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Protective Election

Percentage requirements. To qualify for

of the voting stock of the corporation is

installment payments, the value of the

included in the gross estate of the

You may make a protective election to

interest in the closely held business that

decedent or the corporation had no more

specially value qualified real property.

is included in the gross estate must be

than 45 shareholders.

Under this election, whether or not you

more than 35% of the adjusted gross

may ultimately use special use valuation

The partnership or corporation must be

estate (the gross estate less expenses,

depends upon values as finally

carrying on a trade or business at the

indebtedness, taxes, and losses).

determined (or agreed to following

time of the decedent’s death.

examination of the return) meeting the

Interests in two or more closely held

In determining the number of partners

requirements of section 2032A.

businesses are treated as an interest in a

or shareholders, a partnership or stock

single business if at least 20% of the total

To make a protective election, check

interest is treated as owned by one

value of each business is included in the

“Yes” to line 2 and complete Schedule

partner or shareholder if it is community

gross estate. For this purpose, include

A-1 according to its instructions for

property or held by a husband and wife as

any interest held by the surviving spouse

“Protective Election.”

joint tenants, tenants in common, or as

that represents the surviving spouse’s

tenants by the entirety.

If you make a protective election, you

interest in a business held jointly with the

should complete this Form 706 by valuing

Property owned directly or indirectly by

decedent as community property or as

all property at its fair market value. Do not

or for a corporation, partnership, estate,

joint tenants, tenants by the entirety, or

use special use valuation. Usually, this

or trust is treated as owned

tenants in common.

will result in higher estate and GST tax

proportionately by or for its shareholders,

Value. The value used for meeting the

liabilities than will be ultimately

partners, or beneficiaries. For trusts, only

percentage requirements is the same

determined if special use valuation is

beneficiaries with present interests are

value used for determining the gross

allowed. The protective election does not

considered.

estate. Therefore, if the estate is valued

extend the time to pay the taxes shown

The interest in a closely held farm

under alternate valuation or special use

on the return. If you wish to extend the

business includes the interest in the

valuation, you must use those values to

time to pay the taxes, you should file

residential buildings and related

meet the percentage requirements.

Form 4768 in adequate time before the

improvements occupied regularly by the

Transfers before death. Generally,

return due date.

owners, lessees, and employees

gifts made before death are not included

If it is found that the estate qualifies for

operating the farm.

in the gross estate. However, the estate

special-use valuation based on the values

must meet the 35% requirement by both

Holding company stock. The

as finally determined (or agreed to

including in and excluding from the gross

executor may elect to treat as business

following examination of the return), you

estate any gifts made by the decedent in

company stock the portion of any holding

must file an amended Form 706 (with a

company stock that represents direct

the 3-year period ending on the date of

complete section 2032A election) within

death.

ownership (or indirect ownership through

60 days after the date of this

one or more other holding companies) in

Passive assets. In determining the

determination. Complete the amended

a business company. A holding company

return using special use values under the

value of a closely held business and

is a corporation holding stock in another

whether the 35% requirement is met, do

rules of section 2032A, and complete

corporation. A business company is a

not include the value of any passive

Schedule A-1 and attach all of the

corporation carrying on a trade or

required statements.

assets held by the business. A passive

business.

asset is any asset not used in carrying on

Additional information

a trade or business. Any asset used in a

In general, this election applies only to

For definitions and additional information,

qualifying lending and financing business

stock that is not readily tradable.

see section 2032A and the related

is treated as an asset used in carrying on

However, the election can be made if the

regulations.

a trade or business; see section

business company stock is readily

6166(b)(10) for details. Stock in another

tradable, as long as all of the stock of

Line 3—Installment Payments

corporation is a passive asset unless the

each holding company is not readily

If the gross estate includes an interest in

stock is treated as held by the decedent

tradable.

a closely held business, you may be able

because of the election to treat holding

For purposes of the 20% voting stock

to elect to pay part of the estate tax in

company stock as business company

requirement, stock is treated as voting

installments under section 6166.

stock; see Holding company stock below.

stock to the extent the holding company

The maximum amount that can be

If a corporation owns at least 20% in

owns voting stock in the business

paid in installments is that part of the

value of the voting stock of another

company.

estate tax that is attributable to the closely

corporation, or the other corporation had

held business. In general, that amount is

If the executor makes this election, the

no more than 45 shareholders and at

the amount of tax that bears the same

first installment payment is due when the

least 80% of the value of the assets of

ratio to the total estate tax that the value

estate tax return is filed. The 5-year

each corporation is attributable to assets

of the closely held business included in

deferral for payment of the tax, as

used in carrying on a trade or business,

the gross estate bears to the total gross

discussed below under Time for payment,

then these corporations will be treated as

estate.

does not apply. In addition, the 2%

a single corporation, and the stock will not

interest rate, discussed on page 10 under

Bond or lien required. The IRS requires

be treated as a passive asset. Stock held

Interest computation, will not apply. Also,

either that an estate furnish a surety bond

in the other corporation is not taken into

if the business company stock is readily

as a prerequisite for granting the

account in determining the 80%

tradable, as explained above, the tax

installment payment election or that the

requirement.

must be paid in 5 installments.

executor elects the special lien provisions

Interest in closely held business. For

of section 6324A.

Time for payment. Under the installment

purposes of the installment payment

method, the executor may elect to defer

If you elect the lien provisions, section

election, an interest in a closely held

payment of the qualified estate tax, but

6324A requires that the lien be placed on

business means:

•

not interest, for up to 5 years from the

property having a value equal to the total

Ownership of a trade or business

original payment due date. After the first

deferred tax plus four years of interest.

carried on as a proprietorship,

•

installment of tax is paid, you must pay

The property must be expected to survive

An interest as a partner in a partnership

the remaining installments annually by the

the deferral period.

carrying on a trade or business if 20% or

date 1 year after the due date of the

You do not need to furnish the

more of the total capital interest was

preceding installment. There can be no

required bond or elect the special lien at

included in the gross estate of the

more than 10 installment payments.

the time you file Form 706. The IRS will

decedent or the partnership had no more

contact you and you will be given the

than 45 partners, or

Interest on the unpaid portion of the

•

opportunity to furnish the bond or elect

Stock in a corporation carrying on a

tax is not deferred and must be paid

the special lien provisions.

trade or business if 20% or more in value

annually. Interest must be paid at the

-9-

Part Instructions

Instructions For Form 706 - United States Estate (And Generation-Skipping Transfer) Tax Return - 2005 Page 9

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