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Estate Tax Payments and Liabilities: Sections 6161 and 6166 (Portfolio 832)

Product Code: TPOR42
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Estate Tax Payments and Liabilities: Sections 6161 and 6166, written by Jonathan E. Gopman, Esq., Greenberg Traurig, P.A., and Paul B. McCawley, Esq., Greenberg Traurig, P.A., describes and analyzes

  • The provisions of the Internal Revenue Code relating to extensions of time to pay estate tax attributable to interests in closely held businesses
  • Extensions of time to pay estate tax attributable to reversionary and remainder interests
  • The necessity to file bonds when extensions to pay estate tax have been granted
  • The apportionment of federal estate tax liability
  • Transferee liability relating to the payment of the estate tax
  • Liens relating to the estate tax
  • The potential personal liability of executors and other fiduciaries relating to the payment of the estate tax

Under §6166, an executor may elect to extend the time for paying estate tax when a specified percentage of an estate consists of an interest in a closely held business. Under §6166, the estate tax attributable to a decedent's interest in a closely held business can be paid over a period of 14 years. In fact, payment of the entire amount of the estate tax attributable to the closely held business interest can be deferred for a period of five years and, thereafter, paid in 10 equal annual installments. The Taxpayer Relief Act of 1997 modified the procedures under §6166 by significantly reducing the interest rate on the deferred tax liability, eliminating any income and estate tax deductions for the interest paid on deferred tax liability, and granting estates easier access to the Tax Court to challenge the IRS when it denies §6166 eligibility. Legislation in 1998 removed obstacles to filing a refund claim during the deferral period. The 2001 Tax Relief Act expanded the availability of the benefits of §6166 by broadening the definition of a closely held business.

If an estate includes a remainder or reversionary interest that qualifies under §6163, an executor may defer payment of the estate tax on such interest until six months after the termination of the preceding interest. Furthermore, for reasonable cause, an executor can extend this period for up to three years beyond the initial six-month period.

If estate tax is required to be paid, the issue of tax apportionment must be considered. Federal and state law aspects of tax apportionment are discussed in this portfolio. Additionally, this portfolio discusses certain issues relating to collection of estate tax by an executor or a third party required to pay the estate tax. An executor may have reimbursement rights under §§2206, 2207, 2207A, 2207B, and state law.

If estate tax is not paid when it is due, a transferee of property included in an estate may be subject to personal liability for the payment of such taxes. Additionally, the IRS may collect unpaid estate tax by enforcing liens that attach to certain property. For instance, the government has a special lien for estate taxes under §6324(a) on the gross estate of a decedent for 10 years from the date of the decedent's death, except for the part of the gross estate used to pay debts and administration expenses. Alternatively, certain liens may exist under §6324A during the deferral period under §6166, or under §6324B during the period an additional tax may be imposed under §2032A. This portfolio discusses transferee liability and the liens that may attach to property with respect to the estate tax.

Finally, an executor has certain obligations with respect to the estate tax, including the obligation to file an estate tax return and pay the estate tax. The executor of an estate, and other fiduciaries, may also be subject to personal liability if funds are distributed prior to the payment of the estate tax or other tax liabilities. This portfolio analyzes the source of this personal liability. This portfolio also explains procedures that a fiduciary may follow to reduce or eliminate his or her exposure to such liabilities. For example, an executor may obtain relief from personal liability for estate taxes under §2204 and for income and gift taxes under §6905.

Estate Tax Payments and Liabilities: Sections 6161 and 6166 allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
  • Invaluable practice documents including tables, charts and lists
  • Plain-English guidance from world-class experts
  • Real-world and in-depth analysis that lets you explore various options
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
  • Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Buy Estate Tax Payments and Liabilities: Sections 6161 and 6166 (Portfolio 832) now.

Detailed Analysis

I. Section 6166 - Deferral of Estate Tax on Business Assets

A. Introduction

B. Historical Note

1. The First Two § 6166s

2. The Third § 6166 - Current Law

3. Regulations

4. Other Precedent

5. Legislative History

C. General Rules of § 6166

1. Qualification - § 6166(a)(1) and (2)

2. Payment Dates - § 6166(a)(3)

3. The Election - § 6166(d)

4. Challenging IRS § 6166 Determinations

a. Section 7479 Declaratory Judgments

b. Section 7422 Refund Actions

D. Definitions and Special Rules

1. Interest in Closely Held Business - § 6166(b)(1)

2. More Closely Held Business Rules - § 6166(b)(2)

3. Farm Structures - § 6166(b)(3)

4. Value - § 6166(b)(4)

5. Closely Held Business Amount - § 6166(b)(5)

6. Adjusted Gross Estate - § 6166(b)(6)

7. Partnership Interests and Non-Readily-Tradable Securities - § 6166(b)(7)

8. Holding Company Election - § 6166(b)(8)

9. Deferral Not Available for Portion of Business Consisting of Passive Assets - § 6166(b)(9)

10. Interest in Lending and Finance Business - § 6166(b)(10)

E. Multiple Closely Held Businesses - § 6166(c)

F. Payment of Certain Estate Tax Deficiencies in Installments - § 6166(e)

G. Due Dates for Interest Payments - § 6166(f)

H. Loss of Right to Defer Payment of Estate Tax - § 6166(g)

1. Disposition of Interest in the Closely Held Business, or Withdrawal of Funds from the Closely Held Business

2. Undistributed Income of the Estate

3. Default by the Estate in Paying Estate Tax Installments and/or Interest

4. Acceleration Under § 6324A

5. No Acceleration upon Distribution to First Heir

I. Late Election Allowed for Certain Deficiency Determinations - § 6166(h)

J. Form of the Election

K. The Special Interest Rate of § 6601(j)

1. Estates of Decedents Dying Before 1998

2. Transition Rule for Estates of Pre-1998 Decedents

L. The Regular Interest Rate - § 6621(b)

M. Relationship to Additional Tax Imposed Under § 2032A

N. Relationship to Generation-Skipping Transfer Tax

O. Post-Estate Closing Procedural Requirements

P. Coordination with § 303

Q. Coordination with § 2035 Gifts Included in Estate

R. Coordination with § § 2011 and 2013 Credits and § 2058 Deduction

S. Coordination with § 2056A

T. Coordination with § 2056(b)(7)

U. S Corporation Stock Held by Estate or Trust During § 6166 Deferral Period

II. Relationship of § 303 Redemptions to § 6166 Acceleration Events

A. Redemptions of Stock Under § 303

B. Definitions and Key Concepts

C. Interplay of the Concepts

D. IRS Ruling Policy

E. Illustration of Optimal Redemption Pattern to Maximize § 303 Redemptions While Preserving the Estate's Right to Continue Estate Tax Deferral

F. Section 303 Buy-Sell Agreements for § 6166 Deferral Estates

III. Deductibility Under § 2053 of Interest Payments During § 6166 Deferral Period - Pre-1997 Act Law

Introductory Material

A. General Planning Considerations

B. The Argument for Deductibility of Estimated Interest

C. The Argument Against Deductibility of Estimated Interest

D. Procedural Aspects of Deduction of Accrued Interest Under § 2053 - Rev. Proc. 81-27 and the Bailly Supplemental Opinion

E. Planning Possibility for Interest Deductibility Under § 2053

F. Deductibility of Overpayment of § 6166 Interest Under § 2053

IV. Section 6163 - Extension of Time to Pay Tax on Value of Reversionary or Remainder Interest

A. Introduction

B. Definition of Reversionary or Remainder Interest

C. Technical Application of § 6163

D. Election

E. Application of Generation-Skipping Transfer Tax

F. Miscellaneous

V. Section 6161 - Extension of Time to Pay Tax

A. General Rules

B. Taxpayer's Burdens of Proof

1. Reasonable Cause

2. Undue Hardship

C. Application for Extension

D. Coordination with § 2011 Credit

E. Application of Generation-Skipping Transfer Tax

VI. Section 6165 - Bonds when Time to Pay Tax Has Been Extended

VII. Apportionment of Federal Estate Taxes

A. Introduction

B. Federal Tax Principles Relating to Apportionment

1. Section 2206

2. Section 2207

3. Section 2207A

4. Section 2207B

C. State Law Principles Relating to Apportionment

D. Directing Against the Default Method of Apportionment

E. Contribution and Reimbursement

1. By the Executor

2. Right of Third Party to Reimbursement or Contribution

3. Tax Consequences of Inability to Collect Reimbursement for Tax

F. How the Executor Should Approach Tax Apportionment After Death

1. Review Will and Other Estate Planning Documents

2. Determine the Applicability of the Federal Reimbursement Provisions

3. Determine Applicable State Law

4. Determine the Method of Apportionment

5. Pay the Estate Tax

6. Seek Contribution or Reimbursement

VIII. Transferee Liability

Introductory Material

A. Personal Liability of Certain Non-Probate Transferees

1. Generally

2. Liability of Donee for Estate Taxes when Gift Made Within Three Years of Death

3. Extent of Transferee's Liability

B. Other Sources of Transferee Liability/Method of Collection

IX. Liens

Introductory Material

A. Special Lien for Estate Taxes

1. Generally

2. Divestment of Special Estate Tax Lien

a. Property Used to Pay Charges Against the Estate and Costs of Administration

b. Probate Property

c. Non-Probate Property

3. Priority Issues

a. Generally

b. "Superpriority" Interests

4. Duration of Lien

B. Special Lien for Estate Tax Deferred Under § 6166

C. Special Lien for Additional Estate Tax Attributable to Special Use Valuation/Qualified Family-Owned Business Interests

D. General Tax Lien

E. Release of Lien or Discharge of Property Subject to Lien

1. Generally

2. Release of Special Estate Tax Lien

F. Filing of Lien

G. Enforcement of Lien

H. State Estate or Inheritance Tax Liens

X. Obligations and Personal Liability of Executor and Other Fiduciaries

Introductory Material

A. Definition of "Executor"

B. Notice of Fiduciary Capacity

C. Obligation to Pay Estate Taxes

D. Obligation to File Estate Tax Return

E. Obligation to File Income and Gift Tax Returns

F. Personal Liability of Executor or Other Fiduciary

1. Generally

2. Elements of Personal Liability

a. Payment by Fiduciary

b. Insolvency of the Estate

c. Claim of the United States

d. Notice of Claim

3. Extent of Fiduciary's Liability

4. Method of Collection

5. Historical Notes

G. Discharge from Personal Liability for Estate Tax

1. Discharge of Executor

2. Discharge of Fiduciary Other than Executor

H. Request for Prompt Assessment of Taxes

I. Discharge of Personal Liability for Income and Gift Taxes

J. Personal Liability Under State Law

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Working Papers

Table of Worksheets

Worksheet 1 Chart Showing Development of § 6166

Worksheet 2 Computation to Determine Whether an Estate Qualifies Under § 6166

Worksheet 3 Computation of Maximum Amount of Tax Payable Under § 6166 and Computation of Amount Due with Return

Worksheet 4 Computation of Deficiency Assessment Under § 6166

Worksheet 5 Sample § 6166 Letter (with Optional Alternate Election of § 6161)

Worksheet 6 Computations Relating to Deductibility of Accrued Interest Under § 2053

Worksheet 7 Model Tax Clauses for Wills

Worksheet 8 Model Letters to IRS

Worksheet 9 Form 4422 - Application for Certificate of Release of Estate Tax Lien

Worksheet 10 Form 1127 - Application for Extension of Time for Payment of Tax

Worksheet 11 Rev. Rul. 72â€"188, 1972â€"1 C.B. 383; Modified by Rev. Rul. 86â€"54, 1986â€"1 C.B. 356

Worksheet 12 House Report on Small Business Tax Revision Act of 1958 (H.R. Rep. No. 2198, 85th Cong., 2d Sess. (1958), 1959â€"2 C.B. 709)

Worksheet 13 The Internal Revenue Service Can Improve the Estate Tax Collection Process




Committee Reports:

Treasury Rulings:

























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Jonathan E. Gopman
Jonathan E. Gopman, shareholder, Greenberg Traurig, P.A.; B.A., University of South Florida; J.D., The Florida State University College of Law (with High Honors); Masters of Law in Estate Planning, University of Miami; member, The Florida Bar (Real Property, Probate and Trust Law Section and Tax Section); North Carolina State Bar; frequent lecturer and author and co-author of numerous articles on tax and estate planning topics. 
Paul B. McCawley
Paul B. McCawley, shareholder, Greenberg Traurig, P.A.; B.S.B.A., University of Florida (with High Honors); J.D., University of Florida College of Law (with Honors); LL.M. in Taxation, New York University School of Law; member, The Florida Bar (Real Property, Probate and Trust Law Section and Tax Section).