Section 6166(b)(3) provides:
(3) Farmhouses and certain other structures taken into account
For purposes of the 35-percent requirement of subsection (a)(1), an interest in a closely held business which is the business of farming includes an interest in residential buildings and related improvements on the farm which are occupied on a regular basis by the owner or lessee of the farm or by persons employed by such owner or lessee for purposes of operating or maintaining the farm.
| 6166(b)(3) Comment 1: If the farmhouse and other structures are rented out to persons not engaged in the business of farming, they become passive assets under §6166(b)(9) and are not qualified for inclusion in the business value under section 6166(b)(3). |
| 6166(b)(3) Comment 2: While farmhouses and certain other structures occupied by persons engaged in the business of farming are taken into account for purposes of determining whether the §6166(a)(1) closely held business value exceeds 35-percent of the adjusted gross estate, some commentators believe that they are not to be taken into account when calculating the closely held business value when determining the §6166(a)(2) maximum amount of tax which may be paid in installments. This could create a situation where the 35% test is satisfied under §6166(b)(3) but is not satisfied when the value of the farmhouse and other structures is subtracted - and the calculated maximum tax payable in installments would be based on a §6166(a)(2) ratio that does not satisfy the §6166(a)(1) 35% test for payment of the tax in installments under §6166, a contradictory result. |
Example
|
Section 6166(b)(3), Comment 2 - Example
Method Suggested by Some Commentators - Value of Qualifying Farmhouse and Other Structures Excluded From Calculation of the Maximum Amount of Tax Which May Be Paid in Installments
|
||||
| Estate of: Decedent SSN: 999-99-9999V D/D: Feb-17-2016 | ||||
| All other assets included in the gross estate | 20,000,000.00 | |||
| Farmland used in the farming business included in the gross estate | 8,600,000.00 | |||
| Farmhouse and other structures included in the gross estate | 1,500,000.00 | |||
| Gross estate | 30,100,000,00 | |||
| Schedules J, K, and L deductions | 3,150,000.00 | |||
| §6166(b)(6) Adjusted gross estate | 26,950,000.00 | |||
| (Method Suggested by Some Commentators) | With §6166(b)(3) Inclusion of Farmhouse for §6166(a)(1) | Adjustment | Without §6166(b)(3) Inclusion of Farmhouse for §6166(a)(2) | |
| Farmland used in the farming business | 8,600,000.00 | 0.00 | 8,600,000.00 | |
| Farmhouse and other structures occupied by persons engaged in the business of farming | 1,500,000.00 | (1,500,000.00) | 0.00 | |
| §6166(b)(3) Closely held business value | 10,100,000.00 | (1,500,000.00) | 8,600,000.00 | |
|
Section 6166(b)(3), Comment 2 - Example
§6166(a)(2) Ratio Computation
|
||||
| (Method Suggested by Some Commentators) | §6166(a)(1) | §6166(a)(2) | ||
| Section 6166 business value, divided by | 10,100,000.00 | 8,600,000.00 | ||
| Section 6166(b)(6) adjusted gross estate, yields | 26,950,000.00 | 26,950,000.00 | ||
| Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments (must exceed 35%) | .374768 | .319109 | ||
|
Section 6166(b)(3), Comment 2 - Example
§6166(a)(2) Maximum Amount of Tax Which May be Paid in Installments
|
||
| (Method Suggested by Some Commentators) | §6166(a)(1) | §6166(a)(2) |
| Net estate tax | 8,600,000.00 | 8,600,000.00 |
| Section 6166(a)(2) ratio expressed as a percentage | 37.4768% | 31.9109% |
| Maximum amount of tax which may be paid in installments | 3,223,004.80 | 2,744,337.40 |
| Putative amount of tax which may be paid in installments notwithstanding that including the value of the farmhouse under §6166(b)(3) would otherwise yield a §6166(a)(2) ratio of 37.4768%. In other words, some commentators believe that while §6166(b)(3) says the value of the farmhouse and other structures will qualify for deferral, other subsections within §6166 dictate that a lesser amount of tax will be eligible to be paid in installments. We do not believe that this interpretation is correct. | 2,744,337.40 | |
| 6166(b)(3) Comment 3: We believe that if persons engaged in the business of farming occupy the farmhouse and other structures, the §6166(a)(2) ratio determined for purposes of the 35-percent requirement of subsection (a)(1) is the same when calculating the maximum amount of tax which may be paid in installments. PLR 8327009 provides that the "Decedent's interest as a sole proprietor in a farming and cattle raising operation consisting of land, a main dwelling and contents, farm structures and improvements, and machinery and equipment qualifies as an interest in a closely held business for purposes of section 6166 of the Code." The value of the farmhouse and other structures is included in the decedent's gross estate whether or not a §6166 election is made. If it qualifies under §6166(b)(3) for inclusion in the (a)(1) election, then it must by definition be included in the (a)(2) ratio calculation; the (a)(1) and (b)(3) "interest in a closely held business" is the (a)(2)(A) "closely held business amount" defined in (b)(5) as the "value of the interest in a closely held business which qualifies under subsection (a)(1)." |
| 6166(b)(3) Comment 4: See PLR 9422052, where the closely held business was not engaged in farming; rather, it was engaged in the business of renting and managing rental properties, and the portion of the building used in the business that was allocable to the decedent's residence was excluded from the qualifying business value pursuant to Reg. §20.6166A-2(c)(2). |
IRS Rulings
| PLR 8327009 | Decedent was a sole proprietor engaged in a farming and cattle raising operation. Assets used in the proprietorship consisted of land, a main dwelling and contents, farm structures and improvements, and machinery and equipment, whose estate tax value equaled about 37 percent of the adjusted gross estate. The decedent's interest in these assets, including the main dwelling and contents, qualified as an interest in a closely held business for purposes of section 6166. |