Sale of a Qualifying Business After a Section 6166 Deferral Account Has Been Established

The majority of estates making section 6166 elections seek to pay the tax attributable to some sort of a section 6166(a) operating business in the maximum of 10 installments, the first of which is due on the fifth anniversary date. Interest only is payable on the first 4 anniversary dates, and equal installments of the deferred tax, plus interest, are payable on each of the next 10 anniversary dates, for a total deferral period of 14 years.

At the end of 2009 Cincinnati Campus had about 3,000 active section 6166 billing accounts. However, even though the majority of those might have been elections for the maximum 14-year deferral period, it seems that the average section 6166 billing account is paid off about half way through the 14-year period, around the 7th or 8th anniversary dates. These payoffs are the result of a number of events, such as:

1. Section 6166(g)(1) terminations due to the sale of the business;
2. Voluntary payoffs of the entire balance due to avoid the annual billing and payment routine;
3. Section 6166(g)(3) terminations for failure to pay an amount requested in an annual billing notice; or,
4. (Rarely) a section 6166(g)(2) termination for failure to pay the tax equal to the undistributed net income of an estate in a year in which an installment is payable under section 6166.

When 50% or more of the entire qualifying business interest included in the gross estate is sold, the section 6166 extension ceases to apply and the unpaid balance of deferred tax plus accrued interest is due and payable. Section 6166(g)(1)(A) 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(II) money and other property attributable to such an interest is withdrawn from such trade or business, and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.

While the tax and interest due as a result of a sale of the business is payable upon notice and demand from the IRS, the actual termination of the section 6166 deferral account for interest computation purposes occurs on the date of sale itself. The unpaid tax and all accrued interest become amounts not deferred under section 6166 from the date of sale forward and, as such, begin accruing interest at regular underpayment interest rates until paid. The regular rate interest accruing after the date of sale is deductible as an administration expense on Schedule J of the estate tax return because section 2053(c)(1)(D) does not apply. This would result in an interrelated payoff computation if the date of payment will be when IRS sends its notice and demand for payment - although the amount of interest in the bill from IRS will not be interrelated with the tax unless a request for the interrelation has previously been submitted to Cincinnati Campus.

An estate contemplating a sale of the qualifying business has several options.

First, before the sale the executor or designated agent could call Cincinnati Campus at the toll-free number (1-866-699-4083) to ask the person handling the 6166 billing account to prepare a payoff computation as of the date of sale, which amount would be paid to IRS on the date of sale itself. If a section 6324A lien has been recorded and a Release of Lien is sought, it is possible to have a person from IRS Advisory present at the closing transaction to receive the payoff check and issue the Release of Lien in response, but this would have to be coordinated with IRS Advisory. The more common approach is to arrange for a wire transfer of the payoff amount to IRS Advisory, in exchange for which a Release of Lien is issued.

Second, the estate could simply notify Cincinnati Campus that the sale has occurred and wait to receive the bill for the payoff amount.

Third, the estate could notify Cincinnati Campus that a sale has occurred, but request that Cincinnati run an interrelated computation through the prospective payoff date that allows all regular rate interest accruing after the sale date as a deduction in computing the tax and interest due. NOTE: The IRS is not obligated to run this type of computation (which is sometimes referred to as an up-front interest deduction computation); up-front deduction computations are often run by the Paralegals at Cincinnati Campus, but only as a matter of grace. If Cincinnati cannot run an interrelated payoff computation, the estate can pay the (non-interrelated) payoff amount, then file a supplemental return or a Claim on Form 843 to claim a refund of tax attributable to the allowance of regular rate interest as an interrelated deduction. The supplemental return or Claim would have to be filed within 2 years of the date the tax was paid. (Previously filed supplemental returns (where, for example, interest paid on deferred state estate tax is claimed as a new deduction each year) do not constitute protective claims for refund. See Estate of Axtell v. U.S., 860 F. Supp 795 (D. Wyo. 1994).)