Rev. Rul. 85-43

1985-1 C.B. 356, 1985-14 I.R.B. 6.

INSTALLMENT METHOD; ACCELERATION OF ESTATE TAX PAYMENTS

Published: April 8, 1985

Section 6166.-Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business, 26 CFR 20.6166-3: Acceleration of payment.

(Also Sections 2011; 20-2011-1.)

  Installment method; acceleration of estate tax payments. A state death tax credit is not equivalent to a payment of estate tax for purposes of avoiding the acceleration of federal estate tax installment payments.

ISSUE

  Is a state death tax credit equivalent to a payment of tax imposed by section 2001 of the Internal Revenue Code for purposes of avoiding the acceleration of federal estate tax installment payments under section 6166(g)(1)(B)?

FACTS

  A died in 1982. A's interest in X corporation, a closely held business, exceeded 35 percent of the adjusted gross estate, and A's personal representative elected to pay the portion of the estate tax attributable to the closely held business in 10 equal installments under section 6166 of the Code. A's personal representative timely paid the non-deferred portion of the estate tax and the first installment of the deferred tax on January 10, 1983. In order to pay a state death tax liability, some shares of A's stock of X corporation were redeemed on January 11, 1983, in a redemption of stock to which section 303 applied. The proceeds (an amount less than the maximum amount of credit permitted under section 2011(b)) were paid to the state for death taxes on January 9, 1984. The proceeds, when added to prior distributions, amounted to a disposition of more than 50 percent in value of the estate's interest in X Corporation.

LAW AND ANALYSIS

  Section 6166(a)(1) of the Code provides that if the value of an interest in a closely held business that is included in determining the gross estate of a decedent exceed 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.

  Section 6166(g)(1)(A) of the Code provides that if any portion of an interest in a closely held business that qualifies under section 6166(a)(1) is distributed, sold, exchanged or otherwise disposed of, or money or other property is withdrawn from the trade or business, and the total of such distributions, sales, exchanges or other dispositions and withdrawals equals or exceeds 50 percent of the value of the interest, then the extension of time for payment of tax provided in section 6166(a) will cease to apply, and the unpaid portion of the tax payable in installments must be paid upon notice and demand.

  Section 6166(g)(1)(B) of the Code provides generally, that in the case of a distribution in redemption of stock to which section 303 applies, section 6166(g)(1)(A) will not apply, and, for purposes of other dispositions and withdrawals under section 6166(g)(1)(A), the value of the interest in the closely held business should be reduced by the value of the stock redeemed. Section 6166(g)(1)(B) applies only if, on or before the date prescribed for payment of the first installment due after the date of the distribution (or, if earlier, on or before the day which is 1 year after the date of the distribution), an amount of the tax imposed by section 2001 is paid which is not less than the amount of money and other property distributed.

  Section 2011 of the Code provides that within the limitations of section 2011(b), the tax imposed by section 2011 will be credited with the amount of any estate, inheritance, legacy or succession taxes actually paid to any state.

  Rev. Rul. 83-15, 1983-1 C.B. 224, holds that when the federal estate tax is being paid in installments under section 6166 of the Code, only the amount of the installment actually paid is to be used in computing the credit for the tax on prior transfers under section 2013 of the Code for the estate of the transferee-decedent. See, Reed v. United States, Civil No. 83-3156 (7th Cir. Aug. 24, 1984).

  In Rev. Rul. 84-11, 1984-1 C.B. 201, an adjustment was made by the Internal Revenue Service in 1982 to increase the value of a 1977 gift. Although no gift tax could be assessed for the gift because the period of limitations had expired, the ruling holds that the adjustment does increase the total sum of the gifts because the use of the unified credit under section 2505 of the Code does not result in a payment or assessment of the gift tax that would preclude such adjustment under section 2504(c).

  Section 6166(g)(1)(B) of the Code requires a payment of the tax imposed by section 2001. Only those credits that are based on an actual federal tax payment may be regarded as tax paid for purposes of section 6166(g)(1)(B). An example of such a credit is a credit of the amount of an overpayment of an installment under section 6403. Other credits do not represent actual payments of tax, but do satisfy the tax liability. This is true of the unified credit against the gift tax. See Rev. Rul. 84-11. Other examples are the investment credit, foreign tax credit and the energy credit. The state death tax credit falls into this category--it offsets the estate tax liability but is not based on an actual payment of that tax.

HOLDING

  The application of a state death tax credit is not equivalent to an amount of tax paid for purposes of avoiding acceleration of federal estate tax installment payments under section 6166(g)(1)(B) of the Code.

Rev. Rul. 85-43, 1985-1 C.B. 356, 1985-14 I.R.B. 6.