Section 6166 Security
Doug H. Moy
March 26, 2008 — 2,626 views
Under IRC Section 6166 (“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 ten equal annual installments. The first of those annual payments must be made by the fourth anniversary of the due date (determined without regard to any extension) 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 (“AGE”), 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 [IRC § 6166(a) and (d)]. If the estate qualifies for the election, the estate pays a reduced rate of interest (2 percent) 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 [IRC §§ 6166(f) and 6601(j)]. 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 [IRC §§ 6166(a)(1) and (3)].
Under IRC Section 6324(a), a general federal estate tax lien arises upon the decedent’s date of death and attaches for ten years to all assets of the gross estate (except those used to pay certain expenses). This general federal estate tax lien may not be extended beyond the ten-year period following the date of death. As a result, when an estate qualifies and elects under Section 6166 to pay estate tax over a period of up to fourteen years, the government’s interest in the deferred estate tax is secured by the general federal estate tax lien for only the first nine years and three months of the installment payment period. (Although the lien runs from the date of death, the installment payment period generally runs from the normal payment due date, nine months after the date of death, thus, reducing the time the general lien protects the government to nine years and three months.) During the final four years and nine months of the fourteen-year installment payment period, the government’s interest is no longer secured by the general estate tax lien. In most cases, approximately one-half of the total deferred estate tax still remains to be paid during that final, unsecured portion of the deferral period.
Code Sections 6166(k)(1) and 6165, however, permit the IRS to require a surety bond (not exceeding double the amount with respect to which the extension is granted) from an estate to ensure payment of the deferred estate tax to be paid in installments under Section 6166. In lieu of a surety bond, the executor (personal representative) may elect to grant the IRS a special extended estate tax lien (in the amount of the deferred amount plus any interest, additional amount, addition to tax, assessable penalty and costs attributable to the deferred amount) to secure the government’s interest [IRC §§ 6166(k)(2) and 6324A]. This special lien does not expire until the earlier of the date the estate tax is paid in full or the tax becomes uncollectible [IRC §§ 6324A(d)(2), 6502, and 6503(d)].
In March 2000, the Treasury Inspector General for Tax Administration recommended, in report 2000-30-059 The Internal Revenue Service Can Improve the Estate Tax Collection Process, that the IRS protect the government’s interest in estate tax deferred under Section 6166. In 2002, in response to that report, the IRS implemented a policy requiring a surety bond or, in the alternative, an IRC Section 6324A special lien, as a prerequisite to making the Section 6166 election. On April 12, 2007, in Estate of Roski v. Commissioner, [128 T.C. 113 (2007)], the Tax Court held that the IRS 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’ 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.
As a result of Estate of Roski, the Treasury Department and the IRS are in the process of establishing standards to be applied on a case-by-case basis in the future to identify those estates making an election under Section 6166 in which the government’s interest in the deferred estate tax and the interest thereon is deemed to be sufficiently at risk to justify the requirement of a bond or special lien. Treasury and the IRS intend to issue regulations implementing those standards and related procedures. Until those regulations are issued, however, the IRS will evaluate the factors described below and all other relevant facts to determine on a case-by-case basis whether, at any time and from time to time during the deferral period, the government’s interest in the estate tax deferred under Section 6166 and interest thereon is sufficiently at risk to justify the requirement of a bond or special lien.
In order to determine whether the government’s interest in the deferred tax is adequately secured up to the amount allowed under IRC Sections 6165 and 6324A, the IRS will consider information contained in the estate tax return, attachments to the return, information obtained during examination in audited cases and any other relevant information, such as duration and stability of the business, ability to pay the installments of tax and interest timely and compliance history of the business. No single factor will be determinative, and not all factors may be relevant to every estate. Estates that have filed returns that do not contain adequate information to make this determination may be contacted and required to provide additional financial information to the IRS for purposes of making this determination. The IRS may terminate an estate’s election for failure to respond to such requests within a reasonable timeframe. If, after this individual evaluation and analysis, the IRS determines there is a sufficient credit risk regarding the government’s collection of the estate tax payments deferred under Section 6166 and the interest thereon, the IRS will notify the estate that it must provide a bond or elect to provide an IRC Section 6324A special lien in lieu of a bond. If the estate then refuses to provide a bond or an IRC Section 6324A special lien, the IRS will terminate the estate’s IRC Section 6166 election. The estate may then seek reconsideration of the termination by the Office of Appeals and, if the Office of Appeals upholds the Service’s determination, the estate then will have the opportunity to petition the Tax Court under IRC Section 7479 for a declaratory judgment with regard to whether its IRC Section 6166 election may be continued [IRC § 7479; Rev. Proc. 2005-33, 2005-24 I.R.B. 1231; Notice 2007-90, 2007-46 I.R.B. 1003].
The factors the IRS will consider in determining whether deferred installment payments of estate tax under Section 6166 pose a sufficient credit risk to the government to justify the requirement of a bond or special lien are described below. In making this determination, the IRS will consider all relevant facts and circumstances, in addition to the factors identified in the following non-exclusive list. No single factor will be determinative, and not all factors may be relevant to every estate.
This interim guidance is applicable to each estate: (1) that timely elects to pay the estate tax in installments under Section 6166 and that timely files a return on or after November 13, 2007; (2) whose return was being classified, surveyed or audited by the IRS as of April 12, 2007; or (3) that is currently in the deferred payment period but that has not yet provided a bond or special lien if (a) the general federal estate tax lien will expire within two years from November 13, 2007 or (b) the IRS reasonably believes that the government’s interest in collecting the deferred estate tax and interest thereon in full is sufficiently at risk to require a bond or special lien [Notice 2007-90, 2007-46 I.R.B. 1003; for additional reading regarding the Service’s position on the present value of oil and gas royalties qualifying for deferred installment payment of estate tax under Section 6166, see Doug H. Moy, “Deferring the Payment of Federal Estate Tax Under IRC § 6166 in View of TAM 9214010,” 18 Tax Management Estates, Gifts and Trusts Journal 107 (July-August 1993)].
Copyright © 2007, 2008 by Doug H. Moy. All rights reserved
Doug H. Moy
Doug H. Moy is a nationally recognized author, consulting specialist, seminar instructor and educator. He has an undergraduate degree from Willamette University and a Masters degree from Washington State University. Since 1979, Mr. Moy has consulted to attorneys, tax practitioners and their clients, as well as assisted practitioners representing clients before the IRS Conference of Right and Appeals Division and Settlement Conference Negotiations. He is noted for his ability to communicate his unparalleled knowledge and experience to practitioners at all levels in his field of expertise; namely, estate/gift taxation and planning, with special expertise in living trusts; community property; lottery prize winnings; structured settlement trusts; extricating clients from abusive trust tax shelters; designing effective estate plans; and preparation of Form 706 Estate Tax Returns and 709 Gift Tax Returns. He offers particular assistance and exceptional skill designing creative, practical solutions to challenging and difficult estate planning situations.