CCA 200116001: Lien security for a family-owned business estate deduction

Plain-English summary

Chief Counsel addressed lien security when an estate elected the section 2057 deduction for qualified family-owned business interests. It agreed that local counsel should be consulted if qualifying real property was insufficient to secure the potential additional estate tax, including situations involving personal property. For the security designation, it advised using the business-interest assets for which the estate actually claimed the deduction. The lien amount should equal the maximum potential additional estate tax if all elected property were recaptured within the first six years after death. The memorandum noted that proposed regulations were being developed on these issues.

Ruling snapshot

• Question: How should the IRS secure possible recapture tax after a section 2057 election?
• Outcome: Advice given: secure the maximum potential tax with assets for which the deduction was claimed; consult local counsel on insufficient real-property security.
• Key authorities: IRC §§ 2057(f)(2), 2057(i)(3)(P), 6324B.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
I N T E R N AL R E V E N U E S E R V I C E WASHINGTON, D.C. 20224
November 9, 2000

Number: 200116001
CC:PA:CBS:Br1:LKWilliams
Release Date: 4/20/2001
GL-809665-99
UIL# 51.06.00-00
9999.98-00

MEMORANDUM FOR SBSE ASSOCIATE AREA COUNSEL (DENVER)

FROM: Alan C. Levine
Chief, Branch 1 (Collection, Bankruptcy & Summonses) CC:PA:CBS:Br1

SUBJECT:

This memorandum responds to your request for advice dated November 29, 1999, regarding the qualified family-owned business interest (QFOBI) deduction under I.R.C. § 2057 of the Internal Revenue Code. Specifically, you have asked us to address two issues arising from the special lien procedures for additional estate tax under section 2057. The two issues are:

1. Whether the Service can establish an enforceable lien to secure the
   additional estate tax under section 2057 for personal property qualifying for
   the deduction under section 2057; and

2. Whether an estate electing the deduction under section 2057 can designate
   as security for the lien only those QFOBIs necessary to equal the amount of
   the additional estate tax payable in the event of a recapture.

   As regards Issue 1, SBSE Associate Area Counsel (formerly Rocky Mountain
   District Counsel) concludes that, in the event of a section 2057 election, a lien under I.R.C. § 6324B should be filed for any real property using a modified version of the Form 668-H currently used in connection with the I.R.C. § 2032A special use valuation election. However, if the real property is insufficient to satisfy the lien amount (or, if the assets consist only of personal property), then Associate Area Counsel asks that Examination contact them for guidance. To clarify, we believe the lien arising in connection with a section 2057 election arises under section 2057(i)(3)(P), which references section 6324B. We agree that Associate Area Counsel should be consulted in the event that the real property subject to the section 2057 election is insufficient to secure the additional estate tax.

                                   -2-
   
   As regards Issue 2, Associate Area Counsel concludes that an estate may
   

   not designate as security for the lien only those QFOBIs necessary to equal the amount of recapture tax; rather, the lien should cover all assets subject to the election under section 2057. To the extent there is generally a difference between the amount of QFOBI assets necessary for an estate to be eligible for the deduction (that is, aggregate QFOBIs exceeding 50 percent of the adjusted gross estate) and the amount of QFOBI assets actually subject to the election under section 2057, we believe this conclusion should be clarified. Therefore, an estate that elects the deduction under section 2057 should designate as security for the lien those QFOBI assets for which the deduction is claimed. Further, we believe the lien amount should be an amount equal to the maximum potential additional estate tax payable, assuming that all QFOBI property for which the election is made is subject to recapture within the first 6 years of the date of death. See I.R.C. § 2057(f)(2).

   At this time, Passthroughs and Special Industries Division (CC:PSI:B7) is
   engaged in a Year 2000 Priority Guidance Plan project to issue proposed regulations under section 2057. The regulations should address various issues, including the establishment of an enforceable lien and the designation of lien security for purposes of section 2057. We believe the positions stated in this memorandum are a reasonable interpretation of section 2057 and are wholly consistent with Congressional intent.

   This document is not to be cited as precedent. I.R.C. § 6110(k)(3). If you
   have any questions, please contact the attorney assigned to this case, who can be reached at (202) 622-3610.