Overview of Section 6166(g)(1)

Section 6166(g)(1) provides:

(g) Acceleration of payment

(1) Disposition of interest; withdrawal of funds from business

(A) If-

(i) (I) any portion of an interest in a closely held business which qualifies under subsection (a)(1) is distributed, sold, exchanged, or otherwise disposed of, or

    (II) money and other property attributable to such an interest is withdrawn from such trade or business, and

(ii) the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 50 percent of the value of such interest,

then the extension of time for payment of tax provided in subsection (a) shall cease to apply, and the unpaid portion of the tax payable in installments shall be paid upon notice and demand from the Secretary.

(B) In the case of a distribution in redemption of stock to which section 303 (or so much of section 304 as relates to section 303) applies-

(i) the redemption of such stock, and the withdrawal of money and other property distributed in such redemption, shall not be treated as a distribution or withdrawal for purposes of subparagraph (A), and

(ii) for purposes of subparagraph (A), the value of the interest in the closely held business shall be considered to be such value reduced by the value of the stock redeemed.

This subparagraph shall apply only if, on or before the date prescribed by subsection (a)(3) for the payment of the first installment which becomes due after the date of the distribution (or, if earlier, on or before the day which is 1 year after the date of the distribution), there is paid an amount of the tax imposed by section 2001 not less than the amount of money and other property distributed.

(C) Subparagraph (A)(i) does not apply to an exchange of stock pursuant to a plan of reorganization described in subparagraph (D), (E), or (F) of section 368(a)(1) nor to an exchange to which section 355 (or so much of section 356 as relates to section 355) applies; but any stock received in such an exchange shall be treated for purposes of subparagraph (A)(i) as an interest qualifying under subsection (a)(1).

(D) Subparagraph (A)(i) does not apply to a transfer of property of the decedent to a person entitled by reason of the decedent's death to receive such property under the decedent's will, the applicable law of descent and distribution, or a trust created by the decedent. A similar rule shall apply in the case of a series of subsequent transfers of the property by reason of death so long as each transfer is to a member of the family (within the meaning of section 267(c)(4)) of the transferor in such transfer.

(E) Changes in interest in holding company
If any stock in a holding company is treated as stock in a business company by reason of subsection (b)(8)(A)-

(i) any disposition of any interest in such stock in such holding company which was included in determining the gross estate of the decedent, or

(ii) any withdrawal of any money or other property from such holding company attributable to any interest included in determining the gross estate of the decedent,

shall be treated for purposes of subparagraph (A) as a disposition of (or a withdrawal with respect to) the stock qualifying under subsection (a)(1).

(F) Changes in interest in business company
If any stock in a holding company is treated as stock in a business company by reason of subsection (b)(8)(A)-

(i) any disposition of any interest in such stock in the business company by such holding company, or

(ii) any withdrawal of any money or other property from such business company attributable to such stock by such holding company owning such stock,

shall be treated for purposes of subparagraph (A) as a disposition of (or a withdrawal with respect to) the stock qualifying under subsection (a)(1).

Reg. Section 20.6166A-3(d) explains the provisions of Section 6166(g)(1).

6166(g)(1) Overview, Comment 1:   Reg. Section 20.6166A-3(d) was published in 1960 (without the "A"), and was republished (with the "A") in 1980. The examples in the 20.6166A regulations must be used with caution; they are not given effect to the extent that they are inconsistent with the statute, Section 6166, as it exists today. Further, see the notes in our Section 6166(j) Overview under the Home Page title bar, Section 6166(j) - Regulations.

 

6166(g)(1) Overview, Comment 2:   A closely held business might own some assets that are passive; i.e. they are not used in the conduct of an active trade or business. A common example would be an investment account holding publicly traded stock and bonds that is owned by a residential real estate business.

The value of this passive asset would not be included in determining the closely held business value of the real estate business at the moment immediately before the decedent's death for purposes of section 6166(a)(1). See our Section 6166(b)(9) Overview discussion of section 6166(b)(9)(A). [There could be an unusual set of facts where such an investment account does qualify as an asset used in an active trade or business, but this is not often encountered.]

If the passive asset is subsequently "distributed, sold, exchanged, or otherwise disposed of" or is withdrawn, such distribution or disposition will not be considered an acceleration event for purposes of section 6166(g)(1), because section 6166(g)(1) applies only to assets that were included in the value of the interest in a closely held business which qualified under subsection (a)(1); pursuant to section 6166(b)(9)(A), they were excluded from such value.

Note: There is a distinction between the 6166(g)(1)(A) calculations for a withdrawal of funds from a closely held business and a disposition of the assets of a closely held business.

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.