Rev. Rul. 75-365

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.

A decedent died with a gross estate of $1,500,000. Among the assets included in the gross estate were rental commercial property ($200,000), rental farm property ($100,000), and notes receivable ($250,000), aggregating in value more than 35 percent of the gross estate. All these assets were wholly owned by the decedent as an individual.

Prior to his death the decedent maintained a fully equipped business office to collect rental payments on the properties, receive payments on notes receivable, negotiate leases, make occasional loans, and by contract direct the maintenance of his properties. He maintained records and kept regular office hours for collection of the amounts involved and the maintenance of his properties.

The executor of the decedent's estate did not rely on section 6166(d) of the Code (treating interests in two or more closely held businesses as an interest in a single closely held business) as he did not consider each of the above activities to be a business.

The executor considered the decedent's ownership of assets and the activities in connection therewith, taken in the aggregate, to be the proprietorship of a "closely held business." Since the value of the assets described above, considered in the aggregate, meets the percentage requirements set forth in section 6166(a) of the Code, he asks whether the estate tax attributable to such assets may be payable in installments under the provisions of section 6166.

Under the provisions of section 6166 of the Code, 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 and the regulations thereunder provide 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.

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. The disposition of one or more of the income producing properties would involve no hardship since it would not affect the management of, or threaten the income from, the properties remaining.

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 regard to a business such as a manufacturing, mercantile, or service enterprise, as distinguished from management of investment assets.

See Rev. Rul. 61-55, 1961-1 C.B. 713, wherein it is held that section 6166 of the Code did not apply to the portion of an estate constituting the mere ownership of royalty interests.

It follows that the mere grouping together of income-producing assets from which a decedent obtained income only through ownership of the property rather than from the conduct of a business, in and of itself, does not amount to an interest in a closely held business within the intent of the statute.

In this case the decedent's relationship to the various assets described was merely that of an owner managing investment assets to obtain the income ordinarily expected from them.

Therefore, the assets described do not constitute an interest in a closely held business within the meaning of section 6166(c) of the Code.

Compare Rev. Rul. 75-366, page 472, wherein farm land, under a certain tenant farming arrangement, qualifies as an interest in a closely held business within the meaning of section 6166 of the Code.