Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Section 6166 Balancing Game: An Examination of the Policy Behind Estate of Roski v. Commissioner
As a general rule, an executor has nine months after a decedent’s death to pay federal estate tax. However, there are a handful of exceptions to this general rule. One of these exceptions is commonly known as the closely held business exception. Under section 6166, if the value of a closely held business makes up more than 35% of the decedent’s gross estate, then the executor may elect to defer payment of the estate tax attributable to the business. This can be significant, particularly where the decedent’s interest in a business makes up a significant portion of the taxable estate. Under section 6166, the executor is permitted to defer tax attributable to the business for up to five years, after which the unpaid tax may be paid in ten annual installments. Therefore, the estate may ultimately pay the tax attributable to the business over a 14 year period.
Congress enacted section 6166 to help estates that consist largely of illiquid assets avoid selling or breaking up a small business. Relief granted through deferred payments increases the Service’s risk with regards to uncollected taxes. However, section 6165 provides that the Commissioner “may require the taxpayer to furnish a bond” to secure payment of the deferred amount. In addition, section 6324A provides that the estate can agree to imposition of a special lien on “section 6166 lien property.” Recently, in Estate of Roski v. Commissioner, a taxpayer challenged the Commissioner’s determination that all taxpayers making section 6166 elections must secure deferred payments with a bond or special lien. The court held that, in making a bond or special lien a prerequisite of a section 6166 extension, the Commissioner had abused his discretion. Although the Commissioner retains the discretionary power to impose a bond or lien requirement, he may not require security in every case. Although the court did not analyze the taxpayer’s case on its merits, it rejected the bright-line rule asserted by the Commissioner. The court concluded that requiring an electing estate either to provide a bond or to agree to a special tax lien would place a burden on the taxpayer that is inconsistent with the purpose of section 6166.
The Commissioner’s decision to require a bond or special lien as security for section 6166 extensions may be interpreted as an attempt by the Commissioner to “strike a balance” between the interests of the business in continuing its operations and the Commissioner’s interests in collecting deferred payments of estate tax. The Tax Court’s decision in Roski is noteworthy because it answers the question of whether such a balance may be struck by requiring deferred payments to be secured in all circumstances. As a result of Roski, the Commissioner is forced to consider alternative processes for ensuring collection of deferred payments. Part I of this Note outlines the Commissioner’s decision to respond to the risk of default by requiring that deferred payments be secured with a bond or special lien, and addresses why the Tax Court ruled against such a response in Roski. Part II looks at the policy behind granting relief to small businesses through deferred tax payments, how such relief may confront the government with the risk of not collecting all estate taxes, and how a security requirement burdens the qualifying estate. Part III examines how a required bond or special lien would in fact undermine the objective of section 6166. Part IV concludes by proposing that the Commissioner consider certain factors to determine whether a bond or special lien is necessary, and in effect appropriately balance the government’s interest in collecting estate taxes with the estate’s interest in continuing business operations.