CCA 201144027 AND SECTION 6166 BIFURCATION
IRS released Chief Counsel Email advice number 201144027 on Nov-04-2011. The email was sent on Aug-22-2011, presumably to someone at Cincinnati Campus who was holding a bifurcation election statement for a newly-filed estate tax return. The estate sought to bifurcate the tax between a 6166(b)(8) holding company business interest and a regular 6166(a) operating company interest. Counsel agreed with the Cincinnati denial of the bifurcation election, forcing the estate to choose between a 10-year (or 5-year) election for the entire amount of deferred tax because the 6166(b)(8) interest was included, or a regular 14-year deferral for the tax attributable to the 6166(a) business interest alone.
In CCA 201144027 the Counsel attorney wrote:
I apologize for the delay in getting back to you on this.
The question being posed is whether making the election under section 6166(b)(8) means the treatment specified therein applies to the entirety of the estate tax, or just the portion qualifying under 6166(b)(8). The estate says it's just the qualifying portion; the service center has opined (without providing any reasoning) that it's the entirety of the tax.
Very few legal authorities even mention 6166(b)(8), and those that do focus on the fact that 6166(b)(8) was designed to qualify certain interests for installment-payment treatment that would otherwise not qualify. Since neither the statute nor any authorities mention the availability of a "bifurcated" election (what the estate is urging), my thinking is that such an election is not available -- rather, the estate has to either elect to avail itself of 6166(b)(8), thus forfeiting the deferral option provided by section 6166(a)(3), or not make a 6166(b)(8) election, preserving the option to defer payments that is provided in section 6166(a)(3). .
FYI, in researching this I attempted to talk to the person who provided the original service center advice. I reached ------------, the person designated as the contact person in the letter from the service center containing the election determination. ---- - told me that the advice had come from an attorney who has since retired. She also told me that the advice has since been given with respect to other estates.
I hope that this response is helpful. Please let me know if you would like to discuss this issue further.
This advice is correct if the values of the 6166(b)(8) and 6166(a) business interests do not each exceed 35% of the adjusted gross estate and are being aggregated under section 6166(c) - but it is not correct if the two business values each exceed 35% of the adjusted gross estate and the two business interests are not aggregated under section 6166(c), because then it would be inconsistent with earlier advice sent from Counsel in which bifurcation was most assuredly permitted under the same circumstances, and would also be inconsistent with current IRS Appeals IRM provisions. See below.
The reasoning applied at Cincinnati Campus is valid only if a 6166(c) aggregation, which is to be treated as an interest in a single closely held business, is the interest for which a bifurcation election is made. If a 6166(b)(8) holding company is aggregated with a 6166(a) operating company under section 6166(c), the entire amount of tax is restricted to the deferral terms applicable to the most restrictive business interest in the mix – in this case, the (b)(8) business. There is no bifurcation within a 6166(c) aggregation.
Historical Notes: From the Author's personal experience, in 2004 this position had not been refined to the point where it was limited only to a 6166(c) situation – Counsel’s thinking then was that it applied across the board to all 6166 elections, and this position was then adopted at Cincinnati Campus.
However, by 2008 the thinking had evolved to the point where bifurcation was to be denied only in a 6166(c) situation; if, say, section 6166(b)(8) and 6166(a) business interest values each exceeded 35% of the adjusted gross estate and were not aggregated under section 6166(c), then bifurcation would be allowed. But nothing officially stating these precepts was published. See, however, e.g., CCA 200910042, for an email advice to the field permitting bifurcation between one business interest composed of a section 6166(c) aggregation and another business interest that independently qualified for a 6166 deferral. This email was sent January 13, 2009 and was released March 6, 2009.
In 2009 a provision for bifurcation of 6166 elections clearly stating this concept was incorporated in the Cincinnati Campus IRM at section 18.104.22.168.6.4, which provides:
If the estate owns two businesses that independently qualify for the IRC 6166 election, the executor may elect to bifurcate the installment payments. By contrast, if the estate owns two or more businesses that do not independently qualify for the IRC 6166 election, the interests may be treated as an interest in a single closely held business to determine eligibility. IRC 6166(c).
This IRM provision is still posted on the IRS website.
In addition, Appeals IRM 22.214.171.124.2.9 (August 18, 2014) provides:
9. If the decedent owns two businesses that independently qualify for the IRC section 6166 election, the estate may elect to bifurcate the installment payments. Bifurcation allows the taxpayer to pay taxes attributable to each closely held business over the longest installment period available for that particular business. To receive this treatment, the executor must make a separate election for each business.
After 2009, persons who had been involved with this evolution in thinking moved on to other positions within IRS or retired, and the institutional knowledge of this subject slowly began to degrade. Today, the earlier across-the-board position is remembered and is being applied – albeit improperly in non-6166(c) cases.