This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code.
    
Private Letter Ruling 8846001

NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

July 27, 1988

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

ISSUE

   Under the facts described below, what is the correct timing for installment payments of an estate tax deficiency under section 6166 of the Internal Revenue Code:

FACTS

   Decedent, a citizen of the United States, died on May 17, 1980. The estate tax return was timely filed on February 13, 1981. The estate tax due on the return of $115,787.42 [sic] was paid in full.

   Included in the assets of the estate were properties which comprised a closely held business. The estate tax return was examined and it was determined that the closely held business represented 74.18347 percent (rounded to 74 percent) of the adjusted gross estate. The estate agreed to a deficiency of $67,449.18, and filed a notice of election under section 6166 of the Code within 60 days after the issuance of the notice and demand for payment of the deficiency.

Citing Example (1)-(i) in section 20.6166-1(i) of the Estate Tax Regulations, the Estate contends that because 74 percent of the gross estate was a closely held business as of the date the estate tax return was filed, the Estate could have had a maximum deferral of $135,560.36, i.e. 74 percent of the corrected tax liability of $182,736.60 ($115,287.42 tax reported plus $67,449.18 deficiency). Thus, the Estate contends, it has "prepaid" $68,111.00, or approximately one-half of the tax that it could have paid in installments. Furthermore. the Estate contends, because of this "prepayment" of approximately one-half of its deferrable tax, no portion of the tax that it has actually elected to pay in installments, i.e., the $67,449.18 deficiency, need be paid until approximately the sixth installment (or half way through the maximum of 10 annual installment payments after a 5 year deferral).

LAW AND RATIONALE

   Since changes made to section 6166 of the Code by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, affect only estates of decedents dying after 1981, all references to section 6166 in this technical advice memorandum apply to section 6166 as enacted by the Tax Reform Act of 1976, Pub. L. 94-455.

   Section 6166(a) of the Code provides, in general, that 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 death, a citizen or resident of the United States, exceeds 65% of the adjusted gross estate, the executor may elect to pay part of all of the tax in two or more (but not to exceed 10) equal installments.

   Section 6166(d) of the Code provides that any election under subsection (a) shall be made not later than the time prescribed by section 6075(a) for filing the return of tax imposed by section 2001 (including extensions thereof) and shall be made in such manner as the Secretary shall by regulations prescribe.

   Section 6075(a) of the Code provides that returns made under section 6018(a) (relating to estate taxes) shall be filed within 9 months after the date of the decedent's death.

   Section 6166(h)(1) of the Code provides that if a deficiency in the tax imposed by section 2001 is assessed, the estate qualifies under subsection (a)(1), and the executor does not make an election under subsection (a), the executor may elect to pay the deficiency in installments. Section 6166(h)(3) provides that if an election is made under section 6661(h)(1), the deficiency shall (subject to the limitation in subsection (a)(2)) be prorated to the installments which would have been due if an election had been timely made under subsection (a) at the time the estate tax return was filed. Section 6166(h)(3) further provides that the part of the deficiency so prorated to any installment the date for payment of which would have arrived shall be paid at the time of the making of the election under this subsection. The portion of the deficiency so prorated to installments the date for payment of which would not have so arrived shall be paid at the time such installments would have been due if such election had been made.

   Section 20.6166-1(b) of the Estate Tax Regulations provides that the election under section 6166(a) is made by attaching to a timely filed estate tax return a notice of election containing the following information:

1.  The decedent's name and taxpayer identification number as they appear on the estate tax return;
2.  the amount of tax which is to be paid in installments;
3.  the date selected for payment of the first installment;
4.  the number of annual installments including the first installment, in which the tax is to be paid;
5.  the properties shown on the estate tax return which constitute the closely held business interest (identified by schedule and item number); and
6.  the facts which formed the basis for the executor's conclusion that the estate qualifies for payment of the estate tax in installments.

Example (1)-(i) of the section 20.6166-1(i) of the Estate Tax Regulations states:

   Based upon values shown on decedent A's timely filed estate tax return, 60 percent of the value of A's adjusted gross estate consisted of a farm which was a closely held business within the meaning of section 6166. A's executor, B, made a protective election under section 6166 when he filed A's estate tax return. B also applied for an extension of time under section 6161 to pay $15,000 of the $30,000 of estate tax shown due on the return. The requested extension was granted and was renewed at the end of 1 year. Eighteen months after the return was filed and after examination of A's estate tax return, the value of the farm was found to constitute 67 percent of the adjusted gross estate. B entered into an agreement consenting to the value as established on examination and to a deficiency of $5,000. B then filed a final notice of election under section 6166, choosing a 5-year deferral followed by 10 annual installment payments and thereby terminated his extension under section 6161 because that amount of tax was then included under the section 6166 election. B could have extended payment of 67 percent of the total estate tax, or $23,450. $23,450 is eligible for installment payments under section 6166 and the section 6166 election is considered to be for that amount. B is considered to have prepaid $3,450 of tax since only $20,000 of tax remained unpaid. The $3,450 is attributed to the first installment of $2,345 and to $1,105 of the second installment which would have been payable under the section 6166 election.

   A condition precedent for installment payments under section 6166 of the Code is the election provisions of section 6166. Under the provisions of section 6166(a), an election to pay the tax in installments must be made on a timely filed return. Section 20.6166-1(b) of the Estate Tax Regulations sets forth the contents for an election under section 6166(a). In Example (1)-(i) of section 20.6166-1(i) of the Estate Tax Regulations the estate made a protective election under section 6166 when the estate tax return was filed; therefore B was entitled to extend payment of 67 percent of the tax shown on the return, as well as 67 percent of the deficiency. However, the Estate in the instant case did not make an election or protective election under section 6166(a) with the timely return; therefore, the Estate could not, as it contends, have deferred 74 percent of the tax reported and paid with the return. Pursuant to section 6166(h) of the Code, the Estate in the instant case is only entitled to installment payments with respect to 74 percent of the deficiency.

CONCLUSION

   The deficiency agreed upon after the examination of the estate tax return may be paid in installment payments under section 6166(h) of the Code. Accordingly, 26% of the $67,449.18 deficiency (the portion not attributable to an interest in a closely held business) was due by February 17, 1981 (the due date of the estate tax return) and the balance (74% of the $67,449.18 deficiency) is payable in 10 equal installments starting on February 17,1986.

   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 a precedent.