Rev. Rul. 61-55

Advice has been requested whether working interests and royalty interests in oil and gas properties may be considered as a `trade or business' within the meaning of section 6166 of the Internal Revenue Code of 1954.

Forty percent of the decedent's gross estate consisted of working interests in oil and gas properties. The decedent was engaged in commercial activities of owning, operating, exploring, and developing these properties as a sole proprietor. An additional six percent of his gross estate consisted of royalty interests in oil properties, as opposed to working interests.

Section 6166(a) of the Code provides, in part, that if the value of an interest in a closely held business which is included in determining the gross estate of a decedent exceeds either (1) 35 percent of the value of the gross estate of such decedent, or (2) 50 percent of the taxable estate of such decedent, the executor may elect to pay that portion of the Federal estate tax imposed by section 2001, which is attributable to such interest, in two or more, but not more than ten, equal installments.

The term `closely held business' is defined in section 6166(c) of the Code as follows:

CLOSELY HELD BUSINESS.-For purposes of this section, the term `interest in a closely held business' means-

(1) an interest as a proprietor in a trade or business carried on as a proprietorship.

(2) an interest as a partner in a partnership carrying on a trade or business, if-

(A) 20 percent or more of the total capital interest in such partnership is included in determining the gross estate of the decedent, or

(B) such partnership had 10 or less partners,

(3) stock in a corporation carrying on a trade or business, if-

(A) 20 percent or more in value of the voting stock of such corporation is included in determining the gross estate of the decedent, or

(B) such corporation had 10 or less shareholders. For purposes of this subsection, determinations shall be made as of the time immediately before the decedent's death.

It is held that the ownership, exploration, development, and operation of oil and gas properties by the decedent constituted a `trade or business' within the meaning of section 6166 of the Code. Therefore, the Federal estate tax attributable thereto may be paid in installments if the estate otherwise qualifies under section 6166.

However, the mere ownership of royalty interests in oil properties does not constitute a `trade or business' within the meaning of that section. Consequently, the deferred payment right provided for in section 6166 of the Code is not applicable to the portion of the decedent's estate which consists of such royalty interests.