Aug 1, 2007 12:00 PM, By Jonathan J. Rikoon, partner and chair, Naftali T. Leshkowitz, counsel, and Liora Brener, associat

By: By Jonathan J. Rikoon, partner and chair, Naftali T. Leshkowitz, counsel, and Liora Brener, associat

In 1976, Congress enacted Section 6166 of the Internal Revenue Code so that, when a business owner died, his closely held business wouldn't have to be sold just to pay the federal estate taxes owed on his estate. Before this law, a taxable estate that held an interest in a closely held operating business but otherwise had little liquidity was forced to raise cash for estate taxes by borrowing from third parties or, when that wasn't possible, selling or liquidating the family business.

Section 6166 permits estates that meet certain requirements to defer paying the estate tax on a closely held business for 15 years and to do so at very low interest rates. But to secure what effectively is a long-term loan from the federal government to the estate, the Code authorizes the Internal Revenue Service to impose fairly onerous bond or lien arrangements that may be required.

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