In PLR 201403012, released January 17, 2014, the IRS ruled that a complex estate with multiple commercial real estate fractional interests held in one of the businesses could transfer those interests from the business pro rata to the estate, and then pro rata from the estate to separate LLCs established for each property, without triggering a section 6166(g)(1) acceleration of tax deferred under section 6166.
| Summary of PLR 201403012 | ||
| 1 | Decedent died testate owning a greater than 20 percent interest in each of several closely held | |
| • general partnerships | ||
| • limited liability companies (LLCs), and | ||
| • corporations | ||
| 2 | Decedent and another individual owned a number of commercial real estate rental properties as tenants in common as nominees for one of the general partnerships, which is named "Business" in the PLR. | |
| 3 | The executors of Decedent's estate timely filed an estate tax return and made a section 6166 election to defer payment of the estate tax attributable to the aggregate value of Decedent's interests in the general partnerships (including "Business"), LLCs, and corporations. "Business" represents more than 50% of the total value of the business interests aggregated under §6166(c). | |
| 4 | For business purposes Decedent's estate and the other individual tenant in common wished to restructure "Business" as follows: | |
| "Business" would transfer each of the properties owned by it pro rata Y % to Decedent's estate and the remainder to the other tenant in common. | ||
| Thereafter, Decedent's estate and the other tenant in common would contribute its or his respective interest in one or more of the properties to separate LLCs in return for an interest in the LLC equal in value to the property contributed. | ||
| Each LLC would be owned pro rata by Decedent's estate and the other person, namely Y % by Decedent's estate and the remainder by the other person. | ||
| Each LLC would continue the active business previously conducted by "Business" with respect to that particular property. | ||
| There would be no withdrawal of money or other property from the closely held business as a result of the proposed transaction. | ||
| 5 | Decedent's estate requested rulings that neither | |
| (a) the distribution pro rata of one or more properties from "Business" to Decedent' estate and the other tenant in common, nor | ||
| (b) the subsequent contribution of each property by Decedent's estate and the other tenant in common to the LLCs would constitute a distribution, sale, exchange or other disposition of an interest in a closely held business within the meaning of §6166(g)(1). | ||
| In addition, | ||
| (a) the distribution pro rata of one or more properties from "Business" to Decedent's estate and the other tenant in common, and | ||
| (b) the subsequent contribution of such properties by Decedent's estate and the other tenant in common to the LLCs, taken in the aggregate, would not result in an acceleration of the installment payments of Federal estate tax provided in §6166(a). | ||
| 6 | Because "Business" represents more than 50% of the total value of the closely held business interests reported on the Decedent's estate tax return and aggregated under §6166(c), if the transaction is a distribution, sale, exchange, or other disposition under §6166(g)(1), it would exceed the 50 % threshold of §6166(g)(1)(A)(ii), with the result that the §6166 extension would terminate and the unpaid portion of the estate tax payable in installments would have to be paid on notice and demand. | |
| 7 | Conclusion: The IRS determined that neither the proposed distributions pro rata from "Business" to Decedent's estate and the other tenant in common, nor the subsequent contribution of each property by Decedent's estate and the other tenant in common to the LLCs would constitute a distribution, sale, exchange, or other disposition of an interest in a closely held business under §6166(g)(1). Furthermore, the distributions pro rata from the Decedent's estate and subsequent contributions of property to the LLCs, taken in the aggregate, would not result in the acceleration of the installment payments of Federal estate tax provided in §6166(a). | |
| 8 | Rationale: | |
| Rev. Rul. 66-62 holds that where the change in the operation of a business from an incorporated form to an unincorporated form does not materially alter the business or the interest of the estate in the business, such a change will not result in the termination of the installment privilege under §6166 that is otherwise available to the estate. | ||
| In this case, after the proposed transactions have been completed, the Estate and the other former tenant in common will continue operation of the trade or business in substantially the same manner as before; the business will not be materially altered. There will be no withdrawal of money or other property from the business formerly conducted by "Business". Decedent's estate will hold the same proportionate interest in each LLC as Decedent held in "Business" when he died. | ||
| PLR 201403012 Comment 1: The last paragraph of the PLR provides: |
|
Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, this ruling 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 ruling. See section 11.04 of Rev. Proc. 2013-01. However, when the criteria in section 11.05 of Rev. Proc. 2013-01 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances. |
| Anecdotal evidence indicates that IRS will issue proposed regulations for section 6166 that incorporate and replace Regulations §20.6166-1 and §20.6166A-1 through §20.6166A-4. The proposed regulations will also include provisions for bifurcation of the deferral of the payment of estate tax attributable to a decedent's interests in closely held businesses. |
|
PLR 201403012 - Computation Illustration 1
|
||||
| Gross estate | 57,500,000.00 | |||
| Allowable Schedules J, K, and L deductions | 7,500,000.00 | |||
| §6166(b)(6) adjusted gross estate - and also the taxable estate in this illustration | 50,000,000.00 | |||
| Net estate tax | 17,820,000.00 | |||
| Total estate tax value of all closely held business interests included in the gross estate that qualify for an extension of time for payment under section 6166 | 40,000,000.00 | |||
| §6166(a)(2) ratio for the maximum amount of tax which may be paid in installments, determined as follows: | .800000 | |||
| (a) Total closely held business value | 40,000,000.00 | |||
| (b) §6166(b)(6) adjusted gross estate | 50,000,000.00 | |||
| (a) divided by (b), rounded to 6 decimal places | .800000 | |||
| Maximum amount of tax which may be paid in installments | 14,256,000.00 | |||
| This computation is based on the facts presented in PLR 201403012. The figures here are hypothetical, but the mathematical conclusions replicate those indicated in the PLR. The date of death for this computation is in 2016. | ||||
|
PLR 201403012 - Computation Illustration 1 - Details of the Closely Held Business Interests
|
||||
| Total estate tax value of all closely held business interests, aggregated under §6166(c) | 40,000,000.00 | |||
| Estate Tax Value | §6166(a)(2) Ratio | Percentage of Total Business Value | ||
| General Partnership - named "Business". This constitutes 52.0000% of the total closely held business value. | 20,800,000.00 | .416000 | 52.0000% | |
| Aggregate value of the LLCs | 12,800,000.00 | .256000 | 32.0000% | |
| Aggregate value of the Corporations | 6,400,000.00 | .128000 | 16.0000% | |
| Column totals | 40,000,000.00 | .800000 | 100.0000% | |
| "Business" constitutes more than 50% of the total closely held business value. If IRS were to determine that the transactions involving "Business" assets described in the PLR did in fact constitute a distribution, sale, exchange, or other disposition within the meaning of §6166(g)(1), that would result in the acceleration of the installment payments for the entire closely held business interest. However, if the value of "Business" was less than 50% of the total closely held business value, there would be no acceleration; the 50% threshold in §6166(g)(1) is an "all or nothing" threshold. | ||||
A Bifurcation Election Could Prevent a Complete Termination of the 6166 Election
If at the time the original return is being filed the estate plans to sell or distribute one of the closely held businesses, and if certain parameters are satisfied, the estate could file a bifurcated section 6166 election with the return to continue the §6166 election with respect to the other closely held business interests that will not be sold or disposed of.
In the PLR, Business constituted more than 50% of the § 6166(c) aggregate value. If the transfers of interests in Business were determined to constitute a distribution, sale, or withdrawal of property within the meaning of section 6166(g)(1)(A), then on the date such transfers equaled or exceeded 50% of the value of the trade or business (the § 6166(c) aggregate value) 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.
If -
- the value of the business interest being sold or disposed of equals 50% or more of the total closely held business value, and
- the value of the business interest being sold or disposed of exceeds 35% of the adjusted gross estate, and
- the value of all other closely held business interests in the aggregate also exceeds 35% of the adusted gross estate,
then an estate could make a bifurcated §6166 election to continue the deferral of estate tax attribtable to the business interests that are not sold or disposed of.
If a bifurcated § 6166(a)(1) election is made, then
- a sale or disposition of a business constituting more than 50% of all businesses qualifying for the § 6166(a)(1) election would accelerate only the tax attributable to that business; and,
- the balance of tax attributable to the other businesses would remain eligible for the § 6166 election.
|
PLR 201403012 - Computation Illustration 1 - Details of a §6166 Bifurcation Election
|
||||
| Total estate tax value of all closely held business interests | 40,000,000.00 | |||
| Net estate tax | 17,820,000.00 | |||
| Maximum amount of tax which may be paid in installments | 14,256,000.00 | |||
| First Bifurcation Computation - Section 6166(a) 14-Year Election | ||||
| Estate Tax Value | §6166(a)(2) Ratio | Estate Tax Which May be Paid in Installments | ||
| General Partnership - named "Business". | 20,800,000.00 | .416000 | 7,413,120.00 | |
| Second Bifurcation Computation - Section 6166(a) 14-Year Election | ||||
| Aggregate value of the LLCs | 12,800,000.00 | .256000 | 0.00 | |
| Aggregate value of the Corporations | 6,400,000.00 | .128000 | 0.00 | |
| Column totals (these businesses must be aggregated under §6166(c) because neither business grouping alone exceeds 35% of the adjusted gross estate. Further, in this example the estate tax value of all closely held business interests being aggregated under §6166(c) exceeds 20% of the full value of each such business.) | 19,200,000.00 | .384000 | 6,842,880.00 | |
| IRS Office of Chief Counsel has determined that section 6166(c) can apply to some, but not all, of a decedent's business interests when a bifurcation election is made. See CCA 200910042. Section 6166(c) is utilized within the second bifurcation election so that the combined value exceeds 35% of the adjusted gross estate. | ||||
| If the estate sells or disposes of the General Partnership assets, then section 6166(g)(1) would terminate the section 6166 election on the date that the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 50% of the value of such interest. The unpaid portion of the $7,413,120 tax payable in installments would then be payable upon notice and demand. Meanwhile, the section 6166 election would continue for the $6,842,880 tax payable in installments under the second bifurcation election. Without bifurcation, the unpaid balance of the entire amount of tax payable in installments - $14,256,000 - would be payable upon notice and demand. | ||||
| PLR 201403012 Comment 2: In a bifurcation election the 50% threshold for a section 6166(g)(1) acceleration would be reduced. In this bifurcation example the 50% threshold is no longer 50% of $40,000,000 - it becomes bifurcated. The threshold in the first bifurcation computation is 50% of $20,800,000, or $10,400,000, and in the second bifurcation computation it is 50% of $19,200,000, or $9,600,000. Without bifurcation the estate could sell or dispose of some $19,900,000 in assets without triggering a section 6166(g)(1) acceleration because the 50% threshold would not have been met. |