Rental activity as a closely held business.

Under Sec. 2033, the value of a decedents gross estate includes Lithe value of all property, to the extent of the decedents interest in the property at die time of death. Generally, any estate tax imposed on the value of the decedents estate is due nine months after the date of death.

If one or more of the assets includible in a decedents estate is an interest in a closely held business, the estate may elect to defer payment of the estate tax attributable to the closely held business interest for five years, with only interest being due and payable, the estate would thereafter pay the allocable tax in two or more (but not exceeding 10) equal annual installments. To qualify for such an election, the value of the interest in the closely held business must exceed 35% of the adjusted gross estate under Sec. 6166(a)(1).

Generally, under Sec. 6166 (b)(1), the term "interest in a closely held business" means: [] A proprietorship interest in a trade or business; [] A partnership interest in a trade or business if (a) 20% or more of the total capital interest is includible in determining the gross estate of the decedent, or (b) the partnership had 15 or fewer partners; or [] Stock in a corporation carrying on a trade or business, if 20% of value of stock is includible in the decedent's estate or the corporation had 15 or fewer shareholders.

An interest in a closely held business does not include the value of an interest attributable to passive assets held by the business. A passive asset,, means any asset other than an asset used in carrying on a trade or business under Sec. 6166(b)(9).

The IRS recently ruled in Letter Ruling 9621007 on whether a taxpayer's rental properties were an interest in a closely held business. The decedent actively managed three separate real estate interests. His activities in connection with the properties involved (a) selecting tenants, negotiating lease terms and handling complaints, (b) connecting md depositing rent, paying bins, and filing government and regulatory reports, and (c) making repairs and improvements as required under the terms of the leases.

The Service found such activity to be that of an owner managing investment assets to obtain the type of income that one would ordinarily expect from those assets. According to the IRS, the purpose of Sec. 6166 was to permit the deferral of the payment of the Federal estate tax when, in order to pay the tax at one time, an active business would suffer disruption or even termination by the sale of business assets. Such a policy rationale does not exist in the case of income-producing assets when all or a portion of such assets can be sold to pay estate tax. As a result, the Service ruled that the decedents holding of the real estate assets and his activities therein were not an interest in a closely held business, and the election under Sec. 6166 was not available to the decedent's estate.

Comment

The definition of "interest in a closely held business" found in Sec. 6166 is to be read narrowly, even though the decedent's activities would constitute a trade or business for purposes of some other provisions. If the assets in the ruling were a part of an active enterprise producing business income (such as a large property management firm), the result would likely be different., see, e.g., Letter Ruling 8240055.