Extension of time for payment of estate tax where estate consists largely of interest in closely held business

# (a) 5-year deferral; 10-year installment payment

(1) In general If the value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.

(2) Limitation The maximum amount of tax which may be paid in installments under this subsection shall be an amount which bears the same ratio to the tax imposed by section 2001 (reduced by the credits against such tax) as— (A) the closely held business amount, bears to (B) the amount of the adjusted gross estate.

(3) Date for payment of installments If an election is made under paragraph (1), the first installment shall be paid on or before the date selected by the executor which is not more than 5 years after the date prescribed by section 6151(a) for payment of the tax, and each succeeding installment shall be paid on or before the date which is 1 year after the date prescribed by this paragraph for payment of the preceding installment.

# (b) Definitions and special rules

(1) Interest in closely held business For purposes of this section, the term “interest in a closely held business” means— (A) an interest as a proprietor in a trade or business carried on as a proprietorship; (B) an interest as a partner in a partnership carrying on a trade or business, if— (i) 20 percent or more of the total capital interest in such partnership is included in determining the gross estate of the decedent, or (ii) such partnership had 45 or fewer partners; or (C) stock in a corporation carrying on a trade or business if— (i) 20 percent or more in value of the voting stock of such corporation is included in determining the gross estate of the decedent, or (ii) such corporation had 45 or fewer shareholders.

(2) Rules for applying paragraph (1) For purposes of paragraph (1)— (A) Time for testing Determinations shall be made as of the time immediately before the decedent’s death.

(B) Certain interests held by husband and wife Stock or a partnership interest which— (i) is community property of a husband and wife (or the income from which is community income) under the applicable community property law of a State, or (ii) is held by a husband and wife as joint tenants, tenants by the entirety, or tenants in common, shall be treated as owned by one shareholder or one partner, as the case may be.

(C) Indirect ownership Property owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. For purposes of the preceding sentence, a person shall be treated as a beneficiary of any trust only if such person has a present interest in the trust.

(D) Certain interests held by members of decedent’s family All stock and all partnership interests held by the decedent or by any member of his family (within the meaning of section 267(c)(4)) shall be treated as owned by the decedent.

(3) Farmhouses and certain other structures taken into account For purposes of the 35-percent requirement of subsection (a)(1), an interest in a closely held business which is the business of farming includes an interest in residential buildings and related improvements on the farm which are occupied on a regular basis by the owner or lessee of the farm or by persons employed by such owner or lessee for purposes of operating or maintaining the farm.

(4) Value For purposes of this section, value shall be value determined for purposes of chapter 11 (relating to estate tax).

(5) Closely held business amount For purposes of this section, the term “closely held business amount” means the value of the interest in a closely held business which qualifies under subsection (a)(1).

(6) Adjusted gross estate For purposes of this section, the term, “adjusted gross estate” means the value of the gross estate reduced by the sum of the amounts allowable as a deduction under section 2053 or 2054. Such sum shall be determined on the basis of the facts and circumstances in existence on the date (including extensions) for filing the return of tax imposed by section 2001 (or, if earlier, the date on which such return is filed).

(7) Partnership interests and stock which is not readily tradable (A) In general If the executor elects the benefits of this paragraph (at such time and in such manner as the Secretary shall by regulations prescribe), then— (i) for purposes of paragraph (1)(B)(i) or (1)(C)(i) (whichever is appropriate) and for purposes of subsection (c), any capital interest in a partnership and any non-readily-tradable stock which (after the application of paragraph (2)) is treated as owned by the decedent shall be treated as included in determining the value of the decedent’s gross estate, (ii) the executor shall be treated as having selected under subsection (a)(3) the date prescribed by section 6151(a), and (iii) for purposes of applying section 6601(j), the 2-percent portion (as defined in such section) shall be treated as being zero. (B) Non-readily-tradable stock defined For purposes of this paragraph, the term “non-readily-tradable stock” means stock for which, at the time of the decedent’s death, there was no market on a stock exchange or in an over-the-counter market.

(8) Stock in holding company treated as business company stock in certain cases (A) In general If the executor elects the benefits of this paragraph, then— (i) Holding company stock treated as business company stock For purposes of this section, the portion of the stock of any holding company which represents direct ownership (or indirect ownership through 1 or more other holding companies) by such company in a business company shall be deemed to be stock in such business company. (ii) 5-year deferral for principal not to apply The executor shall be treated as having selected under subsection (a)(3) the date prescribed by section 6151(a). (iii) 2-percent interest rate not to apply For purposes of applying section 6601(j), the 2-percent portion (as defined in such section) shall be treated as being zero.

(B) All stock must be non-readily-tradable stock (i) In general No stock shall be taken into account for purposes of applying this paragraph unless it is non-readily-tradable stock (within the meaning of paragraph (7)(B)). (ii) Special application where only holding company stock is non-readily-tradable stock If the requirements of clause (i) are not met, but all of the stock of each holding company taken into account is non-readily-tradable, then this paragraph shall apply, but subsection (a)(1) shall be applied by substituting “5” for “10”.

(C) Application of voting stock requirement of paragraph (1)(C)(i) For purposes of clause (i) of paragraph (1)(C), the deemed stock resulting from the application of subparagraph (A) shall be treated as voting stock to the extent that voting stock in the holding company owns directly (or through the voting stock of 1 or more other holding companies) voting stock in the business company.

(D) Definitions For purposes of this paragraph— (i) Holding company The term “holding company” means any corporation holding stock in another corporation. (ii) Business company The term “business company” means any corporation carrying on a trade or business.

(9) Deferral not available for passive assets (A) In general For purposes of subsection (a)(1) and determining the closely held business amount (but not for purposes of subsection (g)), the value of any interest in a closely held business shall not include the value of that portion of such interest which is attributable to passive assets held by the business. (B) Passive asset defined For purposes of this paragraph— (i) In general The term “passive asset” means any asset other than an asset used in carrying on a trade or business. (ii) Stock treated as passive asset The term “passive asset” includes any stock in another corporation unless— (I) such stock is treated as held by the decedent by reason of an election under paragraph (8), and (II) such stock qualified under subsection (a)(1). (iii) Exception for active corporations If— (I) a corporation owns 20 percent or more in value of the voting stock of another corporation, or such other corporation has 45 or fewer shareholders, and (II) 80 percent or more of the value of the assets of each such corporation is attributable to assets used in carrying on a trade or business, then such corporations shall be treated as 1 corporation for purposes of clause (ii). For purposes of applying subclause (II) to the corporation holding the stock of the other corporation, such stock shall not be taken into account.

(10) Stock in qualifying lending and finance business treated as stock in an active trade or business company (A) In general If the executor elects the benefits of this paragraph, then— (i) Stock in qualifying lending and finance business treated as stock in an active trade or business company For purposes of this section, any asset used in a qualifying lending and finance business shall be treated as an asset which is used in carrying on a trade or business. (ii) 5-year deferral for principal not to apply The executor shall be treated as having selected under subsection (a)(3) the date prescribed by section 6151(a). (iii) 5 equal installments allowed For purposes of applying subsection (a)(1), “5” shall be substituted for “10”. (B) Definitions For purposes of this paragraph— (i) Qualifying lending and finance business The term “qualifying lending and finance business” means a lending and finance business, if— (I) based on all the facts and circumstances immediately before the date of the decedent’s death, there was substantial activity with respect to the lending and finance business, or (II) during at least 3 of the 5 taxable years ending before the date of the decedent’s death, such business had at least 1 full-time employee substantially all of whose services were the active management of such business, 10 full-time, nonowner employees substantially all of whose services were directly related to such business, and $5,000,000 in gross receipts from activities described in clause (ii). (ii) Lending and finance business The term “lending and finance business” means a trade or business of— (I) making loans, (II) purchasing or discounting accounts receivable, notes, or installment obligations, (III) engaging in rental and leasing of real and tangible personal property, including entering into leases and purchasing, servicing, and disposing of leases and leased assets, (IV) rendering services or making facilities available in the ordinary course of a lending or finance business, and (V) rendering services or making facilities available in connection with activities described in subclauses (I) through (IV) carried on by the corporation rendering services or making facilities available, or another corporation which is a member of the same affiliated group (as defined in section 1504 without regard to section 1504(b)(3)). (iii) Limitation The term “qualifying lending and finance business” shall not include any interest in an entity, if the stock or debt of such entity or a controlled group (as defined in section 267(f)(1)) of which such entity was a member was readily tradable on an established securities market or secondary market (as defined by the Secretary) at any time within 3 years before the date of the decedent’s death.

# (c) Special rule for interest in 2 or more closely held businesses

For purposes of this section, interest in 2 or more closely held businesses, with respect to each of which there is included in determining the value of the decedent’s gross estate 20 percent or more of the total value of each such business, shall be treated as an interest in a single closely held business. For purposes of the 20-percent requirement of the preceding sentence, an interest in a closely held business which represents the surviving spouse’s interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedent’s gross estate.

# (d) Election

Any election under subsection (a) shall be made not later than the time prescribed by section 6075(a) for filing the return of tax imposed by section 2001 (including extensions thereof), and shall be made in such manner as the Secretary shall by regulations prescribe. If an election under subsection (a) is made, the provisions of this subtitle shall apply as though the Secretary were extending the time for payment of the tax.

# (e) Proration of deficiency to installments

If an election is made under subsection (a) to pay any part of the tax imposed by section 2001 in installments and a deficiency has been assessed, the deficiency shall (subject to the limitation provided by subsection (a)(2)) be prorated to the installments payable under subsection (a). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.

# (f) Time for payment of interest

If the time for payment of any amount of tax has been extended under this section— (1) Interest for first 5 years Interest payable under section 6601 of any unpaid portion of such amount attributable to the first 5 years after the date prescribed by section 6151(a) for payment of the tax shall be paid annually.

(2) Interest for periods after first 5 years Interest payable under section 6601 on any unpaid portion of such amount attributable to any period after the 5-year period referred to in paragraph (1) shall be paid annually at the same time as, and as a part of, each installment payment of the tax.

(3) Interest in the case of certain deficiencies In the case of a deficiency to which subsection (e) applies which is assessed after the close of the 5-year period referred to in paragraph (1), interest attributable to such 5-year period, and interest assigned under paragraph (2) to any installment the date for payment of which has arrived on or before the date of the assessment of the deficiency, shall be paid upon notice and demand from the Secretary.

(4) Selection of shorter period If the executor has selected a period shorter than 5 years under subsection (a)(3), such shorter period shall be substituted for 5 years in paragraphs (1), (2), and (3) of this subsection.

# (g) Acceleration of payment

(1) Disposition of interest; withdrawal of funds from business (A) If— (i) (I) any portion of an interest in a closely held business which qualifies under subsection (a)(1) is distributed, sold, exchanged, or otherwise disposed of, or (II) money and other property attributable to such an interest is withdrawn from such trade or business, and (ii) the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 50 percent of the value of such interest, then the extension of time for payment of tax provided in subsection (a) shall cease to apply, and the unpaid portion of the tax payable in installments shall be paid upon notice and demand from the Secretary.

(B) In the case of a distribution in redemption of stock to which section 303 (or so much of section 304 as relates to section 303) applies— (i) the redemption of such stock, and the withdrawal of money and other property distributed in such redemption, shall not be treated as a distribution or withdrawal for purposes of subparagraph (A), and (ii) for purposes of subparagraph (A), the value of the interest in the closely held business shall be considered to be such value reduced by the value of the stock redeemed. This subparagraph shall apply only if, on or before the date prescribed by subsection (a)(3) for the payment of the first installment which becomes due after the date of the distribution (or, if earlier, on or before the day which is 1 year after the date of the distribution), there is paid an amount of the tax imposed by section 2001 not less than the amount of money and other property distributed.

(C) Subparagraph (A)(i) does not apply to an exchange of stock pursuant to a plan of reorganization described in subparagraph (D), (E), or (F) of section 368(a)(1) nor to an exchange to which section 355 (or so much of section 356 as relates to section 355) applies; but any stock received in such an exchange shall be treated for purposes of subparagraph (A)(i) as an interest qualifying under subsection (a)(1).

(D) Subparagraph (A)(i) does not apply to a transfer of property of the decedent to a person entitled by reason of the decedent’s death to receive such property under the decedent’s will, the applicable law of descent and distribution, or a trust created by the decedent. A similar rule shall apply in the case of a series of subsequent transfers of the property by reason of death so long as each transfer is to a member of the family (within the meaning of section 267(c)(4)) of the transferor in such transfer.

(E) Changes in interest in holding company If any stock in a holding company is treated as stock in a business company by reason of subsection (b)(8)(A)— (i) any disposition of any interest in such stock in such holding company which was included in determining the gross estate of the decedent, or (ii) any withdrawal of any money or other property from such holding company attributable to any interest included in determining the gross estate of the decedent, shall be treated for purposes of subparagraph (A) as a disposition of (or a withdrawal with respect to) the stock qualifying under subsection (a)(1).

(F) Changes in interest in business company If any stock in a holding company is treated as stock in a business company by reason of subsection (b)(8)(A)— (i) any disposition of any interest in such stock in the business company by such holding company, or (ii) any withdrawal of any money or other property from such business company attributable to such stock by such holding company owning such stock, shall be treated for purposes of subparagraph (A) as a disposition of (or a withdrawal with respect to) the stock qualifying under subsection (a)(1).

(2) Undistributed income of estate (A) If an election is made under this section and the estate has undistributed net income for any taxable year ending on or after the due date for the first installment, the executor shall, on or before the date prescribed by law for filing the income tax return for such taxable year (including extensions thereof), pay an amount equal to such undistributed net income in liquidation of the unpaid portion of the tax payable in installments. (B) For purposes of subparagraph (A), the undistributed net income of the estate for any taxable year is the amount by which the distributable net income of the estate for such taxable year (as defined in section 643) exceeds the sum of— (i) the amounts for such taxable year specified in paragraphs (1) and (2) of section 661(a) (relating to deductions for distributions, etc.); (ii) the amount of tax imposed for the taxable year on the estate under chapter 1; and (iii) the amount of the tax imposed by section 2001 (including interest) paid by the executor during the taxable year (other than any amount paid pursuant to this paragraph). (C) For purposes of this paragraph, if any stock in a corporation is treated as stock in another corporation by reason of subsection (b)(8)(A), any dividends paid by such other corporation to the corporation shall be treated as paid to the estate of the decedent to the extent attributable to the stock qualifying under subsection (a)(1).

(3) Failure to make payment of principal or interest (A) In general Except as provided in subparagraph (B), if any payment of principal or interest under this section is not paid on or before the date fixed for its payment by this section (including any extension of time), the unpaid portion of the tax payable in installments shall be paid upon notice and demand from the Secretary. (B) Payment within 6 months If any payment of principal or interest under this section is not paid on or before the date determined under subparagraph (A) but is paid within 6 months of such date— (i) the provisions of subparagraph (A) shall not apply with respect to such payment, (ii) the provisions of section 6601(j) shall not apply with respect to the determination of interest on such payment, and (iii) there is imposed a penalty in an amount equal to the product of— (I) 5 percent of the amount of such payment, multiplied by (II) the number of months (or fractions thereof) after such date and before payment is made. The penalty imposed under clause (iii) shall be treated in the same manner as a penalty imposed under subchapter B of chapter 68.

# (h) Election in case of certain deficiencies

(1) In general If— (A) a deficiency in the tax imposed by section 2001 is assessed, (B) the estate qualifies under subsection (a)(1), and (C) the executor has not made an election under subsection (a), the executor may elect to pay the deficiency in installments. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.

(2) Time of election An election under this subsection shall be made not later than 60 days after issuance of notice and demand by the Secretary for the payment of the deficiency, and shall be made in such manner as the Secretary shall by regulations prescribe.

(3) Effect of election on payment If an election is made under this subsection, the deficiency shall (subject to the limitation provided by subsection (a)(2)) be prorated to the installments which would have been due if an election had been timely made under subsection (a) at the time the estate tax return was filed. The part of the deficiency so prorated to any installment the date for payment of which would have arrived shall be paid at the time of the making of the election under this subsection. The portion of the deficiency so prorated to installments the date for payment of which would not have so arrived shall be paid at the time such installments would have been due if such an election had been made.

# (i) Special rule for certain direct skips

To the extent that an interest in a closely held business is the subject of a direct skip (within the meaning of section 2612(c)) occurring at the same time as and as a result of the decedent’s death, then for purposes of this section any tax imposed by section 2601 on the transfer of such interest shall be treated as if it were additional tax imposed by section 2001.

# (j) Regulations

The Secretary shall prescribe such regulations as may be necessary to the application of this section.

# (k) Cross references

(1) Security For authority of the Secretary to require security in the case of an extension under this section, see section 6165. (2) Lien For special lien (in lieu of bond) in the case of an extension under this section, see section 6324A. (3) Period of limitation For extension of the period of limitation in the case of an extension under this section, see section 6503(d). (4) Interest For provisions relating to interest on tax payable in installments under this section, see subsection (j) of section 6601. (5) Transfers within 3 years of death For special rule for qualifying an estate under this section where property has been transferred within 3 years of decedent’s death, see section 2035(c)(2).