The Secondary §6166(a)(2) Qualifying Computation Required By Sections 6166(k)(5) and 2035(c)(2)
A section 6166(a)(2) qualified ratio computation is required in all cases where an estate wishes to make a section 6166 election to defer payment of part or all of the estate tax when a closely held business interest is included in the value of the decedent's gross estate. The value of that business interest must exceed 35% of the adjusted gross estate. The fraction is the value of the 6166 business interest (the numerator) divided by the adjusted gross estate (the denominator). That fraction or ratio is then multiplied by the estate tax to determine the maximum amount of tax which may be paid in installments under section 6166(a).
However, where property was transferred by the decedent within 3 years of the date of death, a secondary section 6166(a)(2) computation is required. The numerator is composed of the 6166 business interest value included in the gross estate plus any 6166 business interests that were transferred within 3 years of the date of death. The denominator is composed of the adjusted gross estate plus all transfers within 3 years of the date of death. The value of the transfers is not reduced by any annual exclusions that might have been allowed on a gift tax return. This ratio must also exceed 35%. If it does not, the estate cannot defer payment of the tax under section 6166. See PLR 8527003.
On the other hand, if both computations exceed 35% of the adjusted gross estate, the amount of tax eligible for deferral under section 6166 is determined by the first computation only, with reference to the actual gross estate and the tax actually payable.
This secondary computation is required by section 2035(c)(2) via section 6166(k)(5).
§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.
. . . .
(k) Cross references
For authority of the Secretary to require security in the case of an extension under this section, see section 6165.
For special lien (in lieu of bond) in the case of an extension under this section, see section 6324A.
(3) Period of limitation
For extension of the period of limitation in the case of an extension under this section, see section 6503(d).
For provisions relating to interest on tax payable in installments under this section, see subsection (j) of section 6601.
(5) Transfers within 3 years of death
For special rule for qualifying an estate under this section where property has been transferred within 3 years of decedent's death, see section 2035(c)(2).
§2035. Adjustments for certain gifts made within 3 years of decedent's death
(a) Inclusion of certain property in gross estate
(1) the decedent made a transfer (by trust or otherwise) of an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the date of the decedent's death, and
(2) the value of such property (or an interest therein) would have been included in the decedent's gross estate under section 2036, 2037, 2038, or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any property (or interest therein) which would have been so included.
(b) Inclusion of gift tax on gifts made during 3 years before decedent's death
The amount of the gross estate (determined without regard to this subsection) shall be increased by the amount of any tax paid under chapter 12 by the decedent or his estate on any gift made by the decedent or his spouse during the 3-year period ending on the date of the decedent's death.
(c) Other rules relating to transfers within 3 years of death
(1) In general
For purposes of—
(A) section 303(b) (relating to distributions in redemption of stock to pay death taxes),
(B) section 2032A (relating to special valuation of certain farms, etc., real property), and
(C) subchapter C of chapter 64 (relating to lien for taxes),
the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, during the 3-year period ending on the date of the decedent's death.
(2) Coordination with section 6166
An estate shall be treated as meeting the 35 percent of adjusted gross estate requirement of section 6166(a)(1) only if the estate meets such requirement both with and without the application of subsection (a).
(3) Marital and small transfers
Paragraph (1) shall not apply to any transfer (other than a transfer with respect to a life insurance policy) made during a calendar year to any donee if the decedent was not required by section 6019 (other than by reason of section 6019(2)) to file any gift tax return for such year with respect to transfers to such donee.
Subsection (a) and paragraph (1) of subsection (c) shall not apply to any bona fide sale for an adequate and full consideration in money or money's worth.
(e) Treatment of certain transfers from revocable trusts
For purposes of this section and section 2038, any transfer from any portion of a trust during any period that such portion was treated under section 676 as owned by the decedent by reason of a power in the grantor (determined without regard to section 672(e)) shall be treated as a transfer made directly by the decedent.