Can an estate make a valid installment election on a late-filed return?
Taxpayer Says: The estate fully complied with the requirements of the Internal Revenue code and substantially complied with the requirements of the related estate tax regulations for making an election to pay the tax due on an installment basis.
Internal Revenue Service Says: A valid installment election can only be made on a timely filed estate tax return. Because the estate filed the tax return late, the election was untimely and denial of the election was appropriate.
From Internal Revenue Code Section 6166: Under section 6166, a qualifying estate may elect to pay the estate tax in installments over an extended period.
From Internal Revenue Code Section 6166(a): 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.–(1) In general.–If the value of an interest in a closely held business, which 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 35% of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in two or more (but not exceeding 10) equal installments. ***Remaining paragraphs omitted.
From Internal Revenue Code Section 6166(d): Election.–Any election under subsection (a) shall be made not later than the time prescribed by section 6075(a) for filing the return of tax imposed by section 2001 (including extensions thereof), and shall be made in such manner as the Secretary shall by regulations prescribe. If an election under subsection (a) is made, the provisions of this subtitle shall apply as though the Secretary were extending the time for payment of the tax.
From Treasury Regulation 20.6166-1: Goes into greater detail regarding how an election under section 6166 is to be made. The regulation provides as follows:
(a) In general.–Section 6166 allows an executor to elect to extend payment of part or all of the portion of the estate tax which is attributable to a closely held business interest (as defined in section 6166(b)(1)). If it is made at the time the estate tax return is filed, the election is applicable both to the tax originally determined to be due and to certain deficiencies. If no election is made when the estate tax return is filed, up to the full amount of certain later deficiencies (but not any tax originally determined to be due) may be paid in installments.
(b) Time and manner of election.–The election provided under section 6166(a) is made by attaching to a timely filed estate tax return a notice of election containing the following information:
(1) The decedent’s name and taxpayer identification number as they appear on the estate tax return;
(2) The amount of tax which is to be paid in installments;
(3) The date selected for payment of the first installment;
(4) The number of annual installments, including the first installment, in which the tax is to be paid;
(5) The properties shown on the estate tax return which constitute the closely held business interest (identified by schedule and item number); and
(6) The facts which formed the basis for the executor’s conclusion that the estate qualifies for payment of the estate tax in installments.
In the absence of a statement in the notice of election as to the amount of tax to be paid in installments, the date selected for payment of the first installment, or the number of installments, the election is presumed to be for the maximum amount so payable and for payment thereof in 10 equal installments, the first of which is due on the date which is five years after the date prescribed in section 6151(a) for payment of estate tax.
THE CAUSE OF THE DISPUTE
In general, federal estate tax returns (Form 706) are due within nine months of the date of death. The estate tax is generally due at that time, too.
As an executor, you can request a six-month extension of time to file the estate tax return. If you have reasonable cause, such as insufficient liquid assets, you can request an extension of up to a year to pay the estate tax.
When 35% or more of the estate assets consist of interests in a small family business, you can request to pay the estate tax related to the business in up to ten annual installments. The request is known as a section 6166 election.
In this case, the estate tax return was due June 27, 2007. The taxpayer requested an extension of time to file, which was granted, until December 27, 2007. Along with the extension, the taxpayer attached a letter stating the intention to elect the section 6166 installment option, and included a check for the initial payment of $9,500,000.
In December, on the advice of an attorney, the taxpayer requested a second extension of time to file. The taxpayer attached a second letter to this extension, reiterating the estate’s intention to elect the installment option for payment of the estate tax.
The IRS disallowed the second extension of time to file, stating the additional time was not allowed under the statute.
The taxpayer filed the estate tax return on June 1, 2010. The taxpayer checked the box on Form 706 to elect installment payments and provided all the information required in the tax regulations, including detail of interests in closely-held businesses. In between the second extension request and the actual filing of Form 706, the estate made annual payments approximately consistent with the installment election and noted on the payments that they were related to the election.
The Internal Revenue Service denied the section 6166 installment request because the estate tax return had not been filed on time. The IRS says a valid installment election under section 6166 can only be made on a timely filed Form 706. Because the estate tax return was filed late, the election under section 6166 was untimely and denial of the election was appropriate.
The taxpayer says section 6166 of the Internal Revenue code only prescribes the time frame in which the election must be made, and does not state that the election must be made on, or in conjunction with, a timely filed estate tax return. In addition, despite the failure to comply with the literal requirements of the related regulation, the taxpayer argues the estate substantially complied because its actions of attaching a statement, checking the box and making payments put the IRS on notice that an election had been made.
WHAT WOULD YOU DECIDE?
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By failing to provide essential information regarding the estate’s closely held business interests–information that goes to the essence of the statutory purpose–the estate did not substantially comply with regulatory requirements, and relief under the doctrine of substantial compliance is not available.
In addition, the time to make an election under section 6166 is fixed by statute. The estate did not timely file its return, nor did it make a timely election under section 6166. Therefore, the estate did not properly make a valid election under section 6166.