Rev. Rul. 75-367

Advice has been requested whether the assets described below constitute an interest in a closely held business within the meaning of section 6166(c) of the Internal Revenue Code of 1954.

The decedent died on February 21, 1973 with a gross estate of $500,000. The estate consisted of the following assets:

(1) The decedent owned 100 percent of the stock in an electing small business corporation. The corporation built homes on land owned and developed by the decedent. Value $70,000.

(2) Land owned by decedent which was being held for the purpose of building homes by the above corporation. Value $100,000.

(3) Business office and warehouse owned by the decedent but used by both the corporation and the decedent in the above operations. Value $20,000.

(4) Eight homes rented and owned by the decedent. These were homes built by the decedent's corporation and sold by the decedent. They were repurchased by the decedent between the years 1959 and 1971. The decedent collected the rents, made the mortgage payments and made the necessary repairs and maintenance to these homes. Value $70,000.

(5) Other investment and personal assets which were not considered business assets by the executor. Value $240,000.

Section 6166 of the Code provides, in effect, that the executor may elect to pay part or all of the tax imposed by section 2001 which is attributable to an "interest in a closely held business" (as defined by section 6166(c)) in installments if the value of such interest exceeds either 35 percent of the gross estate or 50 percent of the taxable estate. Section 6166(c) provides that the term "interest in a closely held business" includes both an "interest as a proprietor in a trade or business carried on as a proprietorship," and "stock in a corporation carrying on a trade or business" if certain ownership requirements are met. Section 6166(d) permits considering interests in two or more closely held businesses together for purposes of section 6166(a) if the decedent's gross estate includes 50 percent or more of the total value of each. The determination as to whether the decedent had an interest in a closely held business for purposes of the election is to be made as of the time immediately preceding the decedent's death.

Section 6166 of the Code in certain cases permits the deferral of the payment of the Federal estate tax where, in order to pay the tax, it would be necessary to sell assets used in a going business and thus disrupt or destroy the business enterprise. This section was not intended to protect continued management of income producing properties or to permit deferral of the tax merely because the payment of the tax might make necessary the sale of income-producing assets, except where they formed a part of an active enterprise producing business income rather than income solely from the ownership of property.

See Rev. Rul. 61-55, 1961-1 C.B. 713, wherein it is held that the ownership, exploration, development, and operation of oil and gas properties is a trade or business within the meaning of section 6166 of the Code. However, the mere ownership of royalty interests in oil properties is not a trade or business within the meaning of section 6166.

What amounts to a "trade or business carried on" within the meaning of the statutory language of section 6166(c)(1) of the Code ("an interest as a proprietor in a trade or business carried on as a proprietorship"), should not be determined merely by reference to a broad definition of what "business" is or to a case-law definition of the term for purposes of some other section of the Code such as section 162, but should be found in keeping with the intent of the legislature in enacting section 6166. Although the management of rental property by the owner may, for some purposes, be considered the conduct of business, in the case of a sole proprietorship, section 6166 was intended to apply only with respect to a business such as a manufacturing, mercantile, or service enterprise, as distinguished from management of investment assets.

Accordingly, the decedent's ownership of stock in the electing small business corporation engaged in home construction qualifies as an interest in a closely held business for purposes of section 6166(c) of the Code. Also, the real estate development and sales operation carried on as a proprietorship along with the business office and warehouse used by both the electing small business corporation and the decedent in selling homes qualifies as an interest in a closely held business for purposes of section 6166(c). However, the decedent's relationship to the rental properties was merely that of an owner managing investment assets to obtain the rents ordinarily expected from them and does not represent an interest in a closely held business within the meaning of section 6166(c).

Since the decedent's ownership exceeds 50 percent in both the electing small business corporation and in the proprietorship of real estate development and sales along with the business office and warehouse, the executor may treat the interest in both of these businesses as an interest in a single closely held business under section 6166(d) of the Code. In the present case, the total value of the two businesses exceeds 35 percent of the gross estate. Therefore, the executor may elect to pay that part of the estate tax attributable to the above business in installments under section 6166(a).

Compare Rev. Rul. 75-365, page 471, this Bulletin, wherein farm land and other properties in the aggregate, which separately were not businesses within the meaning of section 6166 of the Code, do not qualify under section 6166 as an interest in a closely held business.