Estate restructuring will not accelerate installment payments

Plain-English summary

The IRS ruled that an estate's proposed restructuring of interests in a closely held business would not accelerate its deferred estate-tax installment payments. The business would distribute properties pro rata to the estate and another owner, after which the owners would contribute the properties to separate LLCs and continue operating the businesses in substantially the same manner. The IRS found that the transaction would not materially alter the business, would not withdraw money or other property, and would preserve the estate's proportionate ownership interests. The transaction therefore was not a disqualifying disposition under IRC § 6166(g)(1), and the installment-payment privilege would continue.

Ruling snapshot

• Question: Would a pro rata distribution of business properties followed by contributions to LLCs trigger acceleration of deferred estate-tax installments?
• Outcome: Approved.
• Key authorities: IRC §§ 2001, 6166(a), 6166(c), and 6166(g); Treas. Reg. § 20.6166A-3(e); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201403012 Third Party Communication: None
Release Date: 1/17/2014 Date of Communication: Not Applicable
Index Number: 6166.52-00, 6166.50-00,
6166.02-00, 6166.00-00 Person To Contact:
------------------, ID No. ----------------
------------------------------------------ Telephone Number:
--------------------------------- --------------------
--------------------------------- Refer Reply To:
---------------------------------- CC:PA:02
---------------------- PLR-127228-12
---------------------------------- Date:
September 25, 2013

Decedent = --------------------------------------------------------------------------------------------
---------------
Date of death = -----------------
X = ---
Y = ---

Dear -------------------------------------------------------:

   This letter responds to your authorized representative’s letter dated June 21,

2012, as revised on August 30, 2012, and again on April 26, 2013, requesting a ruling
whether a proposed transaction will result in the acceleration of the installment
payments of the estate tax attributable to an interest in a closely held business under
section 6166(g) of the Internal Revenue Code.

Facts

   The facts submitted and the representations made are as follows: Decedent died

testate on Date. Decedent died owning a greater than 20-percent interest in each of
several closely held general partnerships, limited liability companies (LLC), and
corporations. Decedent’s estate represents that, at the time of Decedent’s death,
Decedent and his --------- held X commercial real estate real property interests as
tenants-in-common as nominees for one of the general partnerships, Business.

  Decedent’s executors timely filed a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, and made a section 6166 election to defer
the payment of estate tax attributable to Decedent’s interests in the general
partnerships, LLCs, and corporations, including Business. Business represents more

PLR-127228-12 2

than 50 percent of the total value of the business interests the estate aggregated under
section 6166(c) and for which it made the section 6166 election.

    For business purposes, the partners of Business, Decedent’s estate and

Decedent’s ---------, intend to restructure the business as follows. Business will
distribute each of the properties owned by it pro rata to its partners, namely Y percent to
Decedent’s estate and the remainder to Decedent’s ---------. Thereafter, Decedent’s
estate and Decedent’s --------- will contribute its or his respective interest in one or more
of the properties to separate LLCs in return for an interest in the LLC equal in value to
the property contributed. Each LLC will be owned pro rata by Decedent’s estate and
Decedent’s ---------, namely Y percent by Decedent’s estate and the remainder by
Decedent’s ---------. Each LLC will continue the active business previously conducted
by Business with respect to that particular property. Decedent’s estate represents that
there will be no withdrawal of money or other property from the closely held business as
a result of the proposed transaction.

Rulings Requested

     Decedent’s estate requests rulings that neither (a) the distribution pro rata of one

or more properties from Business to Decedent’s estate and Decedent’s ---------, nor (b)
the subsequent contribution of each property by Decedent’s estate and Decedent’s ------
--------- to the LLCs will constitute a distribution, sale, exchange or other disposition of
an interest in a closely held business within the meaning of section 6166(g)(1). In
addition, (a) the distribution pro rata of one or more properties from Business to
Decedent’s estate and Decedent’s ---------, and (b) the subsequent contribution of such
properties by Decedent’s estate and Decedent’s --------- to the LLCs, taken in the
aggregate, will not result in the acceleration of the installment payments of Federal
estate tax provided in section 6166(a).

Relevant Authorities

    Section 6166(a)(1) provides, in part, that if the value of an interest in a closely

held business that is included in determining the gross estate of a decedent exceeds 35
percent of the adjusted gross estate and the decedent was a citizen or resident of the
United States, the executor may elect to pay part or all of the tax imposed under section
2001 in 2 or more (but not exceeding 10) equal installments. Under section 6166(a)(2),
only the amount of estate tax attributable to the closely held business may be paid in
installments.

    Section 6166(b)(2)(A) provides that the determination of whether an interest

qualifies as an interest in a closely held business under section 6166(b)(1) is made as
of the time immediately before the decedent’s death. A decedent must conduct an
active trade or business, or must hold an interest in a corporation, LLC, or partnership
that carries on an active trade or business, in order for the decedent’s interest to qualify

PLR-127228-12 3

as an interest in a closely held business under section 6166. Rev. Rul. 2006-34, 2006-1
C.B. 1172, illustrates the types of activities that constitute an active trade or business.

    Section 6166(c) provides that where 20 percent or more of the total value of each

of two or more businesses is included in determining the value of a decedent’s estate,
the decedent’s interests in those closely held businesses shall be treated as an interest
in a single closely held business.

    The Tax Reform Act of 1976 created a new section 6166 and redesignated the

former section as section 6166A. Pub. L. No. 94-455, section 2004(a). The Economic
Recovery Tax Act of 1981 repealed section 6166A and amended section 6166 so that it
would apply in most cases that were previously governed by section 6166A. Pub. L.
No. 97-34, section 422(d). Neither the Economic Recovery Tax Act of 1981 nor its
legislative history indicates any Congressional intent that a disposition of an interest
under section 6166A would not be a disposition under section 6166. As a result, the
regulations under section 6166A are considered applicable to this ruling request to the
extent those regulations are not inconsistent with the language of section 6166.

    Section 6166(g)(1)(A) provides that if (i) any portion of an interest in a qualified

closely held business that qualifies for the section 6166(a)(1) election is distributed,
sold, or otherwise disposed of, or money or other property attributable to such an
interest is withdrawn from such trade or business, and (ii) the aggregate of such
distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds
50 percent of the value of such trade or business, then the extension of time for
payment of the tax provided in section 6166(a) shall cease to apply, and any unpaid
portion of the tax payable in installments shall be paid upon notice and demand from the
Secretary.

    Treasury Regulation section 20.6166A-3(e)(1) provides that in any case where in

the aggregate 50 percent or more of the decedent’s interest in a closely held business
has been distributed, sold, exchanged, or otherwise disposed of, the privilege of paying
tax in installments terminates and the whole of the unpaid portion of the tax which is
payable in installments becomes due and shall be paid upon notice and demand from
the District Director. When determining whether the 50-percent threshold is met,
dispositions and withdrawals are aggregated.

   Section 20.6166A-3(e)(2) provides that the phrase “distributed, sold, exchanged,

or otherwise disposed of” is broad in scope and “comprehends all possible ways by
which an interest in a closely held business ceases to form a part of the gross estate.”

    Rev. Rul. 66-62, 1966-1 C.B. 272, holds that where the change in the operation

of a business from an incorporated form to an unincorporated form does not materially
alter the business or the interest of the estate in the business, such a change will not

PLR-127228-12 4

result in the termination of the installment privilege under section 6166 that is otherwise
available to the estate.

Analysis

   Because Business represents more than 50 percent of the total value of the

closely held businesses reported on decedent’s estate tax return and aggregated under
section 6166(c), if the proposed transaction is a distribution, sale, exchange, or other
disposition under section 6166(g)(1), it will exceed the 50 percent threshold of section
6166(g)(1)(A)(ii), with the result that the section 6166 extension would terminate, and
the unpaid portion of the estate tax payable in installments would have to be paid on
notice and demand.

   The transaction in this case, Business’ distribution of the properties from

Business to Decedent’s estate and Decedent’s ---------, their subsequent contribution of
the properties to individual LLCs in exchange for all of the membership interests in the
LLCs, and their continued operation of the trade or business in substantially the same
manner as before, does not materially alter the business. Furthermore, there will be no
withdrawal of money or other property from the business formerly conducted by
Business. Decedent’s estate will hold the same proportionate ownership interest in
each LLC as Decedent held in Business when he died.

     Based solely on the facts and information submitted and the representations

made, neither (a) the distribution pro rata of one or more properties from Business to
Decedent’s estate and Decedent’s ---------, nor (b) the subsequent contribution of each
property by Decedent’s estate and Decedent’s --------- to the LLCs will constitute a
distribution, sale, exchange or other disposition of an interest in a closely held business
within the meaning of section 6166(g)(1). Furthermore, (a) the distribution pro rata of
one or more properties from Business to Decedent’s estate and Decedent’s ---------, and
(b) the subsequent contribution of such properties by Decedent’s estate and Decedent’s
--------- to the LLCs, taken in the aggregate, will not result in the acceleration of the
installment payments of Federal estate tax provided in section 6166(a).

    Except as expressly provided herein, we express or imply no opinion concerning

the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Moreover, this ruling expresses or implies no opinion as to the form of
ownership of the properties as of Decedent’s date of death, or whether the proposed
transactions result in any other tax consequences other than transfer taxes.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

PLR-127228-12 5

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative. We are also sending a copy of it
to the Chief, Estate and Gift Tax Operations.

   The rulings contained in this letter are based upon information submitted and

representations made by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified the facts
alleged or the material submitted in support of the request for rulings, the facts are
subject to verification on examination.

    Temporary or final regulations pertaining to one or more of the issues addressed

in this ruling have not yet been adopted. Therefore, this ruling will be modified or
revoked by the adoption of temporary or final regulations to the extent the regulations
are inconsistent with any conclusion in the ruling. See section 11.04 of Rev. Proc.
2013-01. However, when the criteria in section 11.05 of Rev. Proc. 2013-01 are
satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual
circumstances.

                                  Sincerely,



                                  Lawrence Mack
                                  Branch Chief
                                  (Procedure & Administration)

Enclosures (2): One copy of this letter
Copy for § 6110 purposes