Magazine article The CPA Journal

Estate Tax Deferral and S Corporation Stock

Magazine article The CPA Journal

Estate Tax Deferral and S Corporation Stock

Article excerpt

Stock of an S corporation frequently comprises the bulk of an estate. With such closely held stock, the executor may elect special provisions of IRC Sec. 6166 to defer the payment of estate tax. The rationale of this privilege: a forced sale may be requested and a family business forever lost. While enacted to avoid the forced sale or liquidation of the stock (or the entire corporation) hardship need not be demonstrated.

IRC Sec. 6166 allows for a five-year period of tax deferral for the tax attributable to the closely held business, during which only interest is payable, followed by a ten-year installment period. If the circumstances warrant and the various technical provisions are complied with IRC Sec. 6166 can be a useful strategy.

Ownership of an S corporation is restricted to eligible shareholders. IRC Sec. 1361(b)(1)(B) specifically allows an estate to be an S corporation shareholder. As such the use of IRC Sec. 6166 with its deferral advantage with the estate as a shareholder will not adversely affect the status of the S corporation.

Reg. Sec. 1.641(b)-3 provides that the administration period of an estate cannot be unduly prolonged. If the administration is prolonged beyond a reasonable time in which the executor can fulfill his duties, the estate will be considered terminated for Federal income tax purposes. Once the estate is terminated, there is the possibility an ineligible shareholder may receive S corporation stock which would jeopardize the S corporation status. …

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