Section 6166(b)(1)(A) provides:
(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;
Reg. section 20.6166A-2(c)(2) provides:
(2) In the case of a trade or business carried on as a proprietorship, the interest in the closely held business includes only those assets of the decedent which were actually utilized by him in the trade or business. Thus, if a building was used by the decedent in part as a personal residence and in part for the carrying on of a mercantile business, the part of the building used as a residence does not form any part of the interest in the closely held business. Whether an asset will be considered as used in the trade or business will depend on the facts and circumstances of the particular case, for example, if a bank account was held by the decedent in his individual name (as distinguished from the trade or business name) and it can be clearly shown that the amount on deposit represents working capital of the business as well as nonbusiness funds (e.g., receipts from investments, such as dividends and interest), then that part of the amount on deposit which represents working capital of the business will constitute a part of the interest in the closely held business. On the other hand, if a bank account is held by the decedent in the trade or business name and it can be shown that the amount represents nonbusiness funds as well as working capital, then only that part of the amount on deposit which represents working capital of the business will constitute a part of the interest in the closely held business. In a case where an interest in a partnership or stock of a corporation qualifies as an interest in a closely held business, the decedent's entire interest in the partnership, or the decedent's entire holding of stock in the corporation, constitutes an interest in a closely held business even though a portion of the partnership or corporate assets is used for a purpose other than the carrying on of a trade or business.
| 6166(b)(1)(A) Comment 1: When valuing a sole proprietorship one must analyze each asset to determine whether it was used in an active trade or business at the time of the decedent's death. Assets not used in the carrying on of a trade or business cannot be included in the value qualifying for payment of estate tax in installments under §6166. |
| 6166(b)(1)(A) Comment 2: Note the difference in the Regulation between a sole proprietorship and an interest in a partnership or a corporation, where partnership or corporate assets that are not used in the carrying on of a trade or business can apparently be included in the closely held business value qualifying for payment of the estate tax in installments under §6166. Regulation §20.6166A-2 was first published in 1960 and was redesignated in 1980 (T.D. 6522, 25 FR 13888, Dec. 29, 1960. Redesignated by T.D. 7710, 45 FR 50745, July 31, 1980). However, in 1984 P.L. 98-369 added subsection (b)(9) to section 6166, which provides that only assets used in a trade or business can be included in the closely held business value for purposes of §6166; passive assets cannot be included. With §6166(b)(9), the rules requiring that assets must be used in a trade or business are the same for an interest in a sole proprietorship as for interests as a partner in a partnership or stock in a corporation. |