SECTION 2. BACKGROUND

continues to apply to estates of decedents dying before January 1, 1998, (the effective date of § 503 of the Act) unless such an estate properly makes the § 503(d)(2) election in the manner discussed below.

.02 Changes Made by the Act

(1) Reduced interest rates.

.01 Deferral of Estate Taxes.

(1) Section 6166 provides an election to extend the time for payment of estate tax where greater than 35 percent of the value of the adjusted gross estate consists of one or more interests in a closely held business. Only the estate of a decedent who, at the date of death, was a United States citizen or resident is eligible to make a § 6166 election.

(2) If an estate makes a § 6166 election, the estate tax may be paid in up to ten installments, with the first payment of tax due not more than five years after the date prescribed for payment of the tax. However, interest on the estate tax is not deferred. Under § 6166(f), the interest must be paid annually.

(3) Section 6601(a) imposes underpayment interest at the § 6621 underpayment rate, which for estates is the federal short-term rate plus 3 percentage points. However, § 6601(j), prior to its amendment by the Act, imposed a reduced interest rate of 4 percent on a portion (the “4percent portion”) of the estate tax deferred under § 6166. The 4-percent portion is the lesser of (i) $345,800 reduced by the amount of the credit allowable under § 2010(a) (prior to amendment by § 501(a) of the Act), or (ii) the amount of deferred estate tax. The 4 percent rate

(a) In general. Section 503(a)(1) of the Act amends § 6601(j) to provide a 2-percent interest rate on the “2-percent portion” (defined below) of deferred estate tax. The interest rate on deferred estate tax in excess of the 2-percent portion is 45 percent of the underpayment rate determined under § 6621.

(b) 2-percent portion. Section 503(a)(2) of the Act provides that the 2percent portion is an amount of deferred estate tax not exceeding the lesser of (i) the tentative tax under § 2001(c) computed on $1,000,000 plus the § 2010(c) (as amended by § 501(a) of the Act) applicable exclusion amount, reduced by the § 2010(c) applicable credit amount, or (ii) the amount of the deferred estate tax.

(2) Elimination of interest deduc- tion. Section 503(b) of the Act amends §§ 163 and 2053 to eliminate both the income tax and the estate tax deductions for interest paid on § 6166 deferred estate tax.

(3) Effective dates. Pursuant to § 503(d)(1) of the Act, the amendments described in this section 2.02 generally apply to estates of decedents dying after December 31, 1997. However, § 503(d)(2) provides that any estate of a decedent dying before January 1, 1998, that has made a § 6166 election may elect to have the reduced interest rates and nondeductibility amendments (but not the 2percent portion) contained in § 503 apply to installments due after the effective date of the election. The election must be made before January 1, 1999, in a manner prescribed by the Secretary and, once made, is irrevocable.