Section 6166(b)(7) Provides:

(7) Partnership interests and stock which is not readily tradable

(A) In general

If the executor elects the benefits of this paragraph (at such time and in such manner as the Secretary shall by regulations prescribe), then-

(i) for purposes of paragraph (1)(B)(i) or (1)(C)(i) (whichever is appropriate) and for purposes of subsection (c), any capital interest in a partnership and any non-readily-tradable stock which (after the application of paragraph (2)) is treated as owned by the decedent shall be treated as included in determining the value of the decedent's gross estate,
(ii) the executor shall be treated as having selected under subsection (a)(3) the date prescribed by section 6151(a), and
(iii) for purposes of applying section 6601(j), the 2-percent portion (as defined in such section) shall be treated as being zero.

(B) Non-readily-tradable stock defined

For purposes of this paragraph, the term "non-readily-tradable stock" means stock for which, at the time of the decedent's death, there was no market on a stock exchange or in an over-the-counter market.

Section 6166(b)(1) provides:

(b) Definitions and special rules

(1) Interest in closely held business

For purposes of this section, the term "interest in a closely held business" means-

(A) an interest as a proprietor in a trade or business carried on as a proprietorship;
(B) an interest as a partner in a partnership carrying on a trade or business, if-

(i) 20 percent or more of the total capital interest in such partnership is included in determining the gross estate of the decedent, or
(ii) such partnership had 45 or fewer partners; or

(C) stock in a corporation carrying on a trade or business if-

(i) 20 percent or more in value of the voting stock of such corporation is included in determining the gross estate of the decedent, or
(ii) such corporation had 45 or fewer shareholders.

Section 6166(c) provides:

(c) Special rule for interest in 2 or more closely held businesses
For purposes of this section, interest in 2 or more closely held businesses, with respect to each of which there is included in determining the value of the decedent's gross estate 20 percent or more of the total value of each such business, shall be treated as an interest in a single closely held business. For purposes of the 20-percent requirement of the preceding sentence, an interest in a closely held business which represents the surviving spouse's interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedent's gross estate.

Section 6166(b)(2)(D) provides:

(2) Rules for applying paragraph (1)

For purposes of paragraph (1)-

. . . . . . . . .

(D) Certain interests held by members of decedent's family
All stock and all partnership interests held by the decedent or by any member of his family (within the meaning of section 267(c)(4)) shall be treated as owned by the decedent.

Before a section 6166(b)(7) election can be contemplated, however, the estate tax value of the business interests must exceed 35% of the adjusted gross estate.

1.  The Closely Held Business Value Must Exceed 35% of the Adjusted Gross Estate

The estate tax value of the decedent’s interest in a closely held business is the same both before and after a section 6166(b)(7) election. If this value (or aggregation of values) does not initially exceed 35% of the decedent’s adjusted gross estate, a section 6166(b)(7) election cannot change this result. PLR 200529006 states:

Section 6166(a)(1) provides, in part, 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 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 two or more (but not exceeding ten) equal installments.

. . . . . . .

In other words, unless the estate tax value of the closely held business exceeds 35% of the adjusted gross estate, a section 6166 election of any type may not be made. A section 6166(b)(7) election does not change the estate tax value of a decedent's interest in a closely held business.

2.  The Section 6166(b)(2)(D) Automatic Attribution Applies Only For Purposes of Counting the Number of Partners or Shareholders; Section 6166(b)(7) Requires a Specific Election

Section 6166(b)(2)(D) attributes to the decedent by operation of law the business interests held by section 267(c)(4) family members. An election is not required.

Section 6166(b)(2)(D) provides

All stock and all partnership interests held by the decedent or by any member of his family (within the meaning of section 267(c)(4)) shall be treated as owned by the decedent.

Section 267(c)(4) provides

The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

This automatic attribution does not function as a section 6166(b)(7) election. PLR 200529006 states:

The attribution rules in section 6166(b)(2) apply for purposes of determining whether a corporation has 45 or fewer shareholders within the meaning of section 6166(b)(1). The attribution rules do not apply for purposes of the 35% test of section 6166(a)(1), the 20% test in section 6166(b)(1)(B)(i) and 6166(b)(1)(C)(i), or the formula used in determining the maximum amount of tax that may be paid in installments set forth in section 6166(a)(2).
. . . . . .
To obtain the benefits of section 6166(b)(7), the executor must specifically elect its application. Note, however, that if elected the payment period for the estate tax due cannot exceed 10 years and the special interest provision in section 6601(j) will not apply.

3.  The 20% Tests Must Be Satisfied

There are two 20% ownership tests and one 20% valuation test within section 6166 that can be satisfied with a section 6166(b)(7) election.

Section 6166(b)(1) – Interest in a Closely Held Business
If there are more than 45 partners or shareholders in a closely held business, then

a.  Section 6166(b)(1)(B)(1) requires that the decedent’s gross estate include 20% or more of the total capital interest in the partnership; and
b.  Section 6166(b)(1)(C)(1) requires that the decedent’s gross estate include 20% or more in value of the voting stock in the corporation.

In either case, if there are 45 or fewer partners or shareholders, there is no 20% requirement – it is simply a question of whether or not the closely held business value included in the gross estate exceeds 35% of the adjusted gross estate. A section 6166(b)(7) election would not be applicable.

Section 6166(c)  -Special Rule For Interest in 2 or More Closely Held Businesses
This subsection provides

c) Special rule for interest in 2 or more closely held businesses

For purposes of this section, interest in 2 or more closely held businesses, with respect to each of which there is included in determining the value of the decedent's gross estate 20 percent or more of the total value of each such business, shall be treated as an interest in a single closely held business. For purposes of the 20-percent requirement of the preceding sentence, an interest in a closely held business which represents the surviving spouse's interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedent's gross estate.