n-07-90.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III - Administrative, Procedural, and Miscellaneous

This notice provides interim guidance and describes a change in Internal Revenue
Service policy regarding section 6166 of the Internal Revenue Code, Extension of Time
for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held
Business.

Notice 2007-90

PURPOSE

The purpose of this notice is to alert taxpayers, tax practitioners, executors and
other persons who represent estates, that, in light of a recent Tax Court decision, the
Internal Revenue Service is changing its policy and now will determine on a case-by-
case basis whether security will be required when a qualifying estate elects under
Internal Revenue Code section 6166 to pay all or a part of the estate tax in installments.
This notice invites comments from the public regarding the relevant factors and
appropriate standards for determining whether security is deemed to be necessary (and
thus will be required) to protect the government's interest in obtaining full payment of the
estate tax and interest thereon when that liability is deferred under section 6166.

BACKGROUND

Under section 6166, an estate that meets all of the requirements of the statute

- 2 -
may elect to pay the estate tax attributable to the decedent’s interest in a closely held
business in up to 10 equal, annual installments. The first of those annual payments
must be made by the 5
th
anniversary of the due date (determined without regard to any
extension) of the estate tax liability that is not deferred under section 6166. An estate
qualifies for a section 6166 election if the value of the decedent’s interest in the closely
held business exceeds 35 percent of the adjusted gross estate, the decedent was a
United States citizen or resident at the time of his or her death, and the estate made the
election by attaching a full and complete notice of election with a timely filed federal
estate tax return. I.R.C. § 6166(a) and (d). If the estate qualifies for the election, the
estate pays a reduced rate of interest on the portion of estate tax deferred under section
6166; that interest is payable annually during the entire deferral period, and in most
instances, interest only is paid during the first four years of the deferral period. I.R.C. §§
6166(f) and 6601(j). The deferred tax is payable in no more than ten equal annual
installments, beginning on a date that is not more than five years after the due date of
the Federal estate tax return, which is generally nine months from the date of death.
I.R.C. §§ 6166(a)(1) and (3).
Under section 6324(a), a general federal estate tax lien arises upon the
decedent’s date of death and attaches for ten years to all assets of the gross estate
(except those used to pay certain expenses). This general federal estate tax lien may
not be extended beyond the ten-year period following the date of death. As a result,
when an estate qualifies and elects under section 6166 to pay estate tax over a period
of up to 14 years, the government’s interest in the deferred estate tax is secured by the
general federal estate tax lien for only the first nine years and three months of the

- 3 -
installment payment period. (Although the lien runs from the date of death, the
installment payment period generally runs from the normal payment due date, nine
months after the date of death, thus reducing the time the general lien protects the
government to nine years and three months). During the final four years and nine
months of the 14-year installment payment period, the government’s interest is no
longer secured by the general estate tax lien. In most cases, approximately one-half of
the total deferred estate tax still remains to be paid during that final, unsecured portion
of the deferral period.
Sections 6166(k)(1) and 6165, however, permit the IRS to require a surety bond
(not exceeding double the amount with respect to which the extension is granted) from
an estate to ensure payment of the deferred estate tax to be paid in installments under
section 6166. In lieu of the requirement to post a surety bond, the executor may elect to
grant the IRS a special extended estate tax lien (in the amount of the deferred amount
plus any interest, additional amount, addition to tax, assessable penalty, and costs
attributable to the deferred amount) to secure the government’s interest. I.R.C. §§
6166(k)(2) and 6324A. This special lien does not expire until the earlier of the date the
estate tax is paid in full or the tax becomes uncollectible. I.R.C. §§ 6324A(d)(2), 6502,
and 6503(d).
In March 2000, the Treasury Inspector General for Tax Administration
recommended, in report 2000-30-059 “The Internal Revenue Service Can Improve the
Estate Tax Collection Process,” that the IRS protect the government’s interest in estate
tax deferred under section 6166. In 2002 in response to that report, the IRS
implemented a policy requiring a surety bond, or in the alternative, a section 6324A

- 4 -
special lien, as a prerequisite to making the section 6166 election. On April 12, 2007, in
Estate of Roski v. Commissioner, 128 T.C. 113 (2007), the Tax Court held that the IRS
had abused its discretion by requiring that all estates electing to pay the estate tax in
installments under section 6166 must provide a bond (or alternatively a special lien).
The court found that it was Congress’s intent that the IRS determine, on a case-by-case
basis, that the government’s interest is at risk prior to requiring security from an estate
electing to pay the estate tax in installments under section 6166.
INTERIM PROVISIONS
The Treasury Department and the IRS are in the process of establishing
standards to be applied on a case-by-case basis in the future to identify those estates
making an election under section 6166 in which the government’s interest in the
deferred estate tax and the interest thereon is deemed to be sufficiently at risk to justify
the requirement of a bond or special lien. The Treasury Department and the IRS intend
to issue regulations implementing those standards and related procedures. Until those
regulations are issued, however, the IRS will evaluate the factors described below and
all other relevant facts to determine on a case-by-case basis whether, at any time and
from time to time during the deferral period, the government’s interest in the estate tax
deferred under section 6166 and interest thereon is sufficiently at risk to justify the
requirement of a bond or special lien.
In order to determine whether the government’s interest in the deferred tax is
adequately secured up to the amount allowed under sections 6165 and 6324A, the IRS
will consider information contained in the estate tax return, attachments to the return,
information obtained during examination in audited cases, and any other relevant

- 5 -
information described in paragraphs 1 through 3 of the discussion of the factors to be
considered. Estates that have filed returns that do not contain adequate information to
make this determination may be contacted and required to provide additional financial
information to the IRS for purposes of making this determination. The IRS may
terminate an estate’s election for failure to respond to such requests within a reasonable
timeframe. If, after this individual evaluation and analysis, the IRS determines there is a
sufficient credit risk regarding the government’s collection of the estate tax payments
deferred under section 6166 and the interest thereon, the IRS will notify the estate that it
must provide a bond or elect to provide a section 6324A special lien in lieu of a bond. If
the estate then refuses to provide a bond or a section 6324A special lien, the IRS will
terminate the estate’s section 6166 election. The estate may then seek reconsideration
of the termination by the Office of Appeals and, if the Office of Appeals upholds the
IRS’s determination, the estate then will have the opportunity to petition the Tax Court
under section 7479 for a declaratory judgment with regard to whether its section 6166
election may be continued. I.R.C. § 7479; Rev. Proc. 2005-33, 2005-24 I.R.B. 1231.
The factors the IRS will consider in determining whether deferred installment
payments of estate tax under section 6166 pose a sufficient credit risk to the
government to justify the requirement of a bond or special lien are described below. In
making this determination, the IRS will consider all relevant facts and circumstances, in
addition to the factors identified in the following, non-exclusive list. No single factor will
be determinative, and not all factors may be relevant to every estate.
1. Duration and stability of the business
. This factor considers the nature of the
closely held business on which the estate tax is deferred under section 6166 and of the

- 6 -
assets of that business, the relevant market factors that will impact the business’s future
success, its recent financial history, and the experience of its management, in an effort
to predict the likelihood of its success and survival through the deferred payment period.
Facts relevant to this factor are likely to appear primarily in the appraisal and the
financial statements that accompany the estate tax return. Information regarding any
outstanding liens, judgments, or pending or anticipated lawsuits or other claims against
the business, if any, that are not disclosed in that documentation should be provided by
the estate with the election. The estate may be required to furnish such information in
response to an inquiry by the IRS.
2. Ability to pay the installments of tax and interest timely
. This factor considers
how the estate expects to be able to make the annual payments of tax and interest as
due, and the objective likelihood of realizing that expectation. Facts relevant to this
factor may include the nature of the business’s significant assets and liabilities, and the
business’s cash flow (both historical and anticipated). If not sufficiently disclosed in the
documents attached to the estate tax return, the estate should submit relevant
information with the election under section 6166. The estate may be required to furnish
such information in response to an inquiry by the IRS.
3. Compliance history
. This factor addresses the business’s history regarding
compliance with all federal tax payment and tax filing requirements, in an effort to
determine whether the business and its management respect and comply with all tax
requirements on a regular basis. This factor also addresses the estate’s compliance
history with respect to federal tax payment and filing requirements. The estate may use
a sworn affidavit or other probative documents to provide this information.

- 7 -
This notice is applicable to each estate: (1) that timely elects to pay the estate
tax in installments under section 6166 and that timely files a return on or after
November 13, 2007; (2) whose return was being classified, surveyed or audited by the
IRS as of April 12, 2007; or (3) that is currently in the deferred payment period but that
has not yet provided a bond or special lien if (a) the general federal estate tax lien will
expire within two years from November 13, 2007 or (b) the IRS reasonably believes that
the government’s interest in collecting the deferred estate tax and interest thereon in full
is sufficiently at risk to require a bond or special lien.
REQUEST FOR COMMENTS
The Treasury Department and the IRS intend to issue regulations regarding the
appropriate standards to be applied by the IRS in exercising its discretion with regard to
whether a bond or special lien will be required in order to avoid an IRS termination of an
estate’s election under section 6166, and invite interested persons to submit comments
regarding such standards and possible alternatives to a bond or special lien for
providing security under section 6166.
In particular, comments are requested with regard to the following issues:
1. What factors, in addition to or in place of those stated above, should the IRS
use in determining whether to require security from an estate electing to pay the estate
tax in installments under section 6166?
2. How often during the section 6166 installment payment period (or on what
occurrences) should the IRS reevaluate whether the estate poses a sufficient credit risk
to the government’s collection of the deferred estate tax and related interest to justify
the requirement of a bond or special lien?

- 8 -
3. What facts evident from a review of the estate tax return are likely to be
reasonably accurate predictors of either a future default in or full payment of the
deferred tax payments and related interest?
4. What additional financial information should the IRS require from an estate to
assist in making the determination as to whether the estate poses a sufficient credit risk
to the government with regard to the deferred estate tax and interest thereon to justify
requiring a bond or special lien?
5. For purposes of sections 6165 and 6166(k), should the IRS define a surety
bond under section 7101 to also include other forms of security, and, if so, what other
forms of security, such as certain irrevocable letters of credit from reputable financial
institutions or United States Treasury Bonds, should be so included?
Comments are encouraged to be submitted by January 14, 2008, to: Internal
Revenue Service, CC:PA:LPD:PR (Notice 2007- 90), room 5203, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20224. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (Notice
2007-90), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers may submit electronic comments directly to
the IRS e-mail address: notice.comments@irscounsel.treas.gov
. Please include “Notice
2007-90” in the subject line of any electronic communication.
DRAFTING INFORMATION
The principal author of this notice is Laura Urich Daly of the Office of Associate
Chief Counsel (Procedure and Administration). For further information regarding this
notice, contact Laura Urich Daly at (202) 622-3600 (not a toll-free call).