Code §6166 can be a lifesaver for estates with large business assets. The provision will allow qualifying estates to defer payment of estate taxes on their business interests, and then pay off the tax liability over a 10 year period. Interest must be paid annually on the unpaid tax. Essentially, the IRS becomes a bank and allows the estate to defer full payment of the estate tax for up to 15 years. The purpose of the section is to avoid a fire sale of the business interest to pay estate taxes, and thus to allow a more orderly sale to occur or to allow time to pay the tax out of the cash flow of the business or other sources.
In a recent Tax Court case, an estate made several years of interest payments, but then stopped. The estate applied for, and received, additional extensions to make interest payments based on inability to pay and ongoing estate litigation issues. Eventually, however, the IRS lost patience and asserted its rights under Code §6166(g)(3)(A) to terminate the deferred payment arrangement when payments are late. The estate sought to challenge such termination as an abuse of discretion by the IRS.
The Tax Court ruled in favor of the IRS and upheld the termination of the Code §6166 election.
Some takeaways from the case:
a. The estate was embroiled in litigation between beneficiaries and its fiduciaries. To a certain extent, the IRS was sympathetic and granted extensions of times for interest payments. At some point, the IRS lost patience and terminated the election. Oftentimes in estate litigation it is difficult or impossible for the disputants to act coherently or uniformly as to applicable tax issues. Such problems may be used to obtain discretionary extensions of time to pay interest and taxes from the IRS, but the IRS may or may not by sympathetic to such requests.
b. The fact that the total amount of estate tax due is under audit and the subject of dispute with the IRS will not bar the IRS from being able to terminate the Code §6166 election for nonpayment. In this case, one of the business properties was the subject of dispute as to value – the original Form 706 reported its value at approximately $9 million (the value upon which the original Code §6166 deferral was sought and obtained), a supplementary Form 706 reported it at $0, and the IRS is now seeking to value at over $90 million (yikes!). The Tax Court explicitly ruled that such pending valuation matters were not a bar to the IRS terminating the election for nonpayment.
Estate of Franklin Z. Adell, TC Memo 2013-228 (September 30, 2013)