870 / Can the time for paying the estate tax be extended if the estate includes a closely held business interest?
Under IRC Section 6166, if the decedent's interest in a closely held business exceeds 35 percent of the adjusted gross estate, the portion of the federal estate tax (including the generation-skipping transfer tax if it is imposed on a direct skip transfer occurring as a result of decedent's death) attributable to that interest may be paid in annual installments (maximum of 10), and the executor may elect to delay the beginning of the installment payments up to five years.1 The adjusted gross estate is the gross estate less deductions allowable under IRC Section 2053 and IRC Section 2054 (see Q 847).2 In the case of a gift within three years of death (see Q 824), the requirement that the value of the business interest exceed 35 percent of the gross estate is met by the estate only if the estate meets the requirement both with and without the application of the bringback rule.3
Planning Point: Section 6166 is one of the only estate tax deferral options for estates. Depending on the circumstances, an estate may elect to borrow funds to pay the entire estate tax liability rather than take advantage of Section 6166 as the interest payments should be deductible for estate tax purposes.
For decedents dying prior to 1998, a special 4 percent interest rate applies to the portion of tax on which payment is deferred under IRC Section 6166. However, if such portion exceeds $345,800, reduced by the amount of unified credit allowable against the tax, the excess amount will bear interest at the regular underpayment rate (see Q 869).4 In 1997, the maximum amount of deferred tax eligible for the 4 percent interest rate was $153,000.
For decedents dying after 1997, a special 2 percent interest rate applies to the portion of tax on which payment is deferred under IRC Section 6166. However, if such portion exceeds the amount of tax which would be calculated on the sum of $1,000,000 as indexed ($1,940,000 in 2026, $1,900,000 in 2025, $1,850,000 in 2024 and $1,750,000 in 2023)5 plus the unified credit equivalent, reduced by the amount of the unified credit (see "IRC Section 2010, Unified Credit," in Q 861) allowable against the tax, the excess amount will bear interest at 55 percent of the regular underpayment rate (see above). The $1,000,000 amount is adjusted for inflation, rounded down to the next lowest multiple of $10,000, after 1998.6 No deduction is permitted for estate or income tax purposes for the interest payable on such deferred tax.7 In 2026, the maximum amount of deferred tax eligible for the 2 percent interest rate is $776,000 ($760,000 in 2025, $700,000 in 2023 and $740,000 in 2024).8
If an election to defer taxes was made for a decedent dying before 1998, an irrevocable election could be made before 1999 to apply the lower interest rates (and the corresponding interest deduction disallowance) to payments due after the election was made (however, the 2 percent portion is equal to the amount which would be the 4 percent portion were it not for this election).9
For purposes of determining whether an estate qualifies for an IRC Section 6166 extension, the term "interest in a closely held business" means–
(A) an interest as a proprietor in a trade or business carried on as a proprietorship;
(B) an interest as a partner in a partnership carrying on a trade or business, if –
(i) 20 percent or more of the total capital interest in such partnership is included in determining the gross estate of the decedent, or
(ii) such partnership had 45 (15 for decedents dying before 2002) or fewer partners; or
(C) stock in a corporation carrying on a trade or business if–
(i) 20 percent or more in value of the voting stock of such corporation is included in determining the gross estate of the decedent, or
(ii) such corporation had 45 (15 for decedents dying before 2002) or fewer shareholders.10
For purposes of applying the foregoing rules, community property or property the income from which is community property and property held by two spouses as joint tenants, tenants by the entirety, or tenants in common is treated as though the property were owned by one shareholder or one partner, as the case may be. Also, property owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. For purposes of the preceding sentence, a person is treated as a beneficiary of any trust only if he has a present interest in the trust. All stock and partnership interests owned by the decedent and his family are treated as owned by the decedent. The decedent's family for this purpose includes only his spouse, his ancestors, his lineal descendants, and his brothers and sisters.11 As to any capital interest in a partnership or any nonreadily-tradable stock (i.e., stock for which at the time of decedent's death there was no market on a stock exchange or in an over-the-counter market) attributable to the decedent under the rules described in this paragraph, the value of such interest does not qualify for the five-year deferral or the special 2 percent or 4 percent interest rates.12
For purposes of IRC Section 6166, at the executor's election, the portion of the stock of any holding company which represents direct ownership (or indirect ownership through one or more other holding companies) by such company in a "business company" (i.e., a corporation carrying on a trade or business) is deemed to be stock in such business company. However, as to such holding company stock, the five-year delay and the 2 percent or 4 percent interest provisions (see above) will not apply.13
The value included in the computations necessary to determine if the estate qualifies for an IRC Section 6166 extension is the value determined for purposes of the estate tax.14 Thus, in the case of a farm or other business as to which the executor elected special use valuation (see Q 916), the special use valuation is treated as the value of the property as to which it applies, for purposes of IRC Section 6166.15
Also, for purposes of such valuation, the value of passive assets held by the business is not includable. In general, the term "passive asset" includes any stock held in another corporation. However, holding company stock included in the executor's election, explained just above, is not considered a passive asset. Also, if a corporation owns 20 percent or more in value of the voting stock of another corporation, or such other corporation has 45 (15 for decedents dying before 2002) or fewer stockholders, and 80 percent or more of the value of the assets of each such corporation is attributable to active assets, then such corporations are treated as one corporation. In other words, if the foregoing conditions are met, then for purposes of the passive asset rule, the corporation is not considered to hold stock in another corporation.16
For purposes of IRC Section 6166, interests in two or more closely held businesses, with respect to each of which there is included in determining the value of the decedent's gross estate 20 percent or more of the total value of each such business, are treated as an interest in a single closely held business. For purposes of this 20 percent requirement, an interest in a closely held business which represents the surviving spouse's interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common is treated as having been included in determining the value of the decedent's gross estate.17 However, an interest so attributed will not qualify for the five-year deferral or the special 2 percent or 4 percent interest rates.18
The IRS is permitted to require a bond or a lien to guarantee payment of future installments.19 However, the IRS abuses its discretion by arbitrarily requiring a bond or lien in all cases to secure payment of estate tax deferred under IRC Section 6166.20 The IRS will determine on a case by case basis whether security will be required when an estate elects to defer estate tax on a closely held business under IRC Section 6166.21
In general, if any payment of principal or interest is not paid when due, the whole of the unpaid portion of the tax payable in installments must be paid upon notice and demand from the district director. However, if the full amount of the delinquent payment (principal and all accrued interest) is paid within six months of the original due date, the remaining tax balance is not accelerated. Rather, the payment loses eligibility for the special interest rates (see above) and a penalty is imposed, equal to 5 percent per month based on the amount of the payment.22
1. IRC § 6166(a).
2. IRC § 6166(b)(6).
3. IRC § 2035(c)(2).
4. IRC § 6601(j), prior to amendment by TRA '97.
5. Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40, Rev. Proc. 2025-32.
6. IRC § 6601(j).
7. IRC §§ 163(k), 2053(c)(1)(D).
8. Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.
9. TRA '97, § 503(d)(2).
10. IRC § 6166(b)(1).
11. IRC § 6166(b)(2).
12. IRC § 6166(b)(7).
13. IRC § 6166(b)(8).
14. IRC § 6166(b)(4).
15. House Report No. 94-1380, pages 32-33.
16. IRC § 6166(b)(9).
17. IRC § 6166(c).
18. IRC § 6166(b)(7).
19. IRC §§ 6166(k), 6165, 6324A.
20. Est. of Roski v. Comm., 128 TC 113 (2007).
21. Notice 2007-90, 2007-46 IRB 1003.
22. IRC § 6166(g)(3).