The IRS setup is a jumble of rules and requirements, as all taxpayers know. As annoying as many/most of them may be, it behooves folks to pay attention, nonetheless, and comply. Failure to do so can result in nasty consequences — as the Estate of Wallace R. Woodbury recently found out.
Seems this bloke passed away in late 2006 with a hefty estate tax liability. And when that liability is largely represented by holdings in closely-held businesses, IRS actually shows a little mercy, and allows estates to pay in installments — assuming the rules are followed.
An executor can elect to pay the estate tax attributable to a closely-held business interest in as many as ten equal annual installments, starting no later than five years after the regular due date for payment.
In order to qualify, the decedent must have been a U.S. citizen or resident at the time of death, and the value of the business interest must be more than 35 percent of the decedent’s estate.
Further, an election must be made by the due date (including extensions) of the estate tax return and in the manner set forth in IRS’ rules. The election is made by checking a box on the estate tax return form, and attaching a notice of election to the timely filed estate tax return (Form 706) which (election) contains the following info:
• Decedent’s name and taxpayer ID number.
• Amount of tax which is to be paid in installments.
• Date selected for payment of the first installment (which, as noted above, can be as late as the end of the fifth year after the return’s regular due date).
• Number of annual installments in which the tax is to be paid.
• Assets shown in the estate tax return which constitute the closely-held business interest; and
• Facts which formed the basis for the executor’s conclusion that the estate qualifies for payment of the estate tax in installments.
Unfortunately, Woodbury’s executor made more than a few mistakes regarding all of this, including eventually filing the estate tax return late, and when filing, not including in the attempted “election” the last two points mentioned above, among other things.
And no amount of letters to IRS (with the first extension, and another with an attempted second extension request) claiming an original intention to make the necessary election carried the day.
No soap, said IRS, and the Tax Court agreed. The failure to provide the essential required information regarding the closely-held business interest was not enough in the nature of “substantial compliance” with the regulations to carry the day.
CONSULT YOUR TAX ADVISER — This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at firstname.lastname@example.org.