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IRS Guidance Regarding Elections Made by an Estate Pursuant to Section 6166 to Defer the Payment of Estate Taxes and Instead to Pay Those Estate Taxes in Installments

Estate Planning Journal

The IRS has recently released two internal documents that are designed to provide guidance to IRS personnel regarding elections made by an estate pursuant to Section 6166 to defer the payment of estate taxes and instead to pay those estate taxes in installments.


Section 6166 permits an executor to elect to pay all or a portion of the estate tax attributable to a closely held business in not more than ten equal annual installments. To qualify under Section 6166, the value of the estate's aggregate interest in closely held businesses must exceed 35% of the value of the adjusted gross estate. The amount of estate tax that can be deferred and paid in installments is limited to the portion of the estate tax that is attributable to the value of the interests in the closely held businesses.

If an executor elects to pay estate taxes under Section 6166, the IRS has the statutory authority pursuant to Section 6165 to require that the estate post a bond. In lieu of a bond, the executor may elect to provide a special estate tax lien under Section 6324A. If the executor elects to provide the lien under Section 6324A, the executor is no longer personally liable for the payment of the estate taxes and is not required to provide a bond. However, even if the executor elects to provide the Section 6324A lien, the executor will be required to post a bond if the value of the property pledged for the Section 6324A lien is less than the aggregate value of the deferred tax.

The executor elects what property will be provided to secure the Section 6324A lien. The IRS must accept the property offered for the Section 6324A lien unless such property is not expected to survive the period of time during which the estate tax is being paid in installments. The property pledged for the Section 6324A lien does not have to be property of the estate, but rather, can be any property as long as all parties having an interest in the property agree to the lien. During the deferral period, if the value of the property subject to the Section 6324A lien decreases in value below the amount of the unpaid portion of the deferred estate taxes, the IRS can require that additional property be pledged to secure the lien. If the estate does not provide additional property to secure the lien, the IRS may terminate the Section 6166 election.

Chief Counsel Memorandum POSTS-113182-07

In the Memorandum, the IRS addressed a number of issues regarding the bond and lien requirement to secure payment of deferred estate tax under Section 6166. The first issue discussed was whether the amount of the bond or lien may include the amount of interest to be paid during the deferral period or is the bond or lien limited only to the deferred estate tax.

The IRS noted that Section 6165 provides that the IRS may require the taxpayer to furnish a bond in an amount not to exceed double the amount with respect to which the extension is granted. The IRS recognized that the Code and Regulations are silent as to whether the bond or lien may include interest. However, the IRS concluded that the amount of the bond or lien may include not only the deferred estate tax but also the aggregate amount of interest to be paid over the deferral period, so long as the amount of interest does not exceed the amount of tax deferred. The IRS also addressed whether it may accept a bond or lien in an amount less than the deferred estate taxes and interest. The IRS concluded that it may accept a bond or lien in a lesser amount on a case-by-case basis after examining all the relevant facts and circumstances.

The IRS also addressed the factors it would consider in determining the value of the property offered for the Section 6324A lien. The IRS stated that for several reasons the value of the property offered for the lien may not be the value of the property reported on the federal estate tax return.

The IRS stated that the reason for this difference in valuation may include the following. First, a significant amount of time may have passed from the date of death to the date the Section 6324A lien will attach. Second, the lien may attach only to a portion of the property reported on the federal estate tax return. Third, the use of the property may have changed since the date of death. Also, the IRS stated that if farmland is being pledged as security for the lien, the special-use value under Section 2032A should be used. Similarly, the IRS said that if an interest in a family limited partnership is being pledged as security, the discount used on the federal estate tax return should be used in valuing the property for purposes of the Section 6324A lien. The IRS noted that while mortgaged property may be used for purposes of the Section 6324A lien, such property must be valued based on its net equity.

SBSE Memorandum 05-0609-010

In this Memorandum, the IRS provided updated procedures for processing estate tax returns involving elections to pay estate taxes in installments under Section 6166. These updated procedures will be incorporated into the Internal Revenue Manual. Some of the more significant items set forth in the Memorandum include the following. All federal estate tax returns that contain an election under Section 6166 will be reviewed, and the returns either will be selected for field examination or will be accepted by the IRS. Another interesting section of the Memorandum provides a non-exclusive list of factors that the IRS will consider in determining whether to require a bond or lien.

The first factor listed is the duration and stability of the business. The Memorandum states that this factor considers the nature of the closely held business, the market factors that will affect the business, the financial history of the business, and the experience of the managers of the business. According to the Memorandum, these factors are to be considered in an effort to predict the likelihood that the business will survive during the period the estate taxes are deferred.

The Memorandum notes that the other factors to be considered are any outstanding liens, judgments, pending or anticipated lawsuits, or other claims against the business, as well as the age of the business, and the continuity and stability of management. The Memorandum also notes that if the decedent owned a minority interest in the business, then the financial information pertaining to the business may not be as relevant because the estate cannot force distributions to pay the required deferred estate taxes. The Memorandum says that in these situations, the IRS will consider whether other assets in the estate or other income sources are available to pay the deferred estate taxes.

The second factor listed in the Memorandum is the ability of the estate to make timely payments of the deferred estate taxes. According to the Memorandum, this factor will consider how the estate expects to make the required annual payments of the deferred taxes and the objective likelihood of realizing those expectations. Elements to be examined include both the historical and anticipated cash flow of the business.

The third factor listed in the Memorandum is the compliance history of the business, the estate, and the decedent. The purpose of this factor is to determine whether the business, its management, and the executor comply with all tax requirements on a timely basis. The Memorandum does note that, with respect to the business, the relevance of this factor is proportional to the estate's ownership percentage and control of the business.

Finally, the Memorandum states that all Section 6166 elections will be reviewed six years into the deferral period to determine if additional actions should be taken to protect the interests of the IRS.


These two Memoranda, while not of precedential value, offer useful guidance to practitioners who represent estates that are seeking to use the Section 6166 election to pay estate taxes in installments. The Memoranda will help practitioners navigate the complex rules and Regulations under Section 6166, especially the bond and lien requirements.

Frank S. Baldino is an attorney at Lerch, Early & Brewer in Bethesda, Maryland who practices in the areas of estate planning and probate administration and who co-chairs the firm's Estate Planning and Probate Group. He has extensive experience in the areas of estate planning, charitable giving, estate planning for non-U.S. citizens, tax planning with respect to retirement plans and stock options, asset protection planning, business succession planning and estate and trust administration. Frank may be contacted at 301-657-0715 or


This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.


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