Service Changes Policy on Estate Tax Installment Payments

In Notice 2007-90, the IRS announced a policy change, based on the Tax Court decision in Estate of Roski, 128 TC 113 (2007). The Service now will determine on a case-by-case basis whether security will be required when a qualifying estate elects under Sec. 6166 to pay all or a part of the estate tax in installments.

Sec. 6166 allows certain estates to elect to pay estate tax that is attributable to the decedent’s interest in a closely held business in up to 10 equal, annual installments, starting no later than the fifth anniversary of the due date of the estate tax liability.

The government’s interest in the deferred estate tax is secured by the general federal estate tax lien under Sec. 6324(a) for only the first nine years and three months of the installment payment period. Although this 10-year 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. Since installment payments generally do not have to start until five years and nine months after the date of death, the payment period can extend well past the time when the lien secures the government’s interest. According to the Service, in most cases, approximately half of the total deferred estate tax still remains to be paid during that final, unsecured portion of the deferral period.

As a result, the Service had been requiring either a surety bond or a special lien under Sec. 6324A as a prerequisite to allowing estates to elect to pay in installments. However, in April 2007, the Tax Court, in Estate of Roski, held that the IRS had abused its discretion by requiring this of all estates electing installment payments instead of making the determination case by case. The IRS says it is in the process of establishing standards to be applied on a case-by-case basis in the future to identify when the government’s interest in the deferred estate tax is deemed to be sufficiently at risk to justify the requirement of a bond or special lien. Treasury intends to issue regulations implementing those standards.

Until the standards are determined and the regulations are issued, the Service will determine case by case whether it will require a surety bond or special lien. If an estate refuses to provide the bond or lien when the Service determines one is necessary, the IRS can terminate the installment payment election.