INTERNAL REVENUE CODE SECTION 6166: COMMENTS TO TAX COUNSEL FOR THE SENATE FINANCE COMMITTEE

We can identify no policy reason for providing lesser benefits to a decedent's estate that owns in excess of 35% of the adjusted gross estate in closely held entity interests that technically fail to qualify because the decedent's spouse, children, siblings or other relatives own interests in the same entity, requiring family attribution to qualify for §6166 installment payments.

C. Consolidating Multiple Entities into a Single Business Enterprise.

We recommend that:

(1) An estate be permitted to combine all interests in Closely Held Entities qualified as described above to determine if, together, such interests constitute more than 35% of the adjusted gross estate. Such combined entities may be directly owned (brothersister entities) or indirectly owned (subsidiary entities).

(2) Repeal of the "Holding Company Election" of § 6166(b)(8). Our proposal would allow tiers of subsidiary entities to qualify as "Closely Held Entities" when combined with other entities, without penalty for a shorter payment period or increased interest rate.17

(3) Existing § 6166 references to a "trade or business" be amended to refer to the combined "Closely Held Enterprise," thus referring to all such combined Closely Held Entity interests (instead of each individual entity) to determine if assets are business assets or non-business assets that fail to qualify for § 6166 installment payment deferral.

The rules for determining whether any entity is "closely held" should be the same for (1) a single entity, regardless of the legal form (corporations, partnerships, LLCs, etc.), (2) commonly owned entities, (3) multiple tiers of entities within a group, or (4) any combination of these. We found no compelling policy reason why the rules for qualification should differ for any of those business structures.

1. Consolidating Multiple Commonly Owned (Brother-Sister) Entities

We recommend that § 6166(c) entity combination occur merely by reference to the "Closely Held Entity" qualifications provisions described above. Such "trade or business" inquiry would occur after all qualifying entities have been combined into a single "Business Enterprise," as described below.

As previously noted, § 6166 currently permits commonly owned entities (brother-sister entities) to qualify as a single business enterprise18 by rules that differ from the rules defining a "closely held business."19 Anomalies and inequities can arise under the current statute by reason of its attempt to define a "closely held business interest" by starting with the estate's ownership of individual entities, rather than by focusing instead on the "business enterprise," that may be conducted through multiple entities. This confusion also leads to inconsistencies in determining whether assets are part of the business.

2. Consolidating Tiered Entities

We recommend that the "Holding Company Election" of § 6166(b)(8) be repealed to allow subsidiary tiers of entities to qualify as "Closely Held Entities" without penalty for a shorter payment period or increased interest rate.20 To implement this recommendation, a "proportionate lookthrough rule" similar to § 6166(b)(2)(C) would apply to each tier of entities; thus, to qualify, the estate must indirectly meet the "Number of Owners Test" or "20% Test" described above to qualify to combine the subsidiary interests for estate tax deferral.