Last Updated: 05 October 2015
Section 6166 does not prohibit publicly traded stock from qualifying as "an interest in a closely held business" for purposes of a section 6166 election, except for a few narrow restrictions described below.
Very few estates will be able to qualify publicly traded stock for a section 6166 election, however. A publicly traded stock will be owned by more than 45 shareholders. When there are more than 45 shareholders, section 6166(b)(1)(C)(i) requires that a decedent's gross estate must include 20% or more in value of the voting stock for the interest to qualify. The value included in the gross estate is determined after all applicable discounts - blockage, minority interest, etc. - have been taken. This means that a decedent’s gross estate must include substantially more than 20% of the voting stock in a publicly traded corporation in order for the estate tax value to qualify for a section 6166 election.
There is a provision within section 6166 that allows an estate to qualify closely held stock for a section 6166 election if less than 20% in value of the voting stock is held. For this to occur, family members described in section 267(c)(4) must also own voting stock in the corporation. If the estate makes a section 6166(b)(7) election, the interests owned by those family members will be attributed to the decedent for purposes of satisfying the 20% value test of section 6166(b)(1)(C)(i).
However, this election is not available if the stock is publicly traded.
The section 6166(b)(7) family attribution election does not apply to publicly-traded stock. Sections 6166(b)(7)(A)(i) and (B) specifically provide that stock eligible for a section 6166(b)(7) election must be "non-readily-tradable stock" at the time of the decedent's death. (Section 6166(b)(7)(B) provides "[f]or purposes of this paragraph, the term "non-readily-tradable stock" means stock for which, at the time of the decedent's death, there was no market on a stock exchange or in an over-the-counter market.")
The decedent's gross estate must therefore include 20% or more in value of the voting stock in a publicly traded corporation in order for the interest to qualify for a section 6166 election, since there will almost certainly be more than 45 shareholders.
Stock in a section 6166(b)(8) holding company cannot be publicly traded. Pursuant to section 6166(b)(8)(B)(i), a section 6166(b)(8) election to qualify stock in a holding company cannot be made if the holding company stock itself is not "non-readily-tradable stock" at the time of the decedent's death (within the meaning of section 6166(b)(7)(B)).
Stock in subsidiaries of a section 6166(b)(8) holding company can be publicly traded, but an additional restriction will apply. There is a further restriction in section 6166(b)(8)(B)(ii) if stock in a subsidiary corporation is publicly traded while the holding company stock is not publicly traded. The maximum deferral period is reduced from 9 years to 4 years (i.e. from 10 installments to 5 installments, the first of which is due on the return due date).
NOTE: Because there will be more than 45 shareholders in each publicly-traded corporate sub, the decedent's gross estate must therefore include 20% or more in value of the voting stock in each sub in order for it to qualify, since a 6166(b)(7) family attribution election is not available. Furthermore, if there are 2 or more subs, section 6166(c) requires that the decedent's gross estate must also include 20% or more of the total value of each sub in order for it to qualify, meaning that the 20% voting stock value test could be met while at the same time the 20% of total value test might not be met.
Stock in a section 6166(b)(10) qualified lending or finance business must not have been publicly traded within 3 years before the decedent's death. The section 6166(b)(10) election for a "qualifying lending and finance business" cannot be made pursuant to section 6166(b)(10)(B)(iii) "if the stock or debt of such entity or a controlled group (as defined in section 267(f)(1)) of which such entity was a member was readily tradable on an established securities market or secondary market (as defined by the Secretary) at any time within 3 years before the date of the decedent's death."
See Mendell v. Greenberg, 927 F.2d 667, 685 (2nd Cir. 1990), concerning stock in Loehmann's, Inc. that was traded on the American Stock Exchange, where the court stated
However, because of the estate's substantial holdings in Loehmann's, Inc., they were entitled to the benefits of section 6166 of the Internal Revenue Code, 26 U.S.C. §6166.
The basis of the shareholder's complaint was two-fold. Charles Loehmann, the founder, died in 1977. He owned the largest block of Loehmann's stock. His wife, Anita, died in 1980. Their daughter, Anita Loehmann Stafford (Stafford), was fiduciary of both estates. Substantial estate taxes were due. The estates did not have sufficient liquid assets with which to pay the estate taxes.
The first part of the complaint alleged that Stafford therefore had 2 options -
- Make a section 6166 election to pay the estate taxes over a 14-year deferral period, or
- Sell a substantial portion of Loehmann's stock to immediately pay the estate taxes.
The second part of the complaint alleged that, while a blockage discount was available for estate tax purposes, it would be 8.1% with a section 6166 election versus 30% in the event of an immediate sale.
The complaint alleged that Stafford's agreement to the merger as a Board member was therefore motivated by the need to pay estate taxes and utilize the 30% blockage discount for valuation purposes, and these factors should have been disclosed in the proxy statement that was submitted to shareholders to approve the merger.
The District Court's dismissal of a shareholder's allegation that shareholders' approval of a merger between Loehmann's Inc. and AEA Investors Inc. was obtained by a materially misleading proxy statement was affirmed in part, and reversed and remanded in part.