Section 6166(b)(9) Overview

Section 6166(b)(9) provides:

(9) Deferral not available for passive assets

(A) In general

For purposes of subsection (a)(1) and determining the closely held business amount (but not for purposes of subsection (g)), the value of any interest in a closely held business shall not include the value of that portion of such interest which is attributable to passive assets held by the business.

(B) Passive asset defined

For purposes of this paragraph-

(i) In general

The term "passive asset" means any asset other than an asset used in carrying on a trade or business.

(ii) Stock treated as passive asset

The term "passive asset" includes any stock in another corporation unless-

(I) such stock is treated as held by the decedent by reason of an election under paragraph (8), and

(II) such stock qualified under subsection (a)(1).

(iii) Exception for active corporations

If-

(I) a corporation owns 20 percent or more in value of the voting stock of another corporation, or such other corporation has 45 or fewer shareholders, and

(II) 80 percent or more of the value of the assets of each such corporation is attributable to assets used in carrying on a trade or business,

 then such corporations shall be treated as 1 corporation for purposes of clause (ii). For purposes of applying subclause (II) to the corporation holding the stock of the other corporation, such stock shall not be taken into account.

6166(b)(9) Comment 1:  If, during the course of an IRS examination, it is determined that some assets included in the closely held business amount reported on the estate tax return were passive assets, the IRS adjustment would be to simply exclude the value of those passive assets from the corrected §6166(a)(2) ratio computation. This adjustment would not jeopardize the §6166 election per se unless the resulting §6166(a)(2) ratio fell to 35% or less of the adjusted gross estate; it would not be considered in any manner for section 6166(g) penalty purposes because we would be dealing with the characterization of assets as of the moment immediately before death pursuant to section 6166(b)(2)(A). Section 6166(b)(9)(A) specifically provides that such determination is made "[f]or purposes of subsection (a)(1) and determining the closely held business amount (but not for purposes of subsection (g))".
 
This is consistent with the overall scheme of section 6166:
  • Section 6166 provides an extension of time to pay tax attributable to a qualifying closely held business interest in installments over a maximum of 14 years;
  • Passive assets are not included in the value of the qualifying closely held business interest;
  • Consequently, the time for payment of tax attributable to passive assets is not extended under section 6166; and,
  • If passive assets are distributed from such closely held business (while never having been included in the qualifying closely held business value), there is no extended tax which can be accelerated under section 6166(g)(1).

Conversely, if assets that were used in an active trade or business at the time immediately before the decedent's death, and which were included in the value of a closely held business which qualifies under subsection (a)(1), are subsequently converted to passive assets (or are distributed or disposed of, as above), the following results occur:

  • The section 6166(a)(1) closely held business value remains the same, since it is determined at the moment immediately before the decedent's death;
  • The amount of tax the time for payment of which has been extended under section 6166 remains the same, since the (a)(1) closely held business value has not changed; and
  • There is, indeed, extended tax which can be accelerated under section 6166(g)(1) (if 50% or more of the decedent's interest in the closely held business qualifying under subsection (a)(1) has been distributed or disposed of or, as in this example, converted to a passive asset (which is treated as a distribution or withdrawal)).
  • By its terms, section 6166(b)(9)(A) does not enter into this (g)(1) acceleration determination.
 

6166(b)(9) Comment 2:  Regulations 20.6166A-1 through 20.6166A-4 were published in 1980 (when they were renumbered as shown; they were originally published in 1960). Code section 6166(b)(9) was enacted in 1984. The provisions within the 20.6166A-x regulations that are inconsistent with section 6166(b)(9) have no effect. Further, see our comments under the heading for Section 6166(j) - Regulations.
 

6166(b)(9) Comment 3:  Section 6166(b)(9) will not apply to assets held in a section 6166(b)(10) qualifying lending and finance business (so long as those assets are "used in a qualifying lending and finance business"). Campus Procedures IRM 4.25.2.1.6.10 provides:

IRC section 6166(b)(10), provides that an estate may elect to treat all the assets used in a "qualifying lending and finance business" as assets used in carrying on a trade or business. Thus, none of the assets in a "qualifying lending and finance business" will be considered passive assets under IRC section 6166(b)(9). An estate that makes the section IRC section 6166(b)(10) election is required to make its first installment of tax and interest thereon on the date prescribed by IRC section 6151(a) for payment of the tax; the first installment cannot be deferred. In addition, estates that elect IRC section 6166(b)(10) are allowed a maximum of 5 installments of tax, rather than the usual 10.

Similarly, Appeals IRM 8.7.4.2.2.12 provides:

IRC 6166(b)(10) provides that an estate may elect to treat all the assets used in a "qualifying lending and finance business" as assets used in carrying on a trade or business. Thus, none of the assets in a "qualifying lending and finance business" will be considered passive assets under IRC 6166(b)(9). Estates that make an election under IRC 6166(b)(10) are allowed a maximum of 5 installments of tax, rather than the usual 10, and cannot defer the first installment under IRC 6166(a)(3).

Section 6166(b)(10)(A)(i) does not provide a blanket rule that any asset held by a qualifying lending and finance business will qualify for the election - the asset must still be "used" in the qualifying lending and finance business. It remains to be seen how this distinction will be developed in practice.