Section 6166(b)(1)(C) - Stock in a corporation carrying on a trade or business

Section 6166(b)(1)(C) 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-

. . . . . . . . .

(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.

6166(b)(1)(C) Comment 1:  The phrase "20 percent or more in value of the voting stock" refers to the relationship between the value of the voting stock included in determining the decedent's gross estate and the total value of the voting stock. Section 6166(b)(4) provides that for purposes of section 6166 "value shall be value determined for purposes of chapter 11 (relating to estate tax)." Simply owning 20% of the voting stock is not sufficient (unless the estate tax value does not reflect any valuation discounts). See PLR 6612073550A.
 
Also see IRM 5.5.6.3.2, which provides:
 
   2.  An interest in closely held business is defined as:
  • A proprietorship that carries on a trade or business.
  • An interest in a partnership that carries on a trade or business. Deceased partner's interest that is included in the gross estate must be 20 percent or more of the total capital interest in the partnership or the partnership has 45 or fewer partners.
  • Stock in a corporation carrying on a trade or business if 20 percent or more of the value of voting stock of the corporation is included in the gross estate, or the corporation has 45 or fewer shareholders.

The statute could, in effect, be read as:

(i) 20 percent or more in the estate tax 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.

 

Section 6166(b)(1)(C), Example A

Corporation A - More Than 45 Shareholders
$10,000,000 Value of 100% of the voting stock
20% Percentage of voting stock owned by decedent
$2,000,000 Gross value of voting stock owned by decedent before any discounts
40% Valuation discounts for estate tax purposes
$1,200,000 Estate tax value of decedent's interest in 20% of the voting stock
12% Percentage in value of the voting stock in Corporation A included in determining the gross estate of the decedent
  RESULT: The decedent's interest in Corporation A does not qualify as an interest in a closely held business.
 

 

Section 6166(b)(1)(C), Example B

Corporation A - More Than 45 Shareholders
$10,000,000 Value of 100% of the voting stock
20% Percentage of voting stock owned by decedent
$2,000,000 Gross value of voting stock owned by decedent before any discounts
0% Valuation discounts for estate tax purposes
$2,000,000 Estate tax value of decedent's interest in 20% of the voting stock
20% Percentage in value of the voting stock in Corporation A included in determining the gross estate of the decedent
  RESULT: The decedent's interest in Corporation A qualifies as an interest in a closely held business.
 

 

Section 6166(b)(1)(C), Example C

Corporation B - Fewer Than 45 Shareholders
$10,000,000 Value of 100% of the voting stock
20% Percentage of voting stock owned by decedent
$2,000,000 Gross value of voting stock owned by decedent before any discounts
40% Valuation discounts for estate tax purposes
$1,200,000 Estate tax value of decedent's interest in 20% of the voting stock
12% Percentage in value of the voting stock in Corporation B included in determining the gross estate of the decedent
  RESULT: The decedent's interest in Corporation B qualifies as an interest in a closely held business (because there are fewer than 45 shareholders).
  However, the maximum section 6166(b)(6) adjusted gross estate with which the section 6166(a)(2) 35% ratio could be met is $3,428,571.43, which is less than the current estate tax return filing requirement, and this closely held business interest alone would generate zero estate tax (and no 6166 deferral).
  Substantial adjusted taxable gifts included on line 4 of the Tax Computation on page 1, Form 706, would increase the estate tax, but, if those gifts had been made within 3 years of the date of death, the secondary section 6166(a)(2) ratio required by sections 6166(k)(5) and 2035(c)(2) would also preclude a section 6166 deferral for this business interest.
  Finally, the 12% value is less than 20% of the total value of Corporation B, and it could not be aggregated with other qualifying closely held business interests under section 6166(c).