In our last issue (Vol. II, No. 1, June, 2007), we reported on Estate of Roski v. Commissioner, where the Tax Court held that the IRS could not automatically require a bond or special lien in order to defer the payment of estate taxes under IRC § 6166. Section 6166 is extremely important for many high net worth families in that it allows the deferred payment of estate taxes where an interest in a closely held business accounts for 35% or more of a decedent’s adjusted gross estate. Prior to Estate of Roski, the IRS interpreted IRC Section 6166 in a manner such that it required estates to either post a bond or agree to a special lien on the estate’s assets in order to qualify for such deferral. Estate of Roski held that the IRS must make a good faith determination in each case as to whether such bond or lien should be required to secure payment of the deferred estate tax.
In response to the Roski case, the IRS recently issued Notice 2007-90 outlining the factors it would consider in determining if a bond or special lien is to be required. These factors include: (i) the duration and stability of the business; (ii) the ability of the estate to pay the installments of tax and interest on a timely basis; and (iii) the compliance history of the business regarding federal tax payments and required filings. The IRS will base its determination on information contained in the federal estate tax return and other information obtained during the audit of the return. In addition, it may ask the estate to provide further information. If the IRS determines that a bond or special lien is required, the estate may seek reconsideration of that determination by the IRS Office of Appeals. The IRS also indicated that it will eventually issue regulations on this subject.
This is an important positive development for families whose wealth is significantly comprised of an interest in a closely held business. Obtaining a bond to ensure the payment of the deferred estate tax is often prohibitively expensive, if available at all. The alternative procedure of allowing a special lien to attach to the assets can often hinder the ability of the business owners to obtain necessary financing for their business. Thus, the change of view on the part of the IRS with respect to this matter is very welcome indeed.