If a decedent's estate is subject to estate taxes at his death, the taxes are generally due in full 9 months after the date of death. However, to avoid the need for a "fire sale" liquidation of businesses, Section 6166(a)(1) of the Code permits an executor to elect to pay part or all of the estate tax imposed by section 2001 in two or more (but not exceeding ten) equal installments if a decedent was a citizen or resident of the United States on the date of death and the interest is a qualified closely-held business.
Only the taxes on assets actively used in a trade or business qualify - passive assets do not. The issue often comes up that if the decedent owns real estate, but has agents, employees, or independent contractors involved in its use and management, whether the decedent (or the applicable company owned by the decedent that owns the real property) has the requisite "active" business involvement to qualify for Secton 6166 treatment.
In a recently issued Revenue Ruling, the IRS notes that the fact that some of the real estate activities are conducted by third parties such as independent contractors who are neither agents nor employees of the decedent, partnership, LLC or corporation, will not prevent the business from qualifying as an active trade or business so long as these third-party activities are not of such a nature that the activities of the decedent, partnership, LLC or corporation (and their respective agents and employees) are reduced to the level of merely holding investment property. Often, however, day-to-day real estate operations and activities are performed by independent contractors, such as property management companies. If a decedent, partnership, LLC, or corporation uses an unrelated property management company to perform most of the activities associated with the real estate interests, that fact suggests that an active trade or business does not exist.
The Revenue Ruling provides a list of factors that must be weighed in determining whether there is the requisite active trade or business exists. It also provides several factual scenarios and applies these factors to those scenarios. The factors noted are:
-The amount of time the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) devoted to the trade or business;
-Whether an office was maintained from which the activities of the decedent, partnership, LLC, or corporation were conducted or coordinated, and whether the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) maintained regular business hours for that purpose;
-he extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) was actively involved in finding new tenants and negotiating and executing leases;
-The extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) provided landscaping, grounds care, or other services beyond the mere furnishing of leased premises;
-The extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) personally made, arranged for, performed, or supervised repairs and maintenance to the property (whether or not performed by independent contractors), including without limitation painting, carpentry, and plumbing; and
-The extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) handled tenant repair requests and complaints.
The Revenue Ruling advises that this is not an exclusive list of all applicable factors, and no one factor is dispositive.
Rev. Rul. 2006-34, 2006-26 IRB 1171, 06/22/2006.
Only the taxes on assets actively used in a trade or business qualify - passive assets do not. The issue often comes up that if the decedent owns real estate, but has agents, employees, or independent contractors involved in its use and management, whether the decedent (or the applicable company owned by the decedent that owns the real property) has the requisite "active" business involvement to qualify for Secton 6166 treatment.
In a recently issued Revenue Ruling, the IRS notes that the fact that some of the real estate activities are conducted by third parties such as independent contractors who are neither agents nor employees of the decedent, partnership, LLC or corporation, will not prevent the business from qualifying as an active trade or business so long as these third-party activities are not of such a nature that the activities of the decedent, partnership, LLC or corporation (and their respective agents and employees) are reduced to the level of merely holding investment property. Often, however, day-to-day real estate operations and activities are performed by independent contractors, such as property management companies. If a decedent, partnership, LLC, or corporation uses an unrelated property management company to perform most of the activities associated with the real estate interests, that fact suggests that an active trade or business does not exist.
The Revenue Ruling provides a list of factors that must be weighed in determining whether there is the requisite active trade or business exists. It also provides several factual scenarios and applies these factors to those scenarios. The factors noted are:
-The amount of time the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) devoted to the trade or business;
-Whether an office was maintained from which the activities of the decedent, partnership, LLC, or corporation were conducted or coordinated, and whether the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) maintained regular business hours for that purpose;
-he extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) was actively involved in finding new tenants and negotiating and executing leases;
-The extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) provided landscaping, grounds care, or other services beyond the mere furnishing of leased premises;
-The extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) personally made, arranged for, performed, or supervised repairs and maintenance to the property (whether or not performed by independent contractors), including without limitation painting, carpentry, and plumbing; and
-The extent to which the decedent (or agents and employees of the decedent, partnership, LLC, or corporation) handled tenant repair requests and complaints.
The Revenue Ruling advises that this is not an exclusive list of all applicable factors, and no one factor is dispositive.
Rev. Rul. 2006-34, 2006-26 IRB 1171, 06/22/2006.
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