The Section 6166(a)(2) Ratio for the Maximum Amount of Tax Which May be Paid in Installments
Code section 6166(a)(2) provides:
§6166. Extension of time for payment of estate tax where estate consists largely of interest in closely held business
(a) 5-year deferral; 10-year installment payment
(1) In general
If the value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.
The maximum amount of tax which may be paid in installments under this subsection shall be an amount which bears the same ratio to the tax imposed by section 2001 (reduced by the credits against such tax) as-
(A) the closely held business amount, bears to
(B) the amount of the adjusted gross estate.
The worksheet on page 15 of the instructions for Form 706 specifies that this ratio shall be carried out to 6 decimal places.
|15,000,000||Closely held business value, divided by|
|38,000,000||§6166(b)(6) Adjusted gross estate, yields|
|.394737||§6166(a)(2) ratio – the maximum amount of tax which may be paid in installments (see note below)|
Note: If a spreadsheet is used to determine this ratio, modify the formula so that the 6 digits to the right of the decimal point are rounded; i.e., if the displayed ratio in the cell is expanded beyond 6 decimal places one will see only zeroes to the right of the 6th digit (.39473700000000….). This method will match that used by the IRS.
Formula example: =round(C5/C6,6), where cell C5 contains the estate tax value of the decedent's closely held business interest and cell C6 contains the adjusted gross estate amount.
Without rounding, the result of spreadsheet formula shown above is the actual full decimal of .394736842105263000…. . While the cell display might show “.394737” because of manual cell formatting, the actual content of the cell that is used in a mathematical function has more than six figures to the right of the decimal. Multiplying the tax by this unrounded decimal would yield a deferred tax amount different from the amount determined by the IRS.
Closely held business amount: Section 6166(b)(5) provides:
(b) Definitions and special rules
(1) Interest in closely held business
For purposes of this section, the term "interest in a closely held business" means-
(A) an interest as a proprietor in a trade or business carried on as a proprietorship;
(B) an interest as a partner in a partnership carrying on a trade or business, if-
(i) 20 percent or more of the total capital interest in such partnership is included in determining the gross estate of the decedent, or
(ii) such partnership had 45 or fewer partners; or
(C) stock in a corporation carrying on a trade or business if-
(i) 20 percent or more in value of the voting stock of such corporation is included in determining the gross estate of the decedent, or
(ii) such corporation had 45 or fewer shareholders.
(5) Closely held business amount
For purposes of this section, the term "closely held business amount" means the value of the interest in a closely held business which qualifies under subsection (a)(1).
Adjusted gross estate: Section 6166(b)(6) provides
(6) Adjusted gross estate
For purposes of this section, the term, "adjusted gross estate" means the value of the gross estate reduced by the sum of the amounts allowable as a deduction under section 2053 or 2054. Such sum shall be determined on the basis of the facts and circumstances in existence on the date (including extensions) for filing the return of tax imposed by section 2001 (or, if earlier, the date on which such return is filed).
Further, see section 6166(b)(6) adjusted gross estate.
Gifts Made Within 3 Years of the Date of Death:
If the decedent made taxable gifts within 3 years of the date of death, §6166(k)(5) requires that a second §6166(a)(2) computation be run that includes the total value of all gifts (within the meaning of §2035(c)(2)) made within that 3-year period in the denominator of the fraction. Any such gifts which also consisted of interests in the closely held business are to be included in the numerator of that fraction. See Section 6166)k)(5) and Section 2035(c)(2).