Four operating units conducted active businesses for section 6166

Plain-English summary

A decedent's revocable trust held a large interest in a closely held corporation with six operating units. The estate asked whether four units' activities rose to the level of carrying on a trade or business for the section 6166 estate-tax installment rules. The IRS concluded that an equipment remarketing and leasing unit, a commercial-property management unit, a construction and property-oversight unit, and a hotel unit each conducted an active trade or business. Employees' direct management and supervision remained sufficient even where independent contractors performed some work. The ruling did not decide whether the decedent's particular interests otherwise qualified as interests in a closely held business.

Ruling snapshot

• Question: Did four corporate operating units carry on active trades or businesses for section 6166 purposes?
• Outcome: Approved for each unit, without ruling on the remaining statutory requirements for the decedent's interests.
• Key authorities: IRC §§ 2001, 6151, and 6166; Rev. Rul. 2006-34

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201928007                                              Third Party Communication: None
Release Date: 7/12/2019                                        Date of Communication: Not Applicable
Index Number: 6166.00-00, 6166.03-00
                                                               Person To Contact:
---------------------------------                              ------------------------, ID No. ------------------
--------------------------------                               -----------------------------------------------------
---------------------------------------                        Telephone Number:
-------------------------------------------                    --------------------
                                                               Refer Reply To:
                                                               CC:PA:03
                                                               PLR-126974-18
                                                               Date:
                                                               April 12, 201-9



Legend:
Estate                     =        ---------------------------------
Decedent                   =        --------------------
Executor                   =        ------------------
Date 1                     =        ---------------------
Date 2                     =        ---------------------------------------
Shares                     =        ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Percentage                 =        ------
Company 1                  =        ------------------------------
Company 2                  =        -----------
Company 3                  =        -----------------------------------------
State                      =        ---------------
City                       =        ----------------------
Operating Unit 1           =        ------------------------------------------
Operating Unit 2           =        ----------------------------------
Operating Unit 3           =        -----------------------------------------------
Operating Unit 4           =        ---------------------------------------
Operating Unit 5           =        ---------------------------------
Operating Unit 6           =        -------------------------------
Division 1                 =        ----------
Number 1                   =        --------
Number 2                   =        -----
Number 3                   =        -----
Number 4                   =        -----
Number 5                   =        ----


Dear ---------------:

PLR-126974-18                                2

This letter is in response to a letter from your attorney dated Date 1, requesting several
rulings under section 6166 of the Internal Revenue Code. The facts as submitted reflect
that Decedent died on Date 2. At the time of death, the Trust, a revocable grantor trust,
held Shares (Percentage) of the Company 1, a closely held corporation organized in
State. Company 1 is currently comprised of six operating units: Operating Unit 1; the
Operating Unit 2; Operating Unit 3; Operating Unit 4; Operating Unit 5; and Operating
Unit 6. The operations of the business units are reported on a consolidated corporate
income tax return.

Rulings requested:

      1. The marketing activities of the Operating Unit 2 are sufficient to constitute the
         “carrying on of a trade or business” such that an interest therein will qualify as
         an interest in a closely-held business for purposes of section 6166(a)(1).

      2. The activities of Operating Unit 3 are sufficient to constitute the “carrying on of
         a trade or business” such that an interest therein will qualify as an interest in a
         closely-held business for purposes of section 6166(a)(1).

      3. The activities of the Operating Unit 5 are sufficient to constitute the “carrying
         on of a trade or business” such that an interest therein will qualify as an
         interest in a closely-held business for purposes of section 6166(a)(1).

      4. The activities of Operating Unit 6 are sufficient to constitute the “carrying on of
         a trade or business” such that an interest therein will qualify as an interest in a
         closely-held business for purposes of section 6166(a)(1).

Relevant Authorities:

Under section 6166(a)(1), if the value of an interest in a closely held business that is
included in determining the gross estate of a decedent exceeds 35 percent of the
adjusted gross estate, the estate may elect to pay all or part of the tax imposed by
section 2001 (the estate tax liability) in two or more (but not exceeding ten) equal
installments. Under section 6166(a)(2), the maximum amount of tax that may be
deferred is the percentage of estate tax equal to the percentage of the adjusted gross
estate that is comprised of the closely held business amount. Under section 6166(a)(3),
if the estate makes an election under section 6166(a)(1), the estate has up to five years
from the due date prescribed by section 6151(a) to make the first installment payment.

Pursuant to IRC 6166(b)(1) an” interest in a closely held business” is defined, in
relevant part, as: stock in a corporation carrying on a trade or business if 20% or more
of the value of voting stock of the corporation is included in the gross estate, or the
corporation has 45 or fewer shareholders.

PLR-126974-18                                         3

Revenue Ruling 2006-34 contains a non-exclusive list of factors that are relevant in
determining whether real property interests are interests in a closely held business for
purposes of section 6166: the amount of time the corporation’s employees devoted to
the trade or business; whether an office was maintained from which the activities of the
corporation were conducted and whether the corporation maintained regular business
hours for that purpose; the extent to which the corporation’s employees were actively
involved in finding new tenants and negotiating and executing leases; the extent to
which the corporation’s employees provided services beyond the mere furnishing of
leased premises; the extent to which the corporation’s employees personally arranged
for, performed, or supervised repairs and the maintenance of property (whether or not
performed by independent contractors); and the extent to which the corporation’s
employees handled tenant repair requests and complaints. Although Revenue Ruling
2006-34 addresses interests in real estate, the factors in the revenue ruling are helpful
in evaluating whether other interests are those of an active trade or business.

Discussion:

Ruling request 1

The Date 1, letter requests a ruling that the marketing activities of the Operating Unit 2,
a division of Operating Unit 1, are sufficient to constitute the “carrying on of a trade or
business” such that an interest therein will qualify as an interest in a closely-held
business for purposes of section 6166(a)(1). According to the facts provided, Operating
Unit 2 is responsible for providing remarketing, management and support services
regarding equipment owned by Operating Unit 1 and Division 1 (a division of Operating
Unit 1), and equipment owned by outside lessors. Operating Unit 2 has Number 1 full-
time-equivalent employees that are involved in management, support, remarketing, sale
and re-lease of the equipment. Operating Unit 2 has Number 2 locations and Number 3
off-site warehouse maintained where activities are conducted. Most lessees and
customers are secured through direct activities of Operating Unit 2, and the repair of
equipment is either arranged for, performed by, or supervised by an employee of
Operating Unit 2.

Although Revenue Ruling 2006-34 addresses interests in real estate, not in the
management of personal property, the factors in the revenue ruling are helpful in
evaluating whether the employees of Operating Unit 2 are engaged in a trade or
business. Operating Unit 2 maintains several offices and a warehouse from which the
employees conduct business. The employees of Operating Unit 2: negotiate new
leases and monitor current leases; market and sell, or re-lease, used equipment; and,
store and maintain equipment for sale or re-lease. Accordingly, the activities of
Operating Unit 2 constitute an active trade or business for purposes of section 6166.1

1 This ruling does not address whether decedent’s interest in Operating Unit 2 qualifies as an interest in a
closely-held business for purposes of section 6166(a)(1).

PLR-126974-18                                         4

Ruling request 2

The Date 2, letter requests a ruling that the activities of the Operating Unit 3 a division
of the Company 1, are sufficient to constitute the “carrying on of a trade or business”
such that an interest therein will qualify as an interest in a closely-held business for
purposes of section 6166(a)(1). The facts provide that employees of Operating Unit 3
are involved in day-to-day operations, management, and maintenance of commercial
class properties. Operating Unit 3 has Number 4 full-time-equivalent employees that
work out of company offices in City, State. The employees of Operating Unit 3: find
new tenants; negotiate and execute leases; arrange for, perform, and supervise
property repairs and maintenance; and, handle tenant repair and maintenance requests,
and complaints. Additionally, the employees hire and supervise independent
contractors for substantial repairs and capital improvements, and services such as snow
removal, landscaping, security, janitorial, and cafeteria services.

Applying the factors discussed in Revenue Ruling 2006-34, Operating Unit 3 has a
significant number of full-time employees that are involved in the day-to-day operations,
management, and maintenance of real estate. Therefore, the activities of Operating
Unit 3 constitute the carrying on of a trade or business for purposes of section 6166.2

Ruling request 3

The Date 1, letter requests a ruling that the activities of Operating Unit 5, which
operates under a holding company, the sole member of which is Company 1, are
sufficient to constitute the “carrying on of a trade or business” such that an interest
therein will qualify as an interest in a closely-held business for purposes of section
6166(a)(1). The facts given provide that the Operating Unit 5 has Number 5 full-time
equivalent non-owner employees overseeing all facets of construction and supervising
operations of Company 2, an independent property management firm.

Applying Revenue Ruling 2006-34 to this situation, it appears that Company 2 is acting
as an independent contractor of Operating Unit 5. The use of independent contractors
to perform work does not prevent the business activities from rising to the level of the
conduct of an active trade or business provided that the third-party activities do not
reduce the activities of the corporation to merely holding investment property. From the
facts provided, Operating Unit 5 involves non-owner employees of Company 1 actively
overseeing construction of the subject properties and actively supervising the actions of
Company 2. Therefore the activities of Operating Unit 5 constitute the carrying on of a
trade or business for purposes of section 6166.3

2 This ruling does not address whether decedent’s interest in the Operating Unit 3 qualifies as an interest
in a closely-held business for purposes of section 6166(a)(1).
3 This ruling does not address whether decedent’s interest in the Operating Unit 5 unit qualifies as an
interest in a closely-held business for purposes of section 6166(a)(1).

PLR-126974-18                                         5

Ruling request 4

The Date 1, letter requests a ruling that the activities of Operating Unit 6 the sole
member of which is Company 1, are sufficient to constitute the “carrying on of a trade or
business” such that an interest therein will qualify as an interest in a closely-held
business for purposes of section 6166(a)(1).

The facts presented provide that Operating Unit 6 relies on Company 3, their hotel
management company, to operate and manage the subject hotel and restaurant.
Operating Unit 6 has no ownership interest in Company 3. However, the facts provide
that even though Company 3 operates, maintains, services, and improves the hotel,
employees of Operating Unit 6 are involved in a daily basis in all aspects of the
management and food service of the hotel.

Applying Revenue Ruling 2006-34 to this situation, it appears that Company 3 is acting
as an independent contractor of Operating Unit 6. The use of independent contractors
to perform work does not prevent the business activities from rising to the level of the
conduct of an active trade or business provided that the third-party activities do not
reduce the activities of the corporation to merely holding investment property. Even
though Company 3 is involved in the management of the hotel, Operating Unit 6 is not
merely holding an investment property. Therefore, the activities of Operating Unit 6
constitute the carrying on of a trade or business for purposes of section 6166.4

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. In accordance with the Power of
Attorney on file with this office, a copy of this letter is being sent to your authorized
representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

4 This ruling does not address whether decedent’s interest in Operating Unit 6 qualifies as an interest in a
closely-held business for purposes of section 6166(a)(1).

PLR-126974-18                               6

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.



                                     Sincerely,



                                     Francis M. McCormick
                                     Senior Technician Reviewer
                                     (Procedure & Administration)