Under Section 6166, what happens if heirs dispose of a closely-held business interest?

Under Section 6166 of the Internal Revenue Code, the provision allows for an extension of time for payment of federal estate tax with respect to an interest in a closely-held business. This benefit is designed to prevent the forced sale of a family business or farming operation in order to pay estate taxes when a family member passes away.

However, if heirs dispose of the closely-held business interest, the tax benefits tied to the deferral are forfeited. This means that the deferred tax becomes immediately payable upon the sale or transfer of that business interest. Essentially, the estate tax that was allowed to be deferred while the heirs maintained ownership now requires immediate settlement because the business, as a qualifying asset, is no longer retained by the heirs.

This framework is essential in maintaining the financial viability of family businesses during the transition period after an owner's death and provides clarity on the consequences of altering ownership. The other answers do not accurately reflect the implications under Section 6166 regarding the responsibilities for estate taxes following the disposal of a closely-held business interest.