One of the most important estate tax provisions for the owners of closely held businesses is IRC Section 6166, which allows estate tax to be paid in up to ten installments beginning five years after the tax would be otherwise due. This is often a critical provision for the estate of a business owner where the business would otherwise have to be sold in order to fund the payment of the estate tax. Given that estate tax is due nine months after death, a sale could easily result in fire-sale pricing. In order to qualify for the deferral, the decedent must have owned an interest in a closely held business that is included in his gross estate for estate tax purposes and comprises at least 35% of his adjusted gross estate.
IRC Section 6165 authorizes the IRS to require the taxpayer to post a bond to secure the payment of any tax where an extension of time to pay the tax has been granted. IRC Section 6324A allows the estate to agree to a special lien against the property in lieu of posting the bond. In 2002, the IRS decided that it was going to require either a bond or special lien for all estates electing deferred payment under Section 6166. In Estate of Edward P. Roski, decided by the Tax Court in April, the estate challenged the right of the IRS to make a bond or special lien mandatory in all cases. Further, it said that it had investigated getting a bond and was unable to obtain one for the period required. The estate also argued that the special lien would create undue interference with the operation of its business. The IRS already had a general lien on all of the estate’s assets, and the executor, who was the decedent’s son and a very substantial person, remained personally liable for the payment of the estate tax. The IRS attempted to disallow the election under Section 6166 because the estate did not post a bond or agree to a special lien.
The Tax Court ruled in favor of the estate. It said that the Internal Revenue Code does not permit the IRS to adopt a policy of requiring a bond or special lien for all electing estates. Rather, the IRS must review the circumstances of each case and then make a good-faith determination of whether a bond or special lien is necessary. The ruling did not totally end the case, as the estate will now have to prove that requiring a bond or special lien is not necessary to protect the government.
While the case is a victory for the taxpayer, it remains to be seen how this issue will ultimately be resolved. Ideally, since the Section 6166 election is often critical for high net worth families, the IRS should publish specific guidelines about when a bond or special lien will be required.