Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-23

1976-1 C.B. 264

Section 641
Section 1371

IRS Headnote

Estate as shareholder in small business corporation. The estate of a deceased shareholder that holds stock in a small business corporation solely to facilitate the payment of Federal estate tax will continue to be an eligible shareholder within the meaning of section 1371(a) of the Code for the period during which the estate complies with the provisions of section 6166.

Full Text

Rev. Rul. 76-23

Advice has been requested whether, for purposes of the election under section 1372 of the Internal Revenue Code of 1954, an estate of a deceased shareholder that holds stock in a small business corporation will continue to be an eligible shareholder within the meaning of section 1371(a) for the period during which the estate complies with the provisions of section 6166, where the sole purpose for retaining the stock of the small business corporation in the estate is to facilitate the payment of the estate tax.

Section 1371(a) of the Code provides, in part, that the term "small business corporation" means a domestic corporation that does not have as a shareholder a person (other than an estate) who is not an individual.

Section 6166 of the Code 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 who was (at the date of his death) a citizen or resident of the United States exceeds either 35 percent of the value of the gross estate of such decedent or 50 percent of the taxable estate of such decedent, the executor may elect to pay the estate tax over a two to ten year period. The election is available only with respect to the portion of the estate tax attributable to the closely held business. The election terminates if any installment is not paid on or before its due date (including extensions) or if 50 percent or more of the value of the business is withdrawn from the business or 50 percent or more in value of an interest in the business is distributed, sold, exchanged, or otherwise disposed of. If an estate has undistributed net income for any taxable year after its fourth taxable year, such income must be applied against the balance of the unpaid tax.

Section 641(a)(3) of the Code provides that the tax imposed by section 1(d) applies to the taxable income of estates, including income received by estates of deceased persons during the period of administration or settlement of the estate. Section 1.641(b)-3(a) of the regulations provides, in part, that the period of administration or settlement of an estate is the period actually required by the administrator or executor to perform the ordinary duties of administration, such as the collection of assets and the payment of debts, taxes, legacies, and bequests, whether the period required is longer or shorter than the period specified under the applicable local law for the settlement of estates. However, the period of administration of an estate cannot be unduly prolonged. If the administration of an estate is unreasonably prolonged, the estate is considered terminated for Federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all the duties of administration.

Whether the period of administration of the estate will be considered unduly prolonged depends upon whether the administrator or executor of the estate has unreasonably delayed performance of the ordinary duties of administration. One of the ordinary duties of an administrator or executor of an estate is the payment of Federal estate taxes. Section 6166 of the Code provides a method whereby the estate may pay the Federal estate tax in installments. This section was enacted to alleviate the substantial burdens that might otherwise occur if the estate were forced to liquidate its interest in a closely held business in order to pay Federal estate taxes.

Accordingly, where the sole purpose for retaining stock of a small business corporation in an estate of a deceased shareholder is to facilitate the payment of the estate tax under section 6166 of the Code, the administration of the estate will not be considered unreasonably prolonged for purposes of section 641(a)(3), and thus the estate will continue to be an eligible shareholder within the meaning of section 1371(a) for the period during which the estate complies with the provisions of section 6166.