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United States. Congress. Senate. Committee on Fina.

Description of tax bills and other estate tax matters relating to the section 6166 Technical Revision Act of 1982 (S. 2479), the tax treatment of certain disclaimers (S. 1983), and the estate tax valuation of certain mineral property : scheduled for a hearing before the Subcommittee on Estate and Gi online

. (page 2 of 3)
Online LibraryUnited States. Congress. Senate. Committee on FinaDescription of tax bills and other estate tax matters relating to the section 6166 Technical Revision Act of 1982 (S. 2479), the tax treatment of certain disclaimers (S. 1983), and the estate tax valuation of certain mineral property : scheduled for a hearing before the Subcommittee on Estate and Gi → online text (page 2 of 3)
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may be claimed as an administration expense in determining estate tax
(sec. 2053) or may be claimed as an income tax deduction. The executor
must elect the manner in which the deduction is to be claimed (sec.
642(g)).

In general, interest is only deductible for estate tax purposes when
it is actually paid. The IRS holds that this general rule applies also to
interest on tax payment of which is extended under the installment
payment provision (Rev. Rul. 80-250, 1980-2 C.B. 278). Therefore, if
an estate elects to claim such interest as an estate tax deduction, an
amended estate tax return must be filed each year as the interest is
paid. The interest deduction reduces the decedent's estate tax, and this
reduction is reflected in reductions in the unpaid installments (Rev.
Proc. 81-27, 1981-27 1.R.B. 21) .

Other extensions of time to pay estate tax

If an estate is not eligible to defer estate tax under the installment
payment provision, payment of the tax may be extended under the
general estate tax extension of time to pay. Present law permits an
extension of time to pay tax for up to 10 years upon a showing of
reasonable cause. This extension is granted for a maximum period of
one year at a time and can be renewed annually (as long as the reason-
able cause continues to exist). One situation in which reasonable cause
is present is where an estate does not have sufficient funds to pay the
tax when otherwise due without borrowing at a rate of interest higher
than that generally available (Treas. Reg. § 20.6161-1 (a) ).

Issues

The principal issue is whether the installment payment provision
should be expanded to allow estate tax attributable to additional types
of business investments.

A second issue is whether the circumstances under which estate
tax deferred under the installment payment provision is accelerated
should be liberalized.

A third issue is whether the normal rule that interest is deductible
for estate tax purposes only when paid should be changed in the case
of interest accruing on estate tax deferred under this provision so as to
permit a deduction for the full amount of interest which might be
paid when the estate tax return is filed.

A fourth issue is whether an interest rate, other than the regular
deficiency rate, should apply to extended amounts of tax in excess of
amounts subject to the special 4-percent rate of present law.



11

A final issue is whether decisions of the Internal Revenue Service
as to qualification of an estate for the installment payment provision
or acceleration of unpaid tax should be subject to judicial review even
though the amount is not in dispute.

Explanation of the Bill
Overview

The bill would expand the types of assets that are eligible for
special treatment under the installment payment provision as an in-
terest in a closely held business in several ways, would liberalize the
rules under which unpaid installments of tax and interest are acceler-
ated, would provide a new interest rate on deferred tax and new
rules on the deductibility of that interest, and would provide for judi-
cial review of IRS determinations under the provision.

Qualification requirements

General rul-es

The bill would expand the types of business interests that qualify
for the installment payment provision in numerous ways. The bill
would increase the number of partners or shareholders a closely held
business can have under the numerical tests for qualifying interests
in a partnership or corporation as an interest in a closely held busi-
ness from 15 to 35. Thus, under the bill, if a partnership or corpora-
tion had 35 or fewer partners or shareholders, the numerical test would
be satisfied.

The bill would count interests in partnership profits under the per-
centage test for qualifying interests in a partnership as an interest in a
closely held business. Only interests in partnership capital are counted
under present law. Thus, under the amendment, if the decedent
owned capital or profits interests in a partnership, or a combination
of the two, totaling 20 percent or more of the value of the business,
the percentage test would be satisfied.

The bill would count nonvoting stock under the percentage test for
qualifying an interest in a corporation as an interest in a closely held
business. Only voting stock is counted under present law. Thus, under
the bill, if the decedent owned voting or nonvoting stock, or a combina-
tion of the two, totaling 20 percent or more of the value of the busi-
ness, the percentage test for corporations would be satisfied.

The bill would treat certain notes and other evidences of indebted-
ness as interests in closely held businesses (in addition to stock and
partnership interests which are considered under present law) in de-
termining whether the decedent owned an interest in a closely held
business. This type of interest would be considered in addition to, or in
combination with, corporate stock or interests in partnership profits
and capital. Only debt interests acquired in exchange for stock and
partnership interests owned by the decedent or for money which the de-
cedent loaned the business more than one year before his death, would
be considered. Thus, under the bill, the fact that the decedent withdrew
from the business by selling the decedent's interest pursuant to a "buy-
out" agreement with another owner who planned to continue the busi-
ness after withdrawal from the business of the decedent would not
preclude availability of the installment payment provision for the
decedent's estate.



12

The bill would eliminate the present law difference in treatment of
certain nonbusiness assets owned by partnerships and corporations as
compared to those assets owned by individuals carrying on businesses
as proprietorships. The bill would apply the present rule for proprie-
torships to all businesses where assets were contributed to the business
by or on behalf of the decedent and were not used in the conduct of the
business throughout the one-year period ending on the date of the de-
cedent's death. Therefore, under the bill, these nonbusiness assets
would not be included in determining whether the decedent's interest
in the business satisfied the requirement that 20 percent or more of the
total interests in a partnership or 20 percent or more of the stock in a
corporation (i.e., the percentage tests) be included in the decedent's
gross estate.

Attribution rules
The bill would combine the automatic and elective attribution rules
of present law and would eliminate the penalties that apply under the
elective attribution rules. The new attribution rules would apply to
both the numerical tests and percentage tests for determining whether
partnerships and corporations are closely held businesses. In addition,
the definition of family member (i.e., persons whose stock or partner-
ship interests are treated as owned by the decedent) would be ex-
panded to include spouses of brothers, sisters, and lineal descendants
of the decedent as well as estates of family members. The broader attri-
bution rules would normally increase the value of the business interest
treated as owned by the decedent for purposes of determining whether
his estate qualified under the installment payment provision.

Aggregation rules
The bill would expand the present law rules under which interests
in multiple businesses are aggregated to qualify for the installment
payment provision. Under the bill, interests which satisfy either the
numerical test or the percentage test for determining whether the busi-
ness is a closely held business could be aggregated to meet the require-
ment that an interest in a closely held business equal at least 35 per-
cent of the decedent's adjusted gross estate. This aggregation would
only be permitted if the value of each such business comprised a least
5 percent of the value of the decedent's adjusted gross estate. Thus, an
estate could aggregate interests in a maximum of 20 businesses to qual-
ify for the installment payment provision.

Definition of trade or business

The bill would expand the types of assets that, in combination, con-
stitute a trade or business under the installment payment provision to
include interests (stock, partnership interests, and indebtedness) in
passive holding companies to the extent that the holding company
assets represent interests in active businesses which would meet the
requirements of the provision if owned directly.

The bill would also expand the availability of the installment pay-
ment provision for estates owning interests in oil and gas ventures.
Under the bill, if an income tax election to treat co-owners of an oil and
gas lease as proprietors were in effect at the decedent's death (under
sec. 761(a) ), the co-owners would be treated as proprietors for estate
tax purposes as well.



13

Two other exceptions to the active business requirement would be
enacted by the bill. First, the bill would treat royalty interests in oil
and gas ventures as interests in closely held businesses regardless of
whether these interests are essentially passive investment assets.
Second, the bill would treat assets owned by the decedent that are
passively leased to a closely held business in which the decedent was
a partner or shareholder as interests in such a business.

Expansion of acceleration exceptions

The bill would expand the present law situations in which an inter-
est in a closely held business can be disposed of and in which property
can be withdrawn from the business during the extended payment
period without accelerating the payment of deferred estate tax. These
expanded exceptions would apply to estates of individuals who died
before 1982 which elected the benefits of former section 6166A as well
as to all estate electing the present installment payment provision.

Dispositions and icithdrawals to pay death taxes and estate
expenses
The present rule under which certain redemptions of stock from a
corporation solely to pay Federal estate taxes are not treated as
dispositions or withdrawals under the acceleration rules would be
amended to extend this rule to any disposition or withdrawal of funds
of an interest in a closely held business (whether or not by means of a
redemption under sec. 303) to the extent that the proceeds are used
to pay any death taxes resulting from the decedent's death (including,
but not limited to, Federal estate taxes) and also funeral and adminis-
tration expenses (including interest on the deferred tax) allowable to
the estate as an estate tax deduction. Thus, the exception would apply
to proprietorships and partnerships as well as corporations and would
permit interests in the business to be sold to third parties as well as
redeemed by the business entity. In addition, the bill would delay the
date by which the tax would have to be paid following the disposition
in the case of dispositions occurring during the first 5 years of the
extended payment period. In such cases, payment of the taxes or
expenses would not have to be made until the due date of the first
installment of tax. Therefore, estates could dispose of stock in a closely
held business up to 5 years before the proceeds of the disposition were
used for payment of death taxes or funeral or administration expenses.

Reorganizations
The bill would expand the present exception to the acceleration rules
for certain corporate reorganizations and stock distributions to include
additional types of reorganizations (under sec. 368(a)(1)) and also
tax-free exchanges of common stock for preferred stock in the same
corporation (under sec. 1036).

No acceleration on subsequent death
The bill would expand the present exception to the acceleration rules
for dispositions to a family member by reason of death of the heir (or
subsequent transferee) receiving the decedent's closely held business
property, to permit such transfers without acceleration of unpaid tax
whether or not the transferee is a family member.



14

No acceleration in case of certain buy -outs
The bill would enact a new exception to the acceleration rules for cer-
tain dispositions of interests in and withdrawals of funds from closely
held partnerships and corporations if a note, rather than cash, is
received. Under the new exception, the heir receiving the decedent's
closely held business interest would be treated as disposing of the inter-
est only to the extent that the value of the surrendered stock or
partnership interest exceeded the face value of the note. The exception
would only be available for exchanges where the note is ( 1 ) given by
the corporation or partnership, or (2) where the note is given by an-
other shareholder, partner, or an employee, and the purchaser had been
a shareholder, partner, or employee of the business at all times during
the one-year before the exchange. If the purchaser were a shareholder
or employee, the corporation or partnership would be required to guar-
antee the note. The bill would include special rules to accelerate unpaid
tax if the note became readily tradable, were surrendered, or if 50
percent or more of the value of the business were acquired by a corpora-
tion whose stock was readily tradable. 12

Involuntary conversions
The bill would provide that, in the case of an involuntary conversion,
an interest in closely held business property is not considered to be
disposed of to the extent that qualified replacement property is
acquired.

Like-kind exchange
The bill would provide that, in the case of a like-kind exchange, an
interest in closely held business property is not considered to be dis-
posed of to the extent that the exchange is not taxable for income tax
purposes (under sec. 1031).

Interest on installment payments

Under the bill, the special 4-percent interest rate would continue
to apply the first $345,800 (minus the amount of the decedent's unified
credit) of estate tax extended under the installment payment provision.
However, the rate on extended amounts in excess of the amount sub-
ject to the 4-percent interest rate would not accrue interest at the rate
otherwise applicable to deficiencies (currently 20 percent). Under the
bill, extended amounts in excess of this 4-percent portion would accrue
interest at a rate equal to the average yield to maturity, of 14-year
United States obligations, during the month of December preceding
the year of the decedents' death. 13

The bill would also change the manner in which the interest on in-
stallment payments is deducted for estate tax purposes. Under the
bill, the full amount of interest anticipated to be paid over the 14-
year extended payment period would be deductible when the dece-
dent's estate tax return was filed (even though the interest was not



12 Readily tradable stock or notes would be stock or notes which there was a
market in any stock exchange or in any over-the-counter market.

13 At the present time, the Treasury Department has no obligations maturing
in the month of December. Long-term obligations are normally issued in January
with maturity dates of February 15, May 15, August 15, or November 15.



15

paid at that time). The amount of this deduction would not
be discounted to reflect the fact that the interest was not presently
payable. If the installment payment election were terminated before
expiration of the 14-year extension period, the estate would recompute
the deduction for interest, and its estate tax, at the time of the
termination.

Declaratory judgment relating to installment payment provision

The bill would provide a precedure for obtaining a declaratory
judgment with respect to —

(1) an estate's eligibility for extension of tax under the install-
ment payment provision, or

(2) whether there is an acceleration of unpaid tax.

The declaratory judgment provision would only be available when
there is an actual controversy; therefore, no declaratory judgment
would be available before the decedent's death (with respect to eligi-
bility for the extension) or before a transaction causing a potential
acceleration of unpaid tax.

Jurisdiction to issue the declaratory judgment would be in the Tax
Court, and the decision of the Tax Court would be reviewable in the
same manner as other decisions. Collection of tax would be stayed
until after a decision was rendered by the Tax Court, but the executor
(or heir in the case of a dispute over acceleration of unpaid tax) would
be required to pay the tax or post bond before appealing from the Tax
Court. The bill would also permit the courts to impose penalties in
the case of actions brought primarily for delay and where it was deter-
mined that the estate was not eligible for the extension provided by
the installment payment provision or that the tax was properly
accelerated.

Effective Dates

The provisions of the bill would apply generally to estates of in-
dividuals dying after December 31, 1981.

The provisions of the bill relating to acceleration of unpaid tax
would apply to dispositions and withdrawals after December 31, 1981.

The provisions of the bill amending the rate of interest charged on
installment payments and the estate tax deductibility thereof would
apply to estates of individuals dying after December 31, 1981, and
also —

(1) in the case of the rate of interest charged on installment
payments, to tax outstanding on January 1, 1982, for an estate
for which a timely election was made under either section 6166
or section 6166A, if the executor elects to have the amendment
apply; and

(2) in the case of the rules on the estate tax deduction of in-
terest on installment payments, to tax estimated to accrue after
December 31, 1981, for an estate for which a timely election was
made under either section 6166 or section 6166A, if the executor
elects to have the amendment apply.

Elections to have these amendments apply could be made even though
the estate had elected previously to claim the interest as an income
tax deduction.



16

The provisions of the bill authorizing penalties in the case of cer-
tain declaratory judgment proceedings, and appeals from Tax Court
decisions, would apply after the date of enactment.

Revenue Effect

It is estimated that this bill would reduce Federal budget receipts
by less than $50 million in fiscal year 1982, by $476 million in fiscal
1983, by $514 million in 1984, by $555 million in 1985 and by $599
million in 1986.



2. S. 1983— Senators Symms and Wallop

Tax Treatment of Certain Disclaimers

Present Law

In general, a disclaimer is a refusal to accept the ownership of
property or rights with respect to property. If a qualified disclaimer
is made, the Federal estate, gift, and generation-skipping transfer tax
provisions apply with respect to the property interest disclaimed as if
the interest had never been transferred to the person making the dis-
claimer. Thus, the transfer of property pursuant to the disclaimer
will not be treated as a taxable gift.

Prior to the enactment of section 2518 in 1976, there were no uni-
form Federal disclaimer rules. Before the promulgation of regula-
tions in 1958, the administrative practice of the Internal Revenue
Service was to allow the Federal tax consequences of a disclaimer to
depend upon its treatment under local law.

On November 14, 1958, the Treasury Department issued regula-
tions (T.D. 6334) which required that a disclaimer (1) be effective
under local law and (2) notwithstanding the timeliness of the dis-
claimer under local law, be made "within a reasonable time after
knowledge of the existence of the transfer." In litigating this issue,
they interpreted these regulations to require that a disclaimer be
made within a reasonable time after the creation of the interest,
rather than the time at which the interest vested, or became posses-
sory. Thus, for example, where property is transferred to X for life,
remainder to Y, both X and Y were required to disclaim within, a
reasonable time of the original transfer, although Y could not take
possession of the property until X's death.

These regulations also applied to interests created by transfers
made prior to November 15, 1958. Thus, under the regulations, a dis-
claimer of an interest created by a transfer made prior to Novem-
ber 15, 1958, would be qualified for Federal tax purposes only if it
were made within a reasonable time after the original transfer creat-
ing the interest. j.

This dispute as to the timing of a qualified disclaimer generated
considerable litigation, with conflicting results. The Tax Court up-
held the Treasury position in a series of cases including Jewett v.
Commissioner 70 T.C. 430 (1978), Estate of Halbach v. Commissioner
71 T.C. 141 (1978) and Cottrell v. Commissioner 72 T.C. 489 (1979).
However, the Circuit Courts were divided on the issue. The Eighth
Circuit rejected Treasury's position, concluding that State law deter-
mines the validity of a disclaimer in Keinath v. Commissioner 480
F2d 57 (1973) and Cottrell v. Commissioner, 628 F.2d 1127 (1980).
However, the Ninth Circuit upheld the decision in Jewett v. Commis-
sioner in 1980 (638 F.2d 93) and the Supreme Court granted Cer-
tiorari.

(17)



18

On February 23, 1982, the Supreme Court resolved the controversy
in Jewett v. C om/mAssioner x by upholding the Treasury position. Not-
ing that the Treasury interpretation is entitled to respect because it
has been consistently applied over the years, the Court concluded that
the relevant "transfer" occurs when the interest is created and not at
such later time as the interest vests or becomes possessory.

In the Tax Keform Act of 1976, Congress adopted a set of uniform
rules to govern disclaimers of property interests transferred before
December 31, 1976 (Sec. 2518). Under that section, a disclaimer gen-
erally is effective for Federal estate and gift tax purposes if it is an
irrevocable and unqualified refusal to accept an interest in property
and meets four other conditions. First, the refusal must be in writing.
Second, the written refusal generally must be received by the person
transferring the interest, or the transferor's legal representative, no
later than nine months after the transfer creating the interest. 2 Third,
the disclaiming person must not have accepted the interest or any of
its benefits before making the disclaimer. Fourth, the interest must
pass to a person other than the person making the disclaimer or to the
decedent's surviving spouse as a result of the refusal to accept the
interest. 3

Issue

The issue is whether a disclaimer by an individual of an interest
created before November 15, 1958, should be effective for estate and
gift tax purposes where the disclaimer is made subsequent to a reason-
able period after that individual obtained knowledge of the creation
of the interest.

Explanation of the Bill

Under the bill, a disclaimer of an interest created by a transfer made
before November 15, 1958 would be treated as a qualified disclaimer
if it meets the requirements of section 2518 and is made (1) within
nine months of enactment, or (2) within nine months of the first day
the disclaimant had knowledge of such interest (which knowledge
must be established by clear and convincing evidence). However, in
no event would a disclaimer made after December 31, 1991 be treated
as a qualified disclaimer.

Effective Date

The bill would apply to disclaimers made with respect to transfers
made before November 15, 1958.

Revenue Effect

It is estimated that this bill would reduce budget receipts by less
than $5 million annually.



1 82-1 USTC H13, 453 ; 50 U.S.L.W. 4215 ; 49 AFTR 2d 148,104.

2 However, the period for making the disclaimer is not to expire until nine
months after the date on which the person making the disclaimer has attained
age 21.

3 In addition, with respect to interests created after December 31, 1981, cer-
tain transfers to the person or persons who would have otherwise received the
property if an effective disclaimer had been made under local law, may be
treated as qualified disclaimers, provided the transfer is timely made and the
transferor has not accepted the interest or any of its benefits.



3. Estate Tax Valuation of Certain Mineral Property

Present Law
Overview

For estate tax purposes, real property ordinarily must be included
in a decedent's gross estate at its fair market value based upon its
highest and best use.

The fair market value is the price at which the property would
change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or sell and both having reasonable


2

Online LibraryUnited States. Congress. Senate. Committee on FinaDescription of tax bills and other estate tax matters relating to the section 6166 Technical Revision Act of 1982 (S. 2479), the tax treatment of certain disclaimers (S. 1983), and the estate tax valuation of certain mineral property : scheduled for a hearing before the Subcommittee on Estate and Gi → online text (page 2 of 3)