Magazine article The CPA Journal

Deferring Payment of Estate Tax

Magazine article The CPA Journal

Deferring Payment of Estate Tax

Article excerpt


By Albert De Rosa, CPA Charles Hecht & Company

Under IRC Sec. 6166, if the value of a closely held business is more than 35% of the adjusted gross estate, an estate may elect to defer payment for up to five years on that portion of its estate tax that is attributable to the estate tax value of the closely held business. The deferred tax is paid in installments over 10 years.

The basic purpose of this provision is to permit continuation of a business enterprise where the death of a business owner results in the imposition of a significant estate tax. Consequently, a "distress sale" at reduced prices is not necessary to generate funds to pay the estate tax liability. By extending the period for payment of estate tax, the tax can be paid from later earnings. With more time, the heirs may be able to retain the business within the family or plan for an orderly disposition.


The term "interest in a closely held business" is defined in IRC Sec. 6166(b)(1) as:

1. An interest as sole proprietor in a trade or business;

2. A partnership interest in a trade or business if either a) the partnership has no more than 15 partners or b) 20% or more of the total capital interest in the partnership is included in the gross estate; or

3. Stock in a corporation carrying on a trade or business if either a) the corporation has no more than 15 stockholders or b) 20% or more of the value of the corporation's voting stock is included in the decedent's gross estate. The number of partners or shareholders is determined as of the time immediately before the decedent's death.

In Rev. Rul. 75-365, the IRS set forth a more narrow definition of "trade or business" than the meaning given the phrase in other areas of the tax law. The IRS stated that the election was not intended to protect continued management of income-producing properties or to permit deferral of the tax merely because the payment of the tax might make necessary the sale of income-producing assets. An exception would be where the income-producing assets formed a part of an active enterprise producing business income rather than income solely from the ownership of property. Although the management of rental property by the owner may, for some purposes, be considered the conduct of a trade or business in the case of a sole proprietorship, IRC Sec. 6166 was intended to apply only with regard to a business such as a manufacturing, mercantile, or service enterprise, as distinguished from management of investment assets.


In PLR 9128024, the IRS determined that real estate interests may qualify as an interest in a closely held business. …

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