On October 25, 2013 the IRS released PLR 201343004.

Basic Facts:

The decedent owned more than a 35% interest in the value of Company 1. Company 1 owned Division 1, Division 2, and Division 3, all of which were operating divisions.

The decedent did not own an interest in Company 2. However, Company 1 owned stock in Company 2. Company 2 owned Division 4 and Division 5, which were also operating divisions.

The IRS ruled that:
 

• The activities of Division 1 and Division 5 are sufficient to constitute the “carrying on of a trade or business” for purposes of section 6166(a)(1); and,
• Company 2, Division 3, and Division 4 are qualified lending and finance businesses under section 6166(b)(10).
• The IRS also made clear that if the estate wishes to include the value of the Company 2 assets in its section 6166 election, a section 6166(b)(8) election must be made, stating in footnote 1:

1  We note that in order for an interest in a business to qualify as an interest in a closely held business under section 6166, the decedent must have personally conducted an active trade or business or must have held an interest in a partnership, LLC, or corporation that itself carried on an active trade or business. In this case, the decedent did not personally conduct business for Company 2, nor did he hold an interest in Company 2  (decedent owned stock in Company 1 which held stock in Company 2). In order for Company 2’s assets to be included in the estate’s section 6166 election, the estate must make a section 6166(b)(8) holding company election or the assets must qualify for the active corporation exception under section 6166(b)(9)(B)(iii). Whether the estate may make a section 6166(b)(8) election or would qualify for the active corporation exception is not addressed in this letter ruling.

Issues Raised By This Ruling:

1. Assume the estate makes a section 6166(b)(8) election and that all of the stock owned by Company 1 in Company 2 qualifies as non-readily-tradable stock within the meaning of section 6166(b)(8)(B)(i) and 6166(b)(7)(B). The maximum number of installments would be 10, the first of which is due on the return due date, for a maximum deferral period of nine years. The entire amount of tax deferred under section 6166(b)(8) draws interest at 45% of the current regular underpayment interest rate (R%), for an effective compound interest rate of 1.80% (after .
2. Meanwhile, the maximum number of installments under section 6166(b)(10) is 5, the first of which is due on the return due date, for a maximum deferral period of four years. Company 2 qualifies as a (b)(10) lending and finance business, as does Division 3 in Company 1. The first $572,000 of tax deferred under a (b)(10) election for a death in 2013 (or $486,500 for a date of death in 2012) draws interest at 2%. The balance of deferred tax draws interest at the 45% of R% current regular underpayment interest rate.

Observations:

1.  Maximum deferral period: Four years or nine years? The estate has to make two elections - a 6166(b)(10) election to qualify the lending and finance business interests for section 6166 deferral purposes, and a 6166(b)(8) election to qualify the stock owned by Company 1 in Company 2 for section 6166 deferral purposes. 

At first blush one could say that the 6166(b)(10) deferral cannot be extended beyond its statutory maximum of four years. However, the 6166(b)(8) election is usually treated as superseding the first election (such as a regular 6166(a) election) because, notwithstanding the language in section 6166(a) (and, possibly, by extension, in 6166(b)(10)), tax deferred under a 6166(b)(8) election is not eligible for the special 2% interest rate pursuant to section 6166(b)(8)(A)(iii) and the deferral period is shortened to that available under section 6166(b)(8)(A)(ii). Hence, the 6166(b)(8) rules would seem to apply both for the rate of interest and for the deferral period.

The most common situation is that what would have been a 14-year deferral under section 6166(a) is shortened to a 9-year deferral under section 6166(b)(8), and the special 2% interest rate available in a 6166(a) deferral is lost. To be consistent with this analysis, it might seem that the shorter 4-year deferral under section 6166(b)(10) in this case should be extended to nine years under the 6166(b)(8) election, since section 6166(b)(8) is controlling. The 6166(b)(10) election terms should not apply for deferral purposes.

However, the question whether the deferral period should be 9 years or 4 years can be resolved by looking at section 6166(a)(1), which provides:

(a) 5-year deferral; 10-year installment payment
(1) In general

If the value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.

The 6166(b)(8) rules would therefore apply for purposes of the interest rate (45% of regular underpayment interests rates) and the date the first installment is due (the return due date determined without regard to any extensions), while the separate 6166(b)(10) election would be treated as an election to reduce the number of installments from 10 to 5, for a total deferral period of 4 years.

2.  Interest rate: The entire amount of deferred tax draws interest at the 6166(b)(8) interest rate of 45% of the current regular interest rate of R%. This is what happens when a (b)(8) election is made for business interests that would otherwise qualify under section 6166(a) for the 2%  and 45% of R% rates.

3.  Section 6166(c) applies to each of the business interests involved in the (b)(8) election, which means that 20% or more of the total value of each such business must be included in the gross estate.

4.  Company 1 cannot independently qualify for a 6166(a) election because one of its divisions qualifies as a (b)(10) lending and finance business. As with a 6166(c) aggregation, the 5-installment maximum of the (b)(10) business taints the entire business so it must be treated as a (b)(10) business in its entirety. If the estate chooses not to make a (b)(10) election, then only Company 1 with Divisions 1 and 2 would be eligible for the 6166(a) 14-year deferral (if it otherwise meets the requirements for a section 6166 deferral), since Division 3 and Company 2 would be passive assets. That would obviate the need for a 6166(b)(8) election.

5.  If the section 6166(b)(9)(B)(iii) active corporation exception applies, then Company 1 and Company 2 will be treated as one corporation, in which event a section 6166(b)(8) election would not be required. This would enable the estate to make a 6166(b)(10) election for the combined value of both businesses. In order to qualify for this exception, the following must be true:

• Company 1 must own 20% or more in value of the voting stock of Company 2;
• Company 2 has 45 or fewer shareholders;
• 80% or more of the value of Company 2, and 80% or more of the value of Company 1 determined without the value of the stock in Company 2, is attributable to assets used in carrying on a trade or business. Note: A corporation owning stock in 10 subsidiary corporations met this test and qualified for this exception. See PLR 8813047.