Estate Tax Installment Payments

Under Internal Revenue Code section 6166, an estate that meets all of the requirements of the statute may elect to pay the estate tax attributable to the decedent’s interest in a closely held business in up to 10 equal, annual installments. The first of those annual payments must be made by the 5th anniversary of the due date of the estate tax liability that is not deferred under section 6166.

An estate qualifies for a section 6166 election if the value of the decedent’s interest in the closely held business exceeds 35 percent of the adjusted gross estate, the decedent was a United States citizen or resident at the time of his or her death, and the estate made the election by attaching a full and complete notice of election with a timely filed federal estate tax return.

If the estate qualifies for the election, the estate pays a reduced rate of interest on the portion of estate tax deferred under section 6166; that interest is payable annually during the entire deferral period, and in most instances, interest only is paid during the first four years of the deferral period. The deferred tax is payable in no more than ten equal annual installments, beginning on a date that is not more than five years after the due date of the Federal estate tax return, which is generally nine months from the date of death.

The IRS issued a new notice in connection with section 6166. The IRS’ purpose in a recent notice is to alert taxpayers, tax practitioners, executors and other persons who represent estates, that, in light of a recent Tax Court decision, the Internal Revenue Service is changing its policy and now will determine on a case-by-case basis whether security will be required when a qualifying estate elects under Internal Revenue Code section 6166 to pay all or a part of the estate tax in installments.

The IRS’ motivation for the policy change is the result of the Tax Court’s decision on April 12, 2007, in Estate of Roski v. Commissioner, 128 T.C. 113 (2007), which held that the Internal Revenue Service had abused its discretion by requiring that all estates electing to pay the estate tax in installments under section 6166 must provide a bond (or alternatively a special lien). The court found that it was Congress’s intent that the IRS determine, on a case-by-case basis, that the government’s interest is at risk prior to requiring security from an estate electing to pay the estate tax in installments under section 6166.

The notice invites comments from the public regarding the relevant factors and appropriate standards for determining whether security is deemed to be necessary (and thus will be required) to protect the government’s interest in obtaining full payment of the estate tax and interest thereon when that liability is deferred under section 6166.

For other estate tax planning help or answers to questions about California probate matters, please call Mitchell A. Port at 310.559.5259.