The 4 Types of Section 6166 Deferrals

Cautionary Note About Limited Liability Companies (LLCs)

Many PLRs (e.g., PLR 200321006) and Revenue Ruling 2006-34 include LLCs among the types of entities for which a section 6166 election is permitted. However, section 6166 itself does not include LLCs among the 3 specific types of entities that qualify for a section 6166 election. Recent conversations with attorneys in the IRS Office of Chief Counsel indicate that they are strictly interpreting the statute. This leads to the conclusion that, while a solely-owned LLC would qualify for the section 6166 election under existing provisions within the statute (see below), a fractional interest in an LLC would have to qualify as a fractional interest in a partnership. Also see PLR 201403012, where tenancy-in-common interests were transferred to individual LLCs without triggering a section 6166(g)(1) termination of the section 6166 election.

Rationale:  Wholly-owned LLCs are disregarded entities for tax purposes under Reg. 301.7701-3(b)(ii). If the LLC is owned by an individual and all other requirements of section 6166 are satisfied, it is treated as if it were a sole proprietorship and would therefore qualify under section 6166(b)(1)(A). If it is owned by a partnership, it is treated as a division of the partnership and would be included in the qualifying partnership value under section 6166(b)(1)(B). Finally, if it is owned by a corporation, it is treated as a division of the corporation and would be included in the qualifying corporation value under section 6166(b)(1)(C).

On the other hand, a fractional interest in an LLC is not a disregarded entity because the LLC has more than one member; the default provision of Reg section 301.7701-3(b)(i) treats an LLC with two or more members as a partnership for tax purposes. Qualifying a fractional LLC interest for a 6166 election would therefore require satisfying the partnership interest tests of 6166(b)(1)(B) and, if more than one business is involved in the section 6166 election, the 20% value test of section 6166(c).

Also note that with a strict interpretation of the statute, IRS Counsel may treat fractional interests in LLCs owned by another LLC as passive assets; only stock in corporations owned by another corporation can qualify for treatment as a holding company with a section 6166(b)(8) election.

4 Types of Deferrals, Comment 1:   The number of LLCs reported as sole proprietorships and as partnerships has greatly increased since they were first broken out in 2001 as a separate category for IRS Statistics of Income purposes. See e.g. the Fall 2016 Statistics of Income Bulletin.

Note:  Disregarded single-member LLCs constitute pass-thru partners for purposes of section 6231. See Seaview Trading LLC et al v. Commissioner, 9th Circuit Court of Appeals No. 15-71330, June 7, 2017. A grantor trust holding legal title to an interest in an S corporation also constitutes a pass-thru partner. See Rev. Ruling 2004-88, 2004-32 IRB 165.


 1. Section 6166(a)

This is the regular section 6166 election. It is by far the most common type of election made by executors. See Overview - Section 6166(a).

The maximum number of installments is 10. However, interest only is payable for the first 4 years after the return due date (determined without any extensions). Interest plus an equal installment of tax is paid in each of the following 10 years, for a total deferral of 14 years beyond the return due date. Three interest rates apply:

  • 2% interest accrues on the tax attributable to the first $1,000,000 of taxable business value, adjusted for inflation. See our table showing the computation of the 2% amounts from 1998 through today.
  •  45% of regular underpayment interest rates (45% of R%) accrues on the balance of deferred tax; and
  • Regular underpayment interest rate (R%) interest accrues on unpaid deferred tax, late payments of deferred tax, or late payments of otherwise non-deductible interest computed on the tax deferred under section 6166. See Revenue Ruling 89-32.

NOTE: The 6166(a) election can be for a maximum deferral period of 14 years. The maximum number of installments is 10 (section 6166(a)(1)). Only the deferred tax may be paid in installments. Meanwhile, interest only is payable on each of the first 4 anniversary dates, so, technically, it is not correct to refer to any of the first 4 payments of interest as an "installment." The word "installment" refers only to payments of tax and interest which are due on each of the installment due dates elected by the estate (a minimum of 2 and a maximum of 10).

2. Section 6166(b)(7)

This is often referred to as the family attribution election. See Overview - Section 6166(b)(7).

This is an affirmative election made when the decedent did not own a sufficient percentage of the closely held business to qualify for deferral under the 20% value test of section 6166(c), the 20% of capital interest test in 6166(b)(1)(B)(i) for an interest in a partnership with more than 45 partners, or the 20% in value of voting stock test in 6166(b)(1)(C)(i) for an interest in a corporation with more than 45 shareholders. With a 6166(b)(7) election, interests in the business that are also held by section 267(c)(4) family members will be treated as having been owned by the decedent for purposes of meeting these 20% tests, so that the value of the decedent's interest in the business (i.e., the value reported on the decedent's estate tax return) will qualify for a section 6166 election. The maximum number of installments is 10, the first of which is due on the return due date (determined without regard to any extensions of time to file).

NOTE: Section 6166(b)(2)(D) automatically attributes all stock and partnership interests held by section 267(c)(4) family members to a decedent for purposes of counting the number of shareholders or partners, as the case may be, but it does not constitute an automatic 6166(b)(7) election; section 6166(b)(7)(A) requires that a specific election must be made in order to obtain this attribution toward the particular 20% test threshold. See, e.g., PLR 200529006.

Example 1:

The decedent owned 10% in value of voting stock of a business and there were more than 45 shareholders. Because there were more than 45 shareholders, at least 20% of the value of voting stock in the business must be included in the decedent’s gross estate before the tax attributable to the business can be deferred under section 6166. Section 6166(b)(1)(c)(i). Accordingly, the decedent’s interest in the business would not qualify for the 6166 deferral.

However, if section 267(c)(4) family members also owned voting stock in the business, a 6166(b)(7) election could be made by the decedent's estate to attribute the percentage of voting stock owned by those family members to the decedent. If the family members' ownership interests, when added to the decedent's ownership interest, constituted 20% or more in value of the voting stock, the decedent would then be treated as having owned 20% or more in value of the voting stock in the business at his death and the section 6166 deferral would be allowed. Note, however, that the value of the business included in the decedent’s gross estate would not be increased by the value of the family members' interests that were attributed to the decedent.

Example 2:

The decedent owned 10% of the total value of a closely held business and the estate wishes to aggregate it with another business interest pursuant to section 6166(c) in order to extend the time to pay the tax attributable to the combined business value under section 6166. Section 6166(c) also provides that if two or more businesses are being aggregated, at least 20% of the total value of each such business must be included in the gross estate. If these conditions are met, the aggregate value of all the businesses subject to the 6166(c) election “shall be treated as an interest in a single closely held business,” and the tax attributable to that value would be eligible for deferral under section 6166. But in this example the decedent owned only 10% of one of the businesses, and that particular interest therefore cannot be aggregated with other business interests under section 6166(c).

However, if a 6166(b)(7) election is made, the percentages of that business also owned by section 267(c)(4) family members will be attributed to the decedent for purposes of meeting the section 6166(c) 20% test, even though the value actually included in the decedent’s estate will not be not increased by this attribution. With the 6166(b)(7) election, the otherwise non-qualifying business value included in the gross estate will be treated as though it equaled or exceeded 20% of the total value of the business and will be eligible for inclusion in the aggregate section 6166 business value.

Two interest rates apply in a section 6166(b)(7) election:

  • 45% of regular underpayment interest rates (R%) on the total amount of deferred tax; and
  • Regular underpayment interest rate (R%) interest on unpaid non-deferred tax or any late payments of deferred tax or late payments of interest on the deferred tax. 

3. Section 6166(b)(8)

This is the holding company election for a business that owns stock in another business. See Overview - Section 6166(b)(8). NOTE: A section 6166(b)(8) election statement must contain a specific reference to IRC section 6166(b)(8) to be valid. Temporary Reg. section 301.9100-6T(k) dated 9-5-84 provides:

An election under section 6166(b)(8), as added by section 1021(a) of the Act [the Deficit Reduction Act of 1984], or under section 1021(d)(2) of the Act, shall be made by including on the notice of election under section 6166 required by §20.6166-1(b) a statement that an election is being made under section 6166(b)(8) or section 1021(d)(2) of the Act (whichever is applicable) and the facts which formed the basis for the executor’s conclusion that the estate qualified for such election.

 There are two possible limitations to the maximum number of installments with 6166(b)(8) elections:

 1.  A maximum of 10 installments is allowable under section 6166(b)(8)(B)(i) if all of the holding company and business company stock is non-readily tradable within the meaning of section 6166(b)(7)(B);  or

 2.  A maximum of 5 installments is allowable under section 6166(b)(8)(B)(ii) if only the holding company stock is non-readily tradable.

In either case, the first installment of tax is due on the return due date (determined without regard to any extensions of time to file).

Two interest rates apply:

  • 45% of R% on the total amount of deferred tax; and
  • Regular underpayment interest rate (R%) interest on any unpaid non-deferred tax or any late payments of deferred tax or late payments of interest on deferred tax.

NOTE: Section 6166(c) will apply when there are two or more subs in a 6166(b)(8) holding company. If less than 20% of the total value of any sub is included in the decedent's gross estate, the estate must consider making a 6166(b)(7) election if section 267(c)(4) family members also own interests in those subs. Otherwise, the values of those subs are not eligible for deferral under section 6166(b)(8).

4. Section 6166(b)(10)

Under this section, stock in certain qualifying lending and finance businesses will be treated as stock in an active trade or business rather than as a passive asset. The maximum number of installments is 5. The first installment of tax is due on the return due date (determined without regard to any extensions of time to file).

 Three interest rates apply:

  • 2% interest accrues on the tax attributable to the first $1,000,000 of taxable business value, adjusted for inflation (see our table showing the computation of the 2% amounts from 1998 through today);
  • 45% of regular underpayment interest rates (R%) on the balance of deferred tax; and
  • Regular underpayment interest rate (R%) interest on unpaid non-deferred tax, late payments of deferred tax, or late payments of non-deductible interest on deferred tax.

 

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