Rev. Rul. 75-366

Advice has been requested whether certain properties included in a decedent's estate qualify under section 6166(c) of the Internal Revenue Code of 1954 as an interest in a closely held business.

The decedent died with a gross estate of $400,000 which included $300,000 of farm real estate. The farms were operated by tenant farmers under agreements whereby the decedent received 40 precent of the crops and bore 40 percent of the expenses. The decedent had participated with the tenants in important management decisions, such as what crops to plant, what fields to plant or pasture, how to utilize the subsidy program, what steps to take as to weed control, etc. The decedent had lived several miles from the farms but had made almost daily visits to inspect and discuss operations, and occasionally delivered supplies to the tenants.

Section 6166 of the Code provides that if the value of an interest in a closely held business that is included in the gross estate of a decedent exceeds either (1) 35 percent of the value of the gross estate, or (2) 50 percent of the taxable estate, the executor may elect to pay the portion of the Federal estate tax attributable to the interest in the closely held business in two or more (but not exceeding ten) equal installments.

Section 6166(c) of the Code provides that the term "interest in a closely held business" includes an interest as a proprietor in a trade or business carried on as a proprietorship.

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 purpose 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. 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.

Thus, the question is whether the decedent's interest in the farming operation was within the intent of section 6166(c)(1) of the Code as an interest of a proprietorship in a trade or business carried on as a proprietorship.

An individual is engaged in the business of farming if he cultivates, operates, or manages a farm for gain or profit, either as owner or tenant, and if he receives a rental based upon farm production rather than a fixed rental. Farming under these circumstances is a productive enterprise which is like a manufacturing enterprise which is like a manufacturing enterprise as distinguished from management of investment assets.

In the present case the decedent had participated in the management of the farming operations and his income was based upon the farm production rather than on a fixed rental.

Accordingly, the farm real estate included in the decedent's estate qualifies under section 6166(c) of the Code an interest in a closely held business.

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.