Section 6166(b)(2)(C) - Example 3 (Based on PLR 8428088) | |
| This example is based on PLR 8428088. The following Code sections or their predecessors are involved in this Ruling. | |
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| The decedent died in May 1982. The decedent's gross estate included 18.03% of the value of the voting common stock and voting preferred stock of Corporation A, which had more than 15 shareholders after the application of §6166(b)(2)(C) and (b)(2)(D). Another 24.86% of the total value of the voting stock of Corporation A was held by the decedent's spouse or in trusts for the benefit of decedent's children, grandson, and brother, all of whom held present interests in the trusts. None of the stock of Corporation A was traded on a stock exchange or an over-the-counter market. The decedent made a gift of a 100% interest in a sole proprietorship within 3 years of the date of death. Held: The 35% test of §6166(a)(1) is satisfied if the estate makes a §6166(b)(7) election, which will satisfy the 20% requirement of §6166(b)(1)(C)(i). Held further, the estate meets the 35% test of §6166(a)(1) both with and without the inclusion of gifts made by the decedent within 3 years of the date of death. | |
| The computations in this example are based on a date of death in May 2016. After application of §6166(b)(2)(B), (b)(2)(C,) and (b)(2)(D), there are more than 45 shareholders. | |
| In PLR 8428088 there were 2 classes of voting stock, and we have used 2 classes of voting stock in this example. We have also matched the percentages of voting stock owned by the decedent in the PLR (18.03%) and the §267(c)(4) family members (24.86%). |
Section 6166(b)(2)(C) - Example 3 (Based on PLR 8428088) Structure of Corporation A | ||||
| Number of Shares Outstanding | Undiscounted Value per Share | Total Value | ||
| Class A voting common stock | 100,000 | 200.00 | 20,000,000.00 | |
| Voting Preferred stock | 1,000 | 100.00 | 100,000.00 | |
| Total value of 101,000 shares of voting stock | 20,100,000.00 | |||
| Class B non-voting common stock | 250,000 | 150.00 | 37,500,000.00 | |
| Total value of Corporation A | 57,600,000.00 | |||
Section 6166(b)(2)(C) - Example 3 (Based on PLR 8428088) Stock Ownership and Estate Tax Valuations | ||||
| Owned by Decedent | Number of Shares Owned | Discounted Estate Tax Value per Share | Total Estate Tax Value | |
| Class A voting common stock | 27,800 | 130.00 | 3,614,000.00 | |
| Voting Preferred stock | 100 | 100.00 | 10,000.00 | |
| Total estate tax value of Decedent's 27,900 shares of voting stock | 3,624,000.00 | |||
| Class B non-voting common stock | 75,000 | 90.00 | 6,750,000.00 | |
| Total estate tax value of Decedent's interest in Corporation A | 10,374,000.00 | |||
| Value of Voting Stock Included in Decedent's Gross Estate | ||||
| Total estate tax value of Decedent's 27,900 shares of voting stock | 3,624,000.00 | |||
| Total value of all 101,000 shares of voting stock | 20,100,000.00 | |||
| Percentage in value of voting stock owned by Decedent | 18.03% | |||
| Note that the Decedent owned 27.62% of the voting stock (27,900 of 101,000 voting shares), but only 18.03% in value of the voting stock. (Section 6166(b)(4) provides: For purposes of this section, value shall be value determined for purposes of chapter 11 (relating to estate tax).) | ||||
| Voting Stock Owned by §267(c)(4) Family Members | Number of Voting Shares Owned | Discounted Estate Tax Value per Share | Total Estate Tax Value | |
| Spouse | 13,900 | 130.00 | 1,807,000.00 | |
| Trust for benefit of Decedent's children (3) | 10,515 | 130.00 | 1,366,950.00 | |
| Trust for benefit of Decedent's grandson | 3,505 | 130.00 | 455,650.00 | |
| Trust for benefit of Decedent's brother | 10,515 | 130.00 | 1,366,950.00 | |
| Total estate tax value of 38,435 shares of voting stock owned by §267(c)(4) family members | 4,996,550.00 | |||
| Value of Voting Stock Owned by §267(c)(4) Family Members | ||||
| Total estate tax value of 38,435 shares of voting stock owned by §267(c)(4) family members | 4,996,550.00 | |||
| Total value of all 101,000 shares of voting stock | 20,100,000.00 | |||
| Percentage in value of voting stock owned by §267(c)(4) family members | 24.86% | |||
| 6166(b)(2)(C) Example 3, Comment 1: The ownership interests of the §267(c)(4) family members in Corporation A stock are automatically attributed to the dedecent by §6166(b)(2)(B) and §6166(b)(2)(D) for purposes of counting the number of partners or shareholders. In the PLR there were more than 15 shareholders after such attribution (45 shareholders for the 2016 date of death in this example). In such event, under §6166(b)(1)(C)(i) the decedent's estate must have 20% or more in value of the voting stock included in the gross estate before this interest can be eligible for payment of tax in installments under §6166 (if all other requirements are satisfied), which test is not met. The ownership interests of the §267(c)(4) family members are not automatically attributed to the decedent for purposes of the 20% test in §6166(b)(1)(C)(i). |
| 6166(b)(2)(C) Example 3, Comment 2: The PLR states that "[n]one of the stock of Corporation A is traded on a stock exchange or an an over-the-counter market." This fact is critical. Section 6166(b)(7) permits an election to attribute the ownership interests of §267(c)(4) family members to a decedent under §6166(b)(2) for purposes of satisfying the 20% tests in §6166(b)(1)(B)(i) and §6166(b)(1)(C)(i) only if, at the time of the decedent's death, the stock is non-readily tradable, which is defined as stock for which there was no market on a stock exchange or in an over-the-counter market. |
| 6166(b)(2)(C) Example 3, Comment 3: With a §6166(b)(7) election the spouse's ownership interest is attributed to the decedent under §6166(b)(2)(B) for purposes of satisfying the 20% test of §6166(b)(1)(C)(i). All of the trust beneficiaries were stated to have held present interests in their respective trusts, and the trust ownership interests in Corporation A stock were therefore attributed to the respective beneficiaries under the indirect ownership rules of §6166(b)(2)(C), which were then attributed to the decedent under the §6166(b)(7) election. The consequences of the §6166(b)(7) election are that the first installment of deferred tax is due on the return due date (determined without regard to any extension of time to file); the special 2% interest rate (4% in 1982) is not available; and, the maximum deferral period is 9 years after the return due date. |
Section 6166(b)(2)(C) - Example 3 (Based on PLR 8428088) Estate Tax Computation | ||||||
|---|---|---|---|---|---|---|
| 1 | Gross estate | 30,000,000.00 | ||||
| Schedules J, K, and L deductions | 4,180,000.00 | |||||
| Marital deduction | 0.00 | |||||
| Charitable deduction | 1,500,000.00 | |||||
| 2 | Total allowable deductions | 5,680,000.00 | ||||
| 3a | Tentative taxable estate | 24,320,000.00 | ||||
| 3b | State death tax deduction | 3,358,000.00 | ||||
| 3c | Taxable estate | 20,962,000.00 | ||||
| 4 | Adjusted taxable gifts | 3,500,000.00 | ||||
| 5 | Add lines 3c and 4 | 24,462,000.00 | ||||
| 6 | Tentative tax on the line 5 amount | 9,730,600.00 | ||||
| 7 | Total gift tax paid or payable | 0.00 | ||||
| 8 | Gross estate tax | 9,730,600.00 | ||||
| 9a | Basic exclusion amount | 5,450,000.00 | ||||
| 9b | DSUE amount | 0.00 | ||||
| 9c | Applicable exclusion amount | 5,450,000.00 | ||||
| 9d | Applicable credit amount | 2,125,800.00 | ||||
| 10 | Adjustment to applicable credit amount | 0.00 | ||||
| 11 | Allowable applicable credit amount | 2,125,800.00 | ||||
| 12 | Subtract line 11 from line 8 | 7,604,800.00 | ||||
| 13 | Credit for foreign death taxes | 0.00 | ||||
| 14 | Credit for tax on prior transfers | 0.00 | ||||
| 15 | Total credits | 0.00 | ||||
| 16 | Net estate tax | 7,604,800.00 | ||||
| 17 | Generation-Skipping taxes payable | 0.00 | ||||
| 18 | Total transfer taxes | 7,604,800.00 | ||||
Section 6166(b)(2)(C) - Example 3 (Based on PLR 8428088) §6166(k)(5) and §2035(c)(2) Computation | ||||
| §6166(b)(6) Adjusted Gross Estate Computation | ||||
| Gross estate | 30,000,000.00 | |||
| Allowable §2053 and §2054 deductions | 4,180,000.00 | |||
| Section 6166(b)(6) adjusted gross estate | 25,820,000.00 | |||
| Step 1 - The Regular §6166(a)(2) Ratio Computation | ||||
| Value of the closely held business interest included in the decedent's gross estate | 10,374,000.00 | |||
| Section 6166(b)(6) adjusted gross estate | 25,820,000.00 | |||
| Section 6166(a)(2) ratio - maximum amount of tax which may be paid in installments | 0.401782 | |||
| Step 2 - The §6166(k)(5) and §2035(c)(2) Ratio Computation | ||||
| Adjusted §6166(a)(2) Numerator | ||||
| Value of the closely held business interest included in the decedent's gross estate | 10,374,000.00 | |||
| Value of closely held business interests gifted within 3 years of the date of death | 0.00 | |||
| Adjusted value of the closely held business interest for the §6166(k)(5) computation | 10,374,000.00 | |||
| Adjusted §6166(a)(2) Denominator | ||||
| Section 6166(b)(6) adjusted gross estate | 25,820,000.00 | |||
| Gifts made within 3 years of the date of death | 3,500,000.00 | |||
| Adjusted §6166(b)(6) adjusted gross estate for the §6166(k)(5) computation | 29,320,000.00 | |||
| Adjusted §6166(a)(2) Ratio Computation | ||||
| Adjusted value of the closely held business interest for the §6166(k)(5) computation | 10,374,000.00 | |||
| Adjusted §6166(b)(6) adjusted gross estate for the §6166(k)(5) computation | 29,320,000.00 | |||
| Adjusted §6166(a)(2) ratio for the §6166(k)(5) computation | 0.353820 | |||
| Conclusion | ||||
| Section 6166(a)(2) ratio - maximum amount of tax which may be paid in installments | 0.401782 | |||
| Adjusted §6166(a)(2) ratio for the §6166(k)(5) computation | 0.353820 | |||
| Both ratios exceed 35% of the respective §6166(b)(6) adjusted gross estate amounts. The estate can therefore elect to pay the tax attributable to the closely held business in installments. | ||||
| Maximum Amount of Tax Which May be Paid in Installments | ||||
| Net estate tax | 7,604,800.00 | |||
| Section 6166(a)(2) ratio - maximum amount of tax which may be paid in installments | 0.401782 | |||
| The maximum amount of tax which may be paid in installments | 3,055,471.75 | |||
| Tax not payable in installments and due on the return due date | 4,549,328.25 | |||