26 U.S.C. § 6166 — Extension of time for payment of estate tax where estate consists largely of interest in closely held business

(a) 5-year deferral, 10-year installment payment. If a decedent was a U.S. citizen or resident, and the value of their "interest in a closely held business" counted in the gross estate is more than 35 percent of the "adjusted gross estate," the executor can choose to pay part or all of the estate tax in 2 to 10 equal yearly installments instead of all at once. The most that can go on this plan is limited: take the "closely held business amount" (defined below), divide it by the adjusted gross estate to get a fraction, then apply that same fraction to the total estate tax owed after credits — that capped amount is the most that can be paid in installments. If the executor elects installments, they pick a first-payment date up to 5 years after the normal estate-tax due date; each later installment is due exactly one year after the previous one. (b) Definitions and special rules. "Interest in a closely held business" means a sole proprietorship; or a partnership interest, if 20 percent or more of the partnership's total capital is counted in the gross estate, or the partnership has 45 or fewer partners; or corporate stock, if 20 percent or more of its voting stock by value is counted in the gross estate, or the corporation has 45 or fewer shareholders. These thresholds are tested as of right before the decedent's death. Stock or partnership shares that are community property of a married couple, or that a couple holds jointly, by the entirety, or in common, count as owned by just one shareholder or partner. Property owned indirectly through a corporation, partnership, estate, or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries — a trust beneficiary counts only if they have a present interest in the trust. All stock and partnership interests owned by the decedent's family members, as defined in section 267(c)(4), count as owned by the decedent. For a farming business, "interest in a closely held business" also includes farmhouses and related buildings on the farm that are regularly lived in by the farm's owner, its lessee, or their employees. "Value" means the value used for estate-tax purposes under chapter 11. "Closely held business amount" means the value of the business interest that qualifies under (a)(1). "Adjusted gross estate" means the gross estate minus the deductions allowed under sections 2053 and 2054, based on facts as of the return's due date, including extensions, or the actual filing date if earlier. Special elections can change how business interests are counted. If the executor elects, non-readily-tradable partnership interests and stock — stock with no market on an exchange or over-the-counter at death — count toward the ownership thresholds and toward subsection (c); the executor is treated as choosing the earliest possible first-payment date; and the special low 2-percent interest rate under section 6601(j) doesn't apply. If the executor elects, the part of a holding company's stock that represents its ownership, directly or through other holding companies, of a business company can be treated as stock in that business company, again with the earliest first-payment date and no 2-percent rate — but only if all the stock involved is non-readily-tradable; if only the holding-company stock is non-readily-tradable, the election can still apply, but then the maximum number of installments drops from 10 to 5. Voting-stock counts flow proportionally down the chain of holding companies. "Holding company" means a corporation that holds stock in another corporation; "business company" means a corporation running a trade or business. For the 35-percent test and for figuring the closely held business amount (but not for subsection (g)), the value of the business excludes "passive assets" — anything not actually used in running the business. Stock in another corporation counts as passive unless it was elected as business stock under the holding-company rule above and separately qualifies under (a)(1). But if one corporation owns 20 percent or more of another's voting stock, or the other has 45 or fewer shareholders, and 80 percent or more of each corporation's assets are business-use assets, the two corporations are treated as one for this purpose. If the executor elects, assets used in a "qualifying lending and finance business" count as business-use assets, with the earliest first-payment date and only 5 installments allowed instead of 10. A qualifying lending and finance business is one that was substantially active right before death, or that, in at least 3 of the last 5 tax years, had at least one full-time manager, 10 full-time non-owner employees mostly working for the business, and $5,000,000 in gross receipts from lending-type activities such as making loans, buying receivables, or leasing property. This election isn't available if the business's, or its controlled group's, stock or debt was publicly tradable at any point in the 3 years before death. (c) Two or more closely held businesses. If the estate includes 20 percent or more of the value of each of two or more closely held businesses, they're combined and treated as one for this section. A surviving spouse's community-property or joint-tenancy share counts as included in the decedent's gross estate for this 20-percent test. (d) Election. The installment election must be made by the estate-tax return's due date, including extensions, in the manner IRS regulations require. Once elected, the tax law applies as though the IRS had granted an extension of time to pay. (e) Proration of a deficiency. If a later-assessed tax deficiency applies to an estate paying in installments, the deficiency is spread proportionally across the remaining installments, subject to the (a)(2) cap. The part allocated to an installment not yet due is added to and paid with that installment; the part allocated to an installment already due must be paid immediately on IRS notice and demand. This rule doesn't apply if the deficiency was due to negligence, intentional disregard of the rules, or fraud. (f) Interest during the deferral. Interest on unpaid tax attributable to the first 5 years after the normal due date must be paid every year. Interest attributable to years after that first 5-year period is paid annually along with each installment. A deficiency covered by (e) that's assessed after the 5-year period requires paying, on notice and demand, the interest for that 5-year period plus any interest already assigned to an installment that's already due. If the executor picked a first-payment period shorter than 5 years, that shorter period replaces "5 years" throughout this subsection. (g) Acceleration — the deal can end early. If 50 percent or more of the value of the qualifying business interest is sold, exchanged, distributed, or otherwise disposed of, or money or property is withdrawn from the business — counting dispositions and withdrawals together — the installment deal ends and whatever's left unpaid is due immediately on notice and demand. Some things don't count as a disposition or withdrawal: a stock redemption qualifying under section 303 (or the related part of section 304), as long as an amount of estate tax at least equal to the redemption proceeds is paid by the next installment's due date, or within a year of the redemption if sooner, after which the business interest's value is treated as reduced by the redeemed stock's value; a tax-free reorganization exchange or a spin-off exchange under specified Internal Revenue Code sections, where the new stock simply steps into the old stock's shoes; and passing property to an heir under a will, intestacy law, or the decedent's trust, including further passes of that same property to family members by reason of later deaths. If holding-company stock was treated as business stock under the election described above, a disposition of the actual holding-company stock counted in the gross estate, or a withdrawal of money or property from the holding company tied to that stock, counts as a disposition or withdrawal of the underlying qualifying business stock — and the same rule applies one level down, to dispositions or withdrawals by the holding company from the business company itself. If the estate has "undistributed net income" for a tax year ending on or after the first installment's due date, the executor must, by the estate's income-tax filing deadline with extensions, pay that amount toward the unpaid installment balance. Undistributed net income is the estate's distributable net income, as defined in section 643, minus the amounts deducted for distributions under section 661(a)(1) and (2), the estate's own income tax for the year, and any estate tax, including interest, the executor already paid that year outside this rule. If holding-company stock is treated as business-company stock under the election above, dividends the holding company pays to the corporation count as paid to the estate, to the extent tied to the qualifying stock. Normally, missing any installment payment deadline, even with an extension, makes the whole remaining balance due immediately on notice and demand. But if the missed payment is made within 6 months of its due date, that acceleration doesn't apply, the special 2-percent interest rate doesn't apply to that payment, and instead a penalty applies: 5 percent of the late payment, multiplied by the number of months, or part of a month, it was late. (h) Election in case of certain deficiencies. If a deficiency is assessed, the estate qualifies under (a)(1), and the executor never made the original installment election, the executor can still elect to pay the deficiency in installments, unless the deficiency was due to negligence, intentional rule violations, or fraud. This election must be made within 60 days of the IRS's notice and demand for the deficiency. If elected, the deficiency is prorated across the installments that would have applied had the original election been timely made; the part tied to already-due installments is paid immediately upon electing, and the rest is paid as those installments would have come due. (i) Special rule for certain direct skips. If a business interest is transferred in a generation-skipping "direct skip," as defined in section 2612(c), happening at the same time as and because of the death, any generation-skipping tax on that transfer is treated as additional estate tax for purposes of this section. (j) Regulations. The Secretary can issue regulations needed to apply this section. (k) Cross references. For the Secretary's authority to require security for the extension, see section 6165. For the special lien available instead of a bond, see section 6324A. For the extended statute of limitations, see section 6503(d). For interest rules on tax paid in installments, see subsection (j) of section 6601. For the special rule qualifying an estate under this section when property was transferred within 3 years of death, see section 2035(c)(2).