Estate Tax Payments and Liabilities: Sections 6161 and 6166 (Portfolio 832)

Bloomberg Tax Portfolio, Estate Tax Payments and Liabilities: Sections 6161 and 6166, No. 832, describes and analyzes the provisions of the Internal Revenue Code relating to extensions of time to pay estate tax attributable to interests in closely held businesses; extensions of time to pay estate tax attributable to reversionary and remainder interests; the necessity to file bonds when extensions to pay estate tax have been granted; the apportionment of federal estate tax liability; transferee liability relating to the payment of the estate tax, liens relating to the estate tax; and the potential personal liability of executors and other fiduciaries relating to the payment of the estate tax.

Under §6166, an executor may elect to extend the time for paying estate tax when a specified percentage of an estate consists of an interest in a closely held business. Under §6166, the estate tax attributable to a decedent's interest in a closely held business can be paid over a period of 14 years. In fact, payment of the entire amount of the estate tax attributable to the closely held business interest can be deferred for a period of five years and, thereafter, paid in 10 equal annual installments. The Taxpayer Relief Act of 1997 modified the procedures under §6166 by significantly reducing the interest rate on the deferred tax liability, eliminating any income and estate tax deductions for the interest paid on deferred tax liability, and granting estates easier access to the Tax Court to challenge the IRS when it denies §6166 eligibility. Legislation in 1998 removed obstacles to filing a refund claim during the deferral period. EGTRRA expanded the availability of the benefits of §6166 by broadening the definition of a closely held business. Further, a development has arisen in which estates choose to reduce or eliminate their reliance on §6166, instead privately financing the necessary estate tax payments and seeking to deduct in full the associated interest as an administration expense (often referred to as Graegin loans).

If an estate includes a remainder or reversionary interest that qualifies under §6163, an executor may defer payment of the estate tax on such interest until six months after the termination of the preceding interest. Furthermore, for reasonable cause, an executor can extend this period for up to three years beyond the initial six-month period.

If estate tax is required to be paid, the issue of tax apportionment must be considered. Federal and state law aspects of tax apportionment are discussed in this Portfolio. Additionally, this Portfolio discusses certain issues relating to collection of estate tax by an executor or a third party required to pay the estate tax. An executor may have reimbursement rights under §§2206, 2207, 2207A, 2207B, and state law.

If estate tax is not paid when it is due, a transferee of property included in an estate may be subject to personal liability for the payment of such taxes. Additionally, the IRS may collect unpaid estate tax by enforcing liens that attach to certain property. For instance, the government has a special lien for estate taxes under §6324(a) on the gross estate of a decedent for 10 years from the date of the decedent's death, except for the part of the gross estate used to pay debts and administration expenses. Alternatively, certain liens may exist under §6324A during the deferral period under §6166, or under §6324B during the period an additional tax may be imposed under §2032A. This Portfolio discusses transferee liability and the liens that may attach to property with respect to the estate tax.

Finally, an executor has certain obligations with respect to the estate tax, including the obligation to file an estate tax return and pay the estate tax. The executor of an estate, and other fiduciaries, may also be subject to personal liability if funds are distributed prior to the payment of the estate tax or other tax liabilities. This Portfolio analyzes the source of this personal liability. This Portfolio also explains procedures that a fiduciary may follow to reduce or eliminate his or her exposure to such liabilities. For example, an executor may obtain relief from personal liability for estate taxes under §2204 and for income and gift taxes under §6905.

This Portfolio may be cited as Bekerman, 832 T.M., Estate Tax Payments and Liabilities: Sections 6161 and 6166.