872 / Are there any circumstances that would cause the termination of the estate tax deferral for estates including a closely held business interest?

The IRC Section 6166 election terminates and the whole of the unpaid portion of the tax payable in installments becomes due and is payable upon notice and demand from the district director if (1) any portion of the business interest is distributed, sold, exchanged, or otherwise disposed of, or money and other property attributable to such an interest is withdrawn from the business, and (2) the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 50 percent of the value of such interest.¹

A sale of business assets by the estate to satisfy unpaid mortgages encumbering the business property is not considered a disposition for purposes of the IRC Section 6166 election; however, to the extent proceeds from such a sale exceed the amount used to satisfy the mortgages, the transaction is considered a disposition.²

Distributions in redemption of stock under IRC Section 303 (distributions in redemption of stock held by a decedent at death in an amount not in excess of death taxes and settlement costs under special income tax rules that treat the redemption as a capital transaction rather than as a dividend) are not counted as withdrawals or as disposals of decedent’s interest in the business if an amount equal to any such distribution is paid in estate tax on or before the due date of the first installment of tax due after the distribution, or, if earlier, within one year after the distribution. However, an IRC Section 303 redemption does reduce the value of the business (as of the applicable valuation date) by the amount redeemed, for purposes of determining whether other withdrawals, distributions, sales, exchanges, or disposals meet the applicable 50 percent test.³

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1. IRC § 6166(g)(1)(A).