IRC §6166 (Extension of time for payment of estate tax where estate consists largely of interest in closely held business) allows an executor to ELECT to pay the portion of federal estate tax attributable to a CLOSELY HELD BUSINESS INTEREST in INSTALLMENTS over as long as 14 YEARS, with a reduced 2% interest rate on a portion of the deferred tax. The provision prevents the FORCED SALE of family businesses to pay estate tax. CORE QUALIFICATION §6166(a)(1): the value of an interest in a closely held business included in the gross estate must EXCEED 35% of the ADJUSTED GROSS ESTATE (AGE = gross estate minus deductions under §2053 funeral/administration expenses and §2054 casualty/theft losses). PAYMENT STRUCTURE: up to 10 EQUAL ANNUAL INSTALLMENTS of tax; first installment due no later than 5 YEARS after the original estate tax due date; for the first 4 years (5 years from due date), executor may pay INTEREST ONLY, then 10 annual principal-plus-interest installments - total deferral up to 14 years. CLOSELY HELD BUSINESS §6166(b)(1): (A) sole proprietorship; (B) partnership where 20%+ of capital interest included in estate OR partnership has 45 or fewer partners; (C) corporation where 20%+ of voting stock value included in estate OR corporation has 45 or fewer shareholders. 2% PORTION §6166(b)(2): interest at 2% applies to estate tax on first $1,890,000 (2026 inflation-adjusted figure - verify Rev. Proc.) of taxable value of closely held business above the applicable exclusion amount; the "2-percent portion." Tax attributable to value ABOVE the 2% portion bears interest at 45% of the §6601 underpayment rate. INTEREST NOT DEDUCTIBLE - §163(k) / §2053 - interest on §6166 deferred estate tax is NOT deductible for income OR estate tax purposes. AGGREGATION §6166(c) - interests in 2+ closely held businesses treated as one if 20%+ of each included in estate. ACCELERATION §6166(g) - deferral terminates and unpaid tax becomes due if: (1) disposition of 50%+ of business interest; (2) withdrawal of 50%+ of business; (3) failure to pay any installment timely; (4) undistributed net income not applied. ELECTION on Form 706 filed timely (including extensions); separately notice required. PASSIVE ASSETS §6166(b)(9) excluded from business value. HOLDING COMPANY §6166(b)(8) special election for holding company stock.
The benefit: Defer estate tax attributable to a closely held business over up to 14 years - 5 years of interest-only payments followed by 10 annual installments of principal plus interest. Prevents forced sale of family businesses.
The 35% test: Value of closely held business interest must EXCEED 35% of the adjusted gross estate (gross estate minus §2053 and §2054 deductions).
The 2% rate: Estate tax on the first ~$1.89M (2026, indexed) of taxable closely held business value above the exclusion amount bears interest at just 2%. Tax above that bears interest at 45% of the §6601 underpayment rate.
Closely held business: Sole proprietorship; partnership (20%+ capital in estate OR 45 or fewer partners); corporation (20%+ voting stock in estate OR 45 or fewer shareholders).
The trap: Acceleration under §6166(g) - disposing of 50%+ of the business, missing an installment, or certain withdrawals makes ALL remaining deferred tax immediately due. Interest is NOT deductible.
| Qualification Element | Detail |
|---|---|
| 35% test §6166(a)(1) | Value of closely held business interest in gross estate must EXCEED 35% of adjusted gross estate (AGE) |
| Adjusted gross estate (AGE) | Gross estate MINUS §2053 deductions (funeral expenses, administration expenses, claims against estate, mortgages/debts) and §2054 deductions (casualty/theft losses during administration) |
| Citizen/resident requirement | Decedent must have been US citizen or resident at death |
| Interest passing to surviving spouse | Marital-deduction property excluded from numerator - only TAXABLE portion of business interest counts toward 35% |
| Election timing | Made on TIMELY filed Form 706 (including extensions); 9 months after death plus 6-month extension; protective election possible |
| Active trade or business requirement | Business must be ACTIVE trade or business; mere passive investment / asset-holding does NOT qualify; §6166(b)(9) excludes passive assets from value |
| Value determination | FMV of business interest per estate tax valuation; discounts for lack of marketability/minority may reduce value below 35% threshold - caution |
| Aggregation §6166(c) | Two or more closely held businesses treated as single business if 20%+ of TOTAL value of each included in gross estate |
| Interests held indirectly | Attribution rules under §6166(b)(2) for family-held interests; spouse and family ownership may aggregate |
| Farm as closely held business | Farm operations qualify as trade or business; coordination with §2032A special use valuation |
| Business Type | Requirement |
|---|---|
| Sole proprietorship §6166(b)(1)(A) | An interest as a proprietor in a trade or business carried on as a proprietorship |
| Partnership §6166(b)(1)(B) | Interest as a partner if: (i) 20%+ of total capital interest in partnership included in gross estate; OR (ii) partnership had 45 or fewer partners |
| Corporation §6166(b)(1)(C) | Stock in corporation if: (i) 20%+ of voting stock value included in gross estate; OR (ii) corporation had 45 or fewer shareholders |
| Number of partners/shareholders | Determined at date of death (or alternate valuation date); attribution rules apply to count family members as one |
| 20% inclusion test | Alternative to the 45-or-fewer count; allows large entity to qualify if estate held substantial (20%+) stake |
| Attribution §6166(b)(2)(D) | Property owned by family members (§267(c)(4)) and certain entities attributed to decedent for counting purposes |
| Active business requirement | Holding company / passive investment generally does NOT qualify; must be active trade or business |
| Holding company stock §6166(b)(8) | Special election - stock in holding company treated as business company stock if holding company stock is not readily tradable; but installments accelerated (no 5-year deferral, no 2% rate for this election) |
| Passive assets §6166(b)(9) | Value attributable to passive assets EXCLUDED from closely held business value for both 35% test and deferral amount |
| Multiple entities | §6166(c) aggregation - 20%+ of each treated as one business |
| Payment Element | Detail |
|---|---|
| Maximum installments §6166(a)(1) | Up to 10 EQUAL annual installments of the deferred estate tax principal |
| First installment deferral §6166(a)(3) | First principal installment due no later than 5 YEARS after original due date of estate tax (which is 9 months after death) |
| Interest-only period | For first 5 years (years 1-5), executor pays INTEREST ONLY annually; no principal required |
| Total deferral period | 5-year interest-only + 10 annual principal installments = up to 14 years from original due date |
| Interest payment frequency | Interest payable ANNUALLY throughout entire deferral period (all 14 years) |
| Deferred amount | Only estate tax ATTRIBUTABLE to closely held business interest may be deferred; balance due 9 months after death |
| Tax attributable formula | Total estate tax × (closely held business value / adjusted gross estate) = maximum deferrable amount |
| Election to pay fewer installments | Executor may elect fewer than 10 installments or shorter interest-only period |
| Prepayment | Executor may prepay remaining balance at any time without penalty |
| Interest Rate Element | Detail |
|---|---|
| 2% portion definition | Estate tax attributable to first $1,890,000 (2026 inflation-adjusted; the base $1,000,000 amount indexed since 1998) of taxable value of closely held business in excess of applicable exclusion amount |
| 2% portion calculation | Tentative tax on ($1,890,000 + applicable exclusion amount) MINUS tentative tax on applicable exclusion amount = the "2-percent portion" of estate tax |
| 2% rate applies | Interest on the 2-percent portion charged at FIXED 2% rate |
| Above-2%-portion rate §6601(j) | Tax attributable to business value ABOVE the 2% portion bears interest at 45% of the §6601 underpayment rate (e.g., if underpayment rate 8%, then 45% × 8% = 3.6%) |
| Indexing | The $1,000,000 base amount indexed for inflation since 1998; 2026 figure approximately $1,890,000 (verify current Rev. Proc.) |
| Daily compounding | Both rates calculated on daily compounded basis |
| Interest NOT deductible | §163(h) personal interest disallowance + specific rule - §6166 interest NOT deductible for income tax; NOT deductible as administration expense for estate tax §2053 (per §2053(c)(1)(D)) |
| Rate adjustment | Above-2% rate adjusts with quarterly §6601 underpayment rate changes; 2% portion rate fixed |
| Recomputation | Each installment, interest computed on declining principal balance |
Facts: Robert dies in 2026. His estate:
- Closely held manufacturing C-corp (100% owner): $20,000,000
- Personal residence: $2,000,000
- Investment portfolio: $3,000,000
- Gross estate: $25,000,000
- §2053 deductions (debts, admin expenses): $1,000,000
- Adjusted gross estate: $24,000,000
- Applicable exclusion amount 2026: $15,000,000 (OBBBA permanent)
Step 1 - 35% test:
Closely held business value: $20,000,000
Adjusted gross estate: $24,000,000
$20,000,000 / $24,000,000 = 83.3% > 35% threshold → QUALIFIES
Step 2 - Estate tax computation:
Taxable estate: $25,000,000 - $1,000,000 deductions = $24,000,000
Less applicable exclusion: $15,000,000
Taxable amount: $9,000,000
Federal estate tax (40% top rate): approximately $3,600,000
Step 3 - Deferrable amount:
Tax attributable to business = $3,600,000 × ($20,000,000 / $24,000,000) = $3,000,000
$3,000,000 may be deferred under §6166
Remaining $600,000 due 9 months after death
Step 4 - 2% portion calculation:
2% portion = tentative tax on ($1,890,000 + $15,000,000) minus tentative tax on $15,000,000
= tax on $16,890,000 minus tax on $15,000,000
The estate tax on the first $1,890,000 of business value above exclusion = approximately $756,000 (at 40%)
This $756,000 bears 2% interest
Step 5 - Interest rate split:
2% portion of deferred tax: $756,000 at 2% interest
Remaining deferred: $3,000,000 - $756,000 = $2,244,000 at 45% of §6601 rate (assume underpayment rate 8% → 3.6%)
Step 6 - Payment timeline:
Years 1-5 (after 9-month due date): interest-only on $3,000,000
Year 1 interest: ($756,000 × 2%) + ($2,244,000 × 3.6%) = $15,120 + $80,784 = $95,904
Years 6-15: 10 annual principal installments of $300,000 each + declining interest
Total deferral: ~14 years
Strategic value:
Without §6166, estate must pay $3,600,000 within 9 months - likely forcing sale of business. With §6166, $3,000,000 deferred up to 14 years with favorable 2% rate on $756,000 portion. Business continues operating; installments funded from business cash flow.
| Acceleration Trigger | Detail |
|---|---|
| Disposition/withdrawal 50%+ §6166(g)(1)(A) | If 50%+ of value of business interest is DISPOSED of or WITHDRAWN, all unpaid tax becomes due immediately |
| Aggregation of dispositions | Cumulative dispositions tracked; once cumulative reaches 50%, acceleration triggered |
| Exceptions to disposition | §6166(g)(1)(D) - transfers to family members by reason of death; certain §303 redemptions; tax-free reorganizations may not count as dispositions |
| Failure to pay installment §6166(g)(3) | Failure to pay any principal or interest installment within 6 months of due date accelerates entire balance; loss of 2% rate |
| Late payment within 6 months | Payment within 6 months of due date avoids acceleration but incurs penalty (loss of 2% rate on late portion) plus §6601 interest at full rate |
| Undistributed income §6166(g)(2) | If estate has undistributed net income for any year after 4th year, must be applied to installment due |
| Withdrawal of money/property §6166(g)(1)(B) | Withdrawal of 50%+ of business assets (distributions exceeding earnings) treated as triggering event |
| §303 redemption coordination | §303 stock redemptions to pay death taxes do NOT count as disposition if proceeds applied to estate tax/expenses within prescribed period |
| Continued business requirement | Business must continue as active trade or business; cessation may trigger acceleration |
| Effect of acceleration | All unpaid deferred tax due and payable upon notice and demand; lose remaining deferral benefit |
| Election Element | Detail |
|---|---|
| How to elect §6166(d) | Notice of election attached to TIMELY filed Form 706 (within 9 months of death plus 6-month extension) |
| Protective election | If estate value uncertain (litigation, valuation dispute), protective election preserves §6166 if final values qualify |
| Required information | Decedent name; closely held business description; value; computation of deferrable tax; number of installments elected |
| §6166 lien §6324A | Special estate tax lien on business assets; alternative to bond; executor may elect §6324A lien in lieu of bond |
| Bond requirement §6165 | IRS may require bond up to 2× deferred amount; §6324A special lien is common alternative |
| IRS determination | IRS reviews election; may require security; Estate Tax Lien Advisory Group involvement |
| Agreement of parties | All persons with interest in business property must consent to §6324A lien |
| Personal liability | Executor may have personal liability if distributes estate without providing for deferred tax |
| Form 706 Schedule | Election computation; ongoing annual interest/principal payment vouchers (Form 706-related) |
| Discharge of executor | Executor may seek discharge from personal liability under §2204 but deferred tax obligation continues against estate/business |
| Provision | Interaction with §6166 |
|---|---|
| §303 Stock redemption | Redemption to pay death taxes - capital treatment; redemption proceeds applied to estate tax; coordinates with §6166 deferral without triggering acceleration if structured properly |
| §2032A Special use valuation | Farms/business real property valued at use value rather than highest-and-best-use; can be combined with §6166; recapture rules separate |
| §6161 General extension | Discretionary extension for reasonable cause (up to 10 years); alternative or supplement to §6166 |
| §6163 Reversionary/remainder interest | Extension for estate tax on reversionary or remainder interests |
| §2053 Deductions | Reduce gross estate to adjusted gross estate for 35% test; §6166 interest NOT deductible under §2053(c)(1)(D) |
| §6324A Special lien | Estate tax lien on §6166 business property in lieu of bond |
| OBBBA $15M exemption | Higher exemption ($15M permanent 2026) reduces number of estates needing §6166; but large family businesses still benefit |
| Graegin loan alternative | If §6166 unavailable, third-party "Graegin loan" with deductible interest may finance estate tax (Graegin v. Commissioner) |
| State estate tax | Some states have own deferral provisions; state estate tax separate from §6166 federal deferral |
| Generation-skipping tax | §6166 generally applies to estate tax; GST tax deferral coordination limited |
Aggressive minority/marketability discounts on business interest may reduce value below 35% of AGE - disqualifying §6166. Practitioner must balance valuation discount benefits (lower estate tax) against §6166 qualification. Sometimes lower discount preserves §6166 eligibility.
§6166(b)(9) EXCLUDES passive assets from business value. Practitioner counting investment portfolio held inside operating company toward 35% test overstates qualification. Only active business assets count.
Holding company / passive investment entity does NOT qualify as closely held business. §6166(b)(8) holding company election available but loses 5-year deferral and 2% rate. Practitioner treating investment LLC as qualifying business misapplies §6166.
§6166(g)(1) - disposition of 50%+ of business interest accelerates all deferred tax. Practitioner advising sale of business division or shares without tracking cumulative disposition triggers immediate full tax. Family transfers by death are excepted.
§6166(g)(3) - failure to pay any installment within 6 months accelerates entire balance. Practitioner must calendar all 14 years of payments; one missed payment ends the entire deferral.
§6166 interest is NOT deductible for income tax OR estate tax (§2053(c)(1)(D)). Practitioner deducting §6166 interest as administration expense overstates deductions. This differs from Graegin loan interest which IS deductible.
The $1,000,000 base for the 2% portion is inflation-indexed; 2026 figure approximately $1,890,000. Practitioner using stale $1,000,000 or $1,640,000 understates the favorable 2% portion. Verify current Rev. Proc. figure.
Only the TAXABLE portion of business interest counts toward 35% test. Business interest passing to surviving spouse (marital deduction) excluded from numerator. Practitioner including spousal portion overstates qualification.
Partnership/corporation qualifies if 20%+ in estate OR 45 or fewer partners/shareholders. Practitioner requiring both fails larger entities that meet only one prong. Either test suffices.
§6166(c) - 20%+ of each of 2+ businesses can aggregate to meet 35% test. Practitioner analyzing each business separately may miss aggregation that qualifies. But each must have 20%+ inclusion.
IRS may require bond up to 2× deferred tax OR executor may elect §6324A special lien. Bond is costly; §6324A lien on business assets often preferable. Practitioner not electing §6324A may face expensive bond requirement.
§303 stock redemption to pay death taxes does NOT trigger §6166 acceleration if proceeds applied to estate tax within prescribed period. Practitioner failing to coordinate §303 redemption timing may inadvertently trigger 50% disposition acceleration.
Where estate value uncertain (litigation, IRS valuation dispute), protective §6166 election preserves the option if final values qualify. Practitioner failing to make protective election may lose §6166 if values shift across 35% threshold.
§6166(g)(2) - after 4th year, undistributed net income must be applied to current installment. Practitioner allowing income to accumulate without applying to installments risks acceleration.
Executor distributing estate without providing for deferred §6166 tax may incur personal liability. Practitioner should advise executor to obtain §2204 discharge and ensure adequate security before distribution.
$15M permanent exemption (2026) means fewer estates owe tax at all. But large family businesses (>$15M with spouse) still benefit from §6166. Practitioner should evaluate whether estate tax even applies before §6166 planning.
Primary authority: IRC §6166 (Extension of time for payment of estate tax where estate consists largely of interest in closely held business). §6166(a) (general rule - 35% test, up to 10 installments). §6166(a)(1) (35% of adjusted gross estate threshold). §6166(a)(2) (limitation on amount deferred). §6166(a)(3) (first installment up to 5 years after due date). §6166(b) (definitions and special rules). §6166(b)(1) (interest in closely held business - sole proprietorship, partnership, corporation). §6166(b)(1)(A) (sole proprietorship). §6166(b)(1)(B) (partnership - 20% capital or 45 or fewer partners). §6166(b)(1)(C) (corporation - 20% voting stock or 45 or fewer shareholders). §6166(b)(2) (2-percent portion). §6166(b)(2)(D) (attribution rules for counting). §6166(b)(7) (election to have installment provisions not apply to certain interests). §6166(b)(8) (holding company stock election). §6166(b)(9) (exclusion of passive assets). §6166(b)(10) (certain lending and finance businesses). §6166(c) (aggregation of two or more closely held businesses - 20% each). §6166(d) (election - notice on timely Form 706). §6166(g) (acceleration of payment). §6166(g)(1) (disposition or withdrawal of 50%+). §6166(g)(1)(A) (disposition/withdrawal trigger). §6166(g)(1)(B) (withdrawal of money/property). §6166(g)(1)(D) (exceptions - transfers by death). §6166(g)(2) (undistributed net income). §6166(g)(3) (failure to pay installment - 6-month grace). §6166(i) (interest computation). §6601(j) (2-percent rate and 45% of underpayment rate on excess). §6601 (interest on underpayment). §6324A (special estate tax lien for §6166 deferred amount). §6165 (bonds where time to pay extended). §6161 (general extension of time for payment of tax - reasonable cause). §6163 (extension for reversionary or remainder interest). §303 (distributions in redemption of stock to pay death taxes). §2032A (special use valuation). §2053 (deductions for expenses, claims - reduce gross estate to adjusted gross estate). §2053(c)(1)(D) (§6166 interest not deductible). §2054 (deductions for casualty and theft losses). §2204 (discharge of executor from personal liability). §2001 (imposition of estate tax). §163(h) (personal interest disallowance). §267(c)(4) (family attribution). Reg §20.6166-1 (election requirements). Reg §20.6166A-1 (general installment payment rules). Reg §301.6166-1. Graegin v. Commissioner, T.C. Memo 1988-477 (deductible loan interest alternative to §6166). Form 706 (United States Estate Tax Return). Form 706 Schedule for §6166 election. Revenue Procedure (annual - 2% portion inflation adjustment; 2026 figure approximately $1,890,000).