IRC § 6166 provides for an extension of time to pay estate tax where an estate consists largely of an interest in a closely held business. Rev. Rul. 2006-34 enumerates factors relevant in determining whether a deceased owner’s activities were sufficient to support a finding that the real property interest constituted a closely held business.
Although “no single factor” is dispositive, the IRS will consider (i) time devoted to the business; (ii) whether an office was maintained; (iii) the extent of the decedent’s involvement in finding tenants or negotiating leases; (iv) the extent of landscaping or other services provided that were beyond the mere furnishing of leased premises; and (v) the extent to which the decedent handled tenant repairs and requests. The ruling illuminated these factors with several examples:
In Situation 1, A, who handled the day-to-day operations of a strip mall qualified, since the A provided “significant services” and the owner’s activities went beyond that of a “mere investor.”
B’s mere ownership of an office park, in Situation 2, managed by a property management company in which B had no ownership interest, did not rise to the level of an active trade or business. However, if B owned 20% of the management company (Situation 3), B’s “significant interest” in the managing company would enable the office park to qualify as an interest in a closely held business for purposes of § IRC 6166.
In Situation 4, C owned a one percent general partnership interest and a 20 percent limited partnership interest in a limited partnership that owned three strip malls. C, as general partner, was required to manage the strip malls. Since C’s management activities, which included maintenance, repairs, collecting rents and negotiating leases were significant, C’s interest qualified as an interest in a closely held business.
* * *
Rev. Proc. 2006-31 provides guidance with respect to when the IRS will consent to a taxpayer’s request to revoke an election made under IRC § 83(b). The advice also describes the procedure for submitting such a request.
[Under IRC § 83(a), if property (e.g., stock) is transferred in connection with the performance of services, the excess of the fair market value (FMV) of the property (determined without regard to any restriction, other than a restriction which, by its terms will never lapse) as of the first day that the transferee’s rights in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount paid for the property, is included in the service provider’s gross income for that taxable year.
IRC § 83(b) and Treas. Regs. § 1.83-2(a) permit the service provider to elect to include in gross income the excess of the FMV of the property at the time of transfer (determined without regard to any lapse restriction) over the amount paid for the property, as compensation for services. If this election is made, the subsequent appreciation in value of the property is not taxable as compensation. (Although appreciation may later be taxed as short or long-term capital gain.)]
Under IRC § 83(b)(2), an election under § 83(b) must be filed with the IRS no later than 30 days following the transfer of property to the service provider. IRC §83(b)(2) and Treas. Regs. § 1.83-2(f) provide that an election may not be revoked without the consent of the Commissioner, and such permission will only be granted if (i) the person so electing was under a mistake of fact underlying the transaction, and (ii) the request is made within 60 days after learning of the mistake of fact. A request for consent to revoke an election must be made under the procedures for requesting a letter ruling, and must contain a description of the mistake of fact and the date on which the election was made.
Several examples illuminate Rev. Proc. 2006-31:
One example involves the transfer by Company M of 100 shares of substantially nonvested stock to employee A. The restricted stock agreement provides that the stock will revert to Company M if A’s employment is terminated for any reason prior to July 10, 2010. A pays $50x dollars for the stock, which has a FMV of $100x on July 10, 2006. A files a valid § 83(b) election on that date. On July 28, 2006, A learns that the forfeiture provision means that A will forfeit the stock even if Company M terminates A’s employment without cause. On August 16, 2006, A files a request to revoke the election. While the request was timely, denial results because A’s failure to understand the employment agreement is not a “mistake of fact underlying the transaction.”
In a variation of the example, A requests consent to revoke the election on August 4, 2006. In this case, consent to revoke will be granted for any reason, since the request was filed within 30 days of the time when the § 83(b) election itself could have been made.
In another example, on August 31, 2006, B begins employment with Company O under an employment agreement providing that B will receive Company O Class A common stock. On September 1, 2006, Company O transfers 50x shares of substantially vested Class B common stock. On September 15, B makes a valid § 83(b) election. On September 29, B discovers that Company O has two classes of stock and that B received Class B common stock rather than Class A. On November 1, B files a request to revoke the §83(b) election. B’s request to revoke will be granted since (i) the request consisted of a mistake of fact as to the underlying the transaction; and (ii) the request was timely, since it was made within 60 days after B learned of the mistake of fact.
In a variation of this example, B filed a request to revoke on December 15. Since the request was filed more than 60 days after B learned of the mistake of fact, the request to revoke the § 83(b) election would be denied.
Terminology of IRS Rulings & Procedures
The Code is the primary statutory source of federal tax law. Treasury Regulations which are administrative, rather than statutory, illuminate many individual Code provisions, and often provide examples. “Proposed” Regulations, which do not have the force of law (LeCroy Research Systems Corp. v. Com’r., 751 F.2d 123 (1984)) provide guidance upon which the taxpayer may rely pending IRS approval of “Final” Regulations, published in the form of a “Treasury Decision,” which also usually contains a preamble summarizing pertinent taxpayer comments to the Proposed Regulations.
Treasury Regulations may be either “interpretative” or “legislative.” Interpretative Regulations broadly interpret Code provisions. Legislative regulations, which are enacted pursuant to an express mandate in the Code itself (e.g.,“under regulations prescribed by the Secretary”), in theory at least, possess a higher degree of legal authority.
“Revenue Rulings” are statements of policy published by the IRS generally either in response to a taxpayer inquiry or as a result of a court decision. They represent the official IRS interpretation of the tax law. As such, taxpayers may rely on Revenue Rulings when contemplating transactions arising out of similar facts and circumstances. Nevertheless, Revenue Rulings are mere “opinions” of the IRS, and are not binding on courts.
“Private Letter Rulings” (PLRs), like Revenue Rulings, are issued exclusively in response to a particular taxpayer inquiry concerning specific facts. PLRs are, by definition, less authoritative than Revenue Rulings, since they may only be relied upon by the taxpayer seeking the ruling. PLRs may not technically be used or cited as precedent by taxpayers other than the requesting taxpayer. Still, PLRs are often discussed and cited by tax practitioners as though they provided substantial authority for a tax position taken or planned. After reviewing a request for a PLR (or Revenue Ruling), the IRS may advise that it intends to issue a negative ruling. At this point, the taxpayer may withdraw the request.
“Revenue Procedures” are published to announce IRS practices and procedures that affect the rights or obligations of taxpayers under the Code. 26 C.F.R. § 601.601(d) (2002). Not only may Revenue Procedures be relied upon as substantial authority, but taxpayers who deviate from procedures enunciated therein do so at their own peril.
“General Counsel Memoranda” (GCM) are prepared by the Office of the Chief Counsel. They explain the rationale for Revenue Rulings, PLRs, and Technical Advice Memoranda. GCMs possess “important precedential value in determining future tax questions.” Taxation With Representation Fund v. IRS, 485 F.Supp. 263 (D.D.C. 1980).
“Notices” are intended to provide substantive or procedural guidance prior to the issuance of Revenue Rulings and Treasury Regulations. “Announcements” alert taxpayers to a variety of information, but lack the formality of Notices, Revenue Rulings, or Revenue Procedures. Both Notices and Announcements constitute authority for avoiding the substantial understatement penalty under IRC § 6662, and may be relied upon to the same extent as Revenue Rulings and Revenue Procedures.
“Delegation Orders” are issued by the Commissioner pursuant to IRC § 7122, and delegate to the Commissioner’s subordinates authority to settle criminal or tax cases. “Executive Orders” are issued by the President, and in the federal tax realm include orders that give certain effects to provisions of the Code.
The IRS may decide to “acquiesce” to an adverse court decision, thereby foregoing the right to litigate the issue in another circuit. IRS policy is to announce whether it will acquiesce or not acquiesce to a particular Tax Court or Court of Appeals decision. An “Action on Decision,” the vehicle for such an announcement, is not, at least in the opinion of the IRS, an affirmative statement of IRS position. Rev. Rul. 87-138.
IRC § 6321 provides that following demand, a lien arises in favor of the United States against anyone who fails to pay any tax. IRC § 6323(b) provides that the lien is not valid against any creditor until a Notice of Federal Tax Lien (NFTL) is filed. However, IRC § 6323(b)(10) provides that even a filed tax lien is not valid to the extent a bank account secures a loan, if the bank was without actual notice of the NFTL.
Rev. Rul. 2006-42, interpreting these provisions, states that levy action does not determine superpriority of claims. Rather, levy authority enables the government to secure revenues while competing claims are resolved. Thus, a bank’s security interest in a taxpayer’s account does not relieve the bank of its obligation to honor the levy. The proper course of action for the bank is to either (i) request that the IRS, in the exercise of its administrative discretion, release the levy if the bank proves its superpriority interest; or (ii) file a wrongful levy suit under IRC §7426(a)(1) within 9 months from the date of levy. The bank cannot simply claim an offset against existing funds in the taxpayer’s account.
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Law Offices of David L. Silverman 
2005 Regs., IRS Rulings & Pronouncements
IRC § 6166 provides for an extension of time to pay estate tax where an estate consists largely of an interest in a closely held business. Rev. Rul. 2006-34 enumerates factors relevant in determining whether a deceased owner’s activities were sufficient to support a finding that the real property interest constituted a closely held business.
Although “no single factor” is dispositive, the IRS will consider (i) time devoted to the business; (ii) whether an office was maintained; (iii) the extent of the decedent’s involvement in finding tenants or negotiating leases; (iv) the extent of landscaping or other services provided that were beyond the mere furnishing of leased premises; and (v) the extent to which the decedent handled tenant repairs and requests. The ruling illuminated these factors with several examples:
In Situation 1, A, who handled the day-to-day operations of a strip mall qualified, since the A provided “significant services” and the owner’s activities went beyond that of a “mere investor.”
B’s mere ownership of an office park, in Situation 2, managed by a property management company in which B had no ownership interest, did not rise to the level of an active trade or business. However, if B owned 20% of the management company (Situation 3), B’s “significant interest” in the managing company would enable the office park to qualify as an interest in a closely held business for purposes of § IRC 6166.
In Situation 4, C owned a one percent general partnership interest and a 20 percent limited partnership interest in a limited partnership that owned three strip malls. C, as general partner, was required to manage the strip malls. Since C’s management activities, which included maintenance, repairs, collecting rents and negotiating leases were significant, C’s interest qualified as an interest in a closely held business.
* * *
Rev. Proc. 2006-31 provides guidance with respect to when the IRS will consent to a taxpayer’s request to revoke an election made under IRC § 83(b). The advice also describes the procedure for submitting such a request.
[Under IRC § 83(a), if property (e.g., stock) is transferred in connection with the performance of services, the excess of the fair market value (FMV) of the property (determined without regard to any restriction, other than a restriction which, by its terms will never lapse) as of the first day that the transferee’s rights in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount paid for the property, is included in the service provider’s gross income for that taxable year.
IRC § 83(b) and Treas. Regs. § 1.83-2(a) permit the service provider to elect to include in gross income the excess of the FMV of the property at the time of transfer (determined without regard to any lapse restriction) over the amount paid for the property, as compensation for services. If this election is made, the subsequent appreciation in value of the property is not taxable as compensation. (Although appreciation may later be taxed as short or long-term capital gain.)]
Under IRC § 83(b)(2), an election under § 83(b) must be filed with the IRS no later than 30 days following the transfer of property to the service provider. IRC §83(b)(2) and Treas. Regs. § 1.83-2(f) provide that an election may not be revoked without the consent of the Commissioner, and such permission will only be granted if (i) the person so electing was under a mistake of fact underlying the transaction, and (ii) the request is made within 60 days after learning of the mistake of fact. A request for consent to revoke an election must be made under the procedures for requesting a letter ruling, and must contain a description of the mistake of fact and the date on which the election was made.
Several examples illuminate Rev. Proc. 2006-31:
One example involves the transfer by Company M of 100 shares of substantially nonvested stock to employee A. The restricted stock agreement provides that the stock will revert to Company M if A’s employment is terminated for any reason prior to July 10, 2010. A pays $50x dollars for the stock, which has a FMV of $100x on July 10, 2006. A files a valid § 83(b) election on that date. On July 28, 2006, A learns that the forfeiture provision means that A will forfeit the stock even if Company M terminates A’s employment without cause. On August 16, 2006, A files a request to revoke the election. While the request was timely, denial results because A’s failure to understand the employment agreement is not a “mistake of fact underlying the transaction.”
In a variation of the example, A requests consent to revoke the election on August 4, 2006. In this case, consent to revoke will be granted for any reason, since the request was filed within 30 days of the time when the § 83(b) election itself could have been made.
In another example, on August 31, 2006, B begins employment with Company O under an employment agreement providing that B will receive Company O Class A common stock. On September 1, 2006, Company O transfers 50x shares of substantially vested Class B common stock. On September 15, B makes a valid § 83(b) election. On September 29, B discovers that Company O has two classes of stock and that B received Class B common stock rather than Class A. On November 1, B files a request to revoke the §83(b) election. B’s request to revoke will be granted since (i) the request consisted of a mistake of fact as to the underlying the transaction; and (ii) the request was timely, since it was made within 60 days after B learned of the mistake of fact.
In a variation of this example, B filed a request to revoke on December 15. Since the request was filed more than 60 days after B learned of the mistake of fact, the request to revoke the § 83(b) election would be denied.
Terminology of IRS Rulings & Procedures
The Code is the primary statutory source of federal tax law. Treasury Regulations which are administrative, rather than statutory, illuminate many individual Code provisions, and often provide examples. “Proposed” Regulations, which do not have the force of law (LeCroy Research Systems Corp. v. Com’r., 751 F.2d 123 (1984)) provide guidance upon which the taxpayer may rely pending IRS approval of “Final” Regulations, published in the form of a “Treasury Decision,” which also usually contains a preamble summarizing pertinent taxpayer comments to the Proposed Regulations.
Treasury Regulations may be either “interpretative” or “legislative.” Interpretative Regulations broadly interpret Code provisions. Legislative regulations, which are enacted pursuant to an express mandate in the Code itself (e.g.,“under regulations prescribed by the Secretary”), in theory at least, possess a higher degree of legal authority.
“Revenue Rulings” are statements of policy published by the IRS generally either in response to a taxpayer inquiry or as a result of a court decision. They represent the official IRS interpretation of the tax law. As such, taxpayers may rely on Revenue Rulings when contemplating transactions arising out of similar facts and circumstances. Nevertheless, Revenue Rulings are mere “opinions” of the IRS, and are not binding on courts.
“Private Letter Rulings” (PLRs), like Revenue Rulings, are issued exclusively in response to a particular taxpayer inquiry concerning specific facts. PLRs are, by definition, less authoritative than Revenue Rulings, since they may only be relied upon by the taxpayer seeking the ruling. PLRs may not technically be used or cited as precedent by taxpayers other than the requesting taxpayer. Still, PLRs are often discussed and cited by tax practitioners as though they provided substantial authority for a tax position taken or planned. After reviewing a request for a PLR (or Revenue Ruling), the IRS may advise that it intends to issue a negative ruling. At this point, the taxpayer may withdraw the request.
“Revenue Procedures” are published to announce IRS practices and procedures that affect the rights or obligations of taxpayers under the Code. 26 C.F.R. § 601.601(d) (2002). Not only may Revenue Procedures be relied upon as substantial authority, but taxpayers who deviate from procedures enunciated therein do so at their own peril.
“General Counsel Memoranda” (GCM) are prepared by the Office of the Chief Counsel. They explain the rationale for Revenue Rulings, PLRs, and Technical Advice Memoranda. GCMs possess “important precedential value in determining future tax questions.” Taxation With Representation Fund v. IRS, 485 F.Supp. 263 (D.D.C. 1980).
“Notices” are intended to provide substantive or procedural guidance prior to the issuance of Revenue Rulings and Treasury Regulations. “Announcements” alert taxpayers to a variety of information, but lack the formality of Notices, Revenue Rulings, or Revenue Procedures. Both Notices and Announcements constitute authority for avoiding the substantial understatement penalty under IRC § 6662, and may be relied upon to the same extent as Revenue Rulings and Revenue Procedures.
“Delegation Orders” are issued by the Commissioner pursuant to IRC § 7122, and delegate to the Commissioner’s subordinates authority to settle criminal or tax cases. “Executive Orders” are issued by the President, and in the federal tax realm include orders that give certain effects to provisions of the Code.
The IRS may decide to “acquiesce” to an adverse court decision, thereby foregoing the right to litigate the issue in another circuit. IRS policy is to announce whether it will acquiesce or not acquiesce to a particular Tax Court or Court of Appeals decision. An “Action on Decision,” the vehicle for such an announcement, is not, at least in the opinion of the IRS, an affirmative statement of IRS position. Rev. Rul. 87-138.
IRC § 6321 provides that following demand, a lien arises in favor of the United States against anyone who fails to pay any tax. IRC § 6323(b) provides that the lien is not valid against any creditor until a Notice of Federal Tax Lien (NFTL) is filed. However, IRC § 6323(b)(10) provides that even a filed tax lien is not valid to the extent a bank account secures a loan, if the bank was without actual notice of the NFTL.
Rev. Rul. 2006-42, interpreting these provisions, states that levy action does not determine superpriority of claims. Rather, levy authority enables the government to secure revenues while competing claims are resolved. Thus, a bank’s security interest in a taxpayer’s account does not relieve the bank of its obligation to honor the levy. The proper course of action for the bank is to either (i) request that the IRS, in the exercise of its administrative discretion, release the levy if the bank proves its superpriority interest; or (ii) file a wrongful levy suit under IRC §7426(a)(1) within 9 months from the date of levy. The bank cannot simply claim an offset against existing funds in the taxpayer’s account.
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