAllocate Flag used in the interest computation has been renamed. It is not called the Special Allocation Flag. This name change is to avoid any implication that the use of this flag automates the computation or that its use is normal.

The action of this flag has been changed for §6166 computations, but has been left the same for non-§6166 computations. This flag now has the following action:

§6166

If you wish to have the total principal and interest payments allocated first to the outstanding Non-Qualified Tax, and then to Interest select 'y'. To the extent interest is overpaid, the remaining balance will be applied to the Qualified Tax.

Non-§6166

If you do not know how the principal and interest payments were allocated, you can enter 'y' here and the total payments entered for this period will be allocated automatically between interest and principal based upon the outstanding balance.

Guess Toggle Modified

There are now three options:

Iterate

A simple iterative process where the answer to each trial is used to compute the next trial. The is the same as Guess Off in the old toggle.

Guess

The program tries to make a guess as to the tax to to use for the next trial. This is usually the fastest method. This is unchanged from the old version.

Force

This is a new method. Try this method when the other methods will not work. This method will take at least seventy-five trials.

From the input section, this toggle is changed by using the Alt F4 key. While Inter-Est is computing the tax, if you hit the F4 key, it will turn on the FORCE option for the rest of that single run only.

This change was made because some computations came up that the old toggles would not work on. The new FORCE option is an attempt to get an answer to these computations.

The Facts that created the problems were:

Sec. 6166 interest for federal tax.
Large taxable estates.
Extension of time (installment) as to State Death Tax also.
State Death Tax Credit was not allowed until the State Tax was actually paid.
Federal interest was charged on the amount allowed as State Death Tax Credit until it was actually paid.
There were over 10 years of interest and payments.

§6166 Starting Balance Error Corrected

An error was found in computing the starting balance for a Sec. 6166 computation interest period. The error occurred when the balance went from positive to negative. The routine to adjust the starting balance made the adjustment for the overpayment of the 4% qualified amount twice. This has been corrected. This error did not affect the tax computation, it just made the amount of the refund incorrect.

Estimated Future Interest Computation Changed

Two changes were made to correct problems with the computation of estimated future interest. When -1 was input as the number of future interest periods two errors might occur:

If §6166 had not been selected, the tax payment that had been entered for the last period would be used to compute the starting balance when computing the estimated future interest. This has been corrected.
If §6166, no estimated future would be computed. This has been corrected by treating -1 the same as 1 for the purpose of estimated future interest. You should never use -1 for future interest where there is a §6166 election as you have a specific pattern of payments. The -1 option was intended only for rough estimates.

New INSTALL Program Added

An INSTALL program is now furnished for each disk or set of disks which are intended for use on a hard disk. Just put Disk #1 in the A Drive (or B Drive if necessary) and enter a:install<CR>. The INSTALL Program will tell you what to do to install Inter-Est.

Penalty Computation Corrected

If you entered payments for the purpose of the Sec. 6651(a)(2) penalty that where over 50 months after the due date, the penalty could be overstated in the computation. This has been corrected.

Support for §6662 and §6663 penalties added

Normal and Complex Residue computations are supported along with support for interrelated attorneys fees. Support has also been inserted for interest on these penalties.

Support for §6651(f) penalty added

§6651(a) penalty computation changed to allow for the new §6651(f) fraud increase to the Failure to File Penalty is now supported

State §6166 interest features added

An option was added to State §6166 Computation to allow for estates in Illinois. This option allows you to enter a fixed percentage for the Qualifying ratio. In addition, the option:

Make all qualified tax qualify for the special rate.
Multiplies the 4% interest factor by 1.5 before using it. This gives an effective interest rate of 6% if you are using simple interest.
Uses the input Qualifying ratio even if it is less than 35%.

This change was made to allow for Illinois interest provisions. If you have any problems, or need a similar provision for another state, please contact me.

Limitation to State Death Tax Changed

The limitation to state death tax has been changed. Before when a limitation to State Death Tax Credit was entered it was used to limit the Primary State Death Tax Credit and nothing more. This has been changed so that three more items are limited by the same dollar amount. These items are:

State Death Tax Credit for the purpose of the Second Limitation of the TPT.
State Death Tax Credit for the purpose of the §2044 computation, and
State Death Tax Credit for the purpose of the Second limitation of the TPT in the §2044 computation.

Interest Table Editor Modified

Alt R will now let you do a search and replace. The input routine for the search string and the replace string ignore trailing blanks. The search and replace looks for all occurrences of the search string following the cursor position. All occurrences following the cursor are replaced. This should make it easier to update the interest table every quarter

New Features added to PRE Program

The following features have been added to PRE since the beginning of the year. This list of changes is an abbreviated version of the list of current changes in Appendix F of the Inter-Est manual.

TPT Error Corrected

When the date of death for the transferor was an even multiple of two years prior to the date of death of the transferee, PRE computed the percentage allowable as 20% too small. See Regulations Sec. 20.2013-1(c), last paragraph.

View Option Modified

The View Option in PRE has been changed to display the Annuity Totals in the Recapitulation Schedule.

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Cecil Cammack, Jr. dba
Cammack Computations Co.
P. O. Box 725, Cleburne, TX 76033
Voice: 1 (800) 594-5826
Email: cammack@inter-est.com
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