NATIONAL OFFICE

TECHNICAL ADVICE MEMORANDUM

Internal Revenue Service
March 4, 1985
Number 8527003

UI List:
UI No. 6166.00-00; Alternate extension of time for payment of estate tax where estate consists largely of interest in closely held business

ISSUES:
1) Whether gifts made within 3 years of death are includible in the gross estate only for purposes of determining the estate's eligibility for the deferral provisions under section 6166 of the Internal Revenue Code.

2) Whether gifts made within 3 years of death are includible in determining only the amount of the interest in the closely held business (the numerator); or,
whether gifts made within 3 years of death are includible in determining both the amount of the interest in the closely held business and the amount of the adjusted gross estate (the numerator and the denominator) to be used in computing the amount of the estate tax deferrable under section 6166 of the Code.

3) Whether for purposes of issues 1 and 2, gifts made within 3 years of death are includible in the gross estate without regard to any exclusions in either the eligibility fraction or the deferral fraction.

FACTS:
Decedent died in 1983. The estate tax return included in the gross estate shares in a closely held corporation valued at $541,875. The adjusted gross estate was valued at $1,446,049.74. Within 3 years of Decedent's death he made gifts of stock in the closely held corporation included in gift tax returns, valued at $187,280.75. After exclusions of $40,000, the taxable gifts were $147,280.75.

The estate elected to pay the Federal estate tax in installments pursuant to section 6166(a) of the Code. The fraction used by the estate to determine the deferral percentage was as follows:

541,875 +147,280.75/1,446,049.74 = 48%

LAW:
Section 6166(a)(1) of the Code allows an executor to elect to extend payment of part or all of the portion of the Federal estate tax which is attributable to an interest in a closely held business, as defined in section 6166(b)(1), if the value of such interest exceeds 35 percent of the adjusted gross estate.

Section 6166(a)(2) of the Code provides that the maximum amount of tax which may be paid in installments shall be an amount which bears the same ratio to the tax imposed by section 2001 (reduced by the credits against such tax) as the closely held business amount bears to the amount of the adjusted gross estate.

Section 6166(b)(6) of the Code defines "adjusted gross estate" as the value of the gross estate reduced by the sum of the amounts allowable as a deduction under section 2053 or 2054.
Under section 2035(a) and (b) of the Code the entire value of a gift made within 3 years of death was includible in a decedent's gross estate, unless no gift tax return was required because the gift's value was equal to or less than the amount of the exclusion.

For decedents dying after December 31, 1981, section 2035(d)(1) of the Code provides, with certain exceptions, that gifts made within 3 years of death are not includible in the gross estate of such decedents. Section 2035(d)(4) of the Code provides an exception with regard to the coordination of the 3-year rule with section 6166(a)(1) for estates of decedents dying after December 31, 1981. Section 2035(d)(4) provides that an estate will be treated as meeting the 35 percent of adjusted gross estate requirement of section 6166(a)(1) only if the estate meets such requirement both with and without the application of the inclusion rule of section 2035(a) with regard to gifts made within 3 years of decedent's death. According to the HouseWays and Means Committee Report on Pub.L. 97-448 this section was added to clarify that the special 3-year rule applies for purposes of section 6166 only to determine eligibility for the deferral provisions (H.R.Rep. No. 794, 97th Cong., 2d Sess. 20 (1982)).

RATIONALE:
Although gifts made by a decedent during his lifetime are generally not included in the gross estate, gifts made in the 3 year period immediately preceding a decedent's death are subject to the special rule provided by section 2035(d)(4) of the Code for purposes of determining the eligibility of the estate for the deferral provisions of section 6166.

In determining the eligibility test under section 2035(d)(4) of the Code, includible gifts under section 2035(a) would be added to the gross estate and thereby increase the adjusted gross estate (the denominator of the section 6166 deferral fraction). If such gifts would have constituted an interest in the closely held business they would also be added to the interest in the closely held business (the numerator of the section 6166 deferral fraction). The amount of includible gifts under section 2035(a) of the Code is determined without regard to any exclusions if a gift tax return was required.

Thus, the correct fraction used to determine if the estate meets the eligibility test under section 2035(d)(4) of the Code through the inclusion of  gifts within 3 years of death in determining the 35 percent of adjusted gross estate requirement is as follows:

541,875 + 187,280.75/1,446,049.74 + 187,280.75 = 45%

Under section 6166(a) of the Code an estate is eligible for the deferral provisions if the value of the closely held business interest exceeds 35 percent of the adjusted gross estate. Moreover, the tax deferral is available only with respect to the portion of the estate tax attributable to the value represented by the closely held business.

The fraction used to determine if the value of a decedent's interest in the closely held business exceeds 35 percent of the adjusted gross estate and to determine the percent of tax, if any, to be deferred is described in section 6166(a)(2) of the Code. Stated algebraically, the numerator and denominator of the section 6166 deferral fraction are as follows:

value of interest in a closely held business which is included in the gross estate/value of the adjusted gross estate

Pursuant to section 2035(d)(1) of the Code gifts made by the Decedent during his lifetime, including those made within 3 years of death are not includible in the gross estate and, therefore, will not be taken into consideration in determining the numerator or the denominator of the deferral fraction.

Thus, the correct deferral fraction under section 6166(a)(2) of the Code to be used by the estate is:

541,875/1,446,049.74 = 37%

Because both the eligibility fraction under section 2035(d)(4) of the Code and the deferral fraction under section 6166(a)(2) produce percentages which exceed the 35 percent of adjusted gross estate requirement, the executor may elect to extend payment of a portion of the Federal estate tax limited to 37 percent.

CONCLUSIONS:

1) Accordingly, the gifts made within 3 years of death are includible in the gross estate only for purposes of determining the estate's eligibility for the deferral provisions under section 6166 of the Code.

2) Such gifts are not includible in determining either the numerator or the denominator of the fraction under section 6166(a)(2) of the Code to be used in computing the amount of estate tax deferrable under section 6166.

3) Such gifts are includible in the gross estate without regard to any exclusions only for purposes of determining the estate's eligibility for the deferral provisions under section 6166 of the Code. No gifts are includible in the gross estate for purposes of determining the amount of deferral provisions under section 6166.

A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Internal Revenue Code provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in this memorandum have not yet been adopted. Therefore, this memorandum will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the memorandum. See section 11.03 of Rev.Proc. 85-2, 1985-1 I.R.B. 33. However, a technical advice memorandum involving a continuing transaction generally is not revoked or modified retroactively if the taxpayer can demonstrate that the criteria in section 11.04 of Rev.Proc. 85-2 are satisfied.

This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code.