Estate Administrative Expenses and the Personal Representative

• Publication year: 2000
• Pages: 69
• Citation: Vol. 29 No. 9 Pg. 69

29 Colo.Law. 69 Colorado Lawyer 2000.

2000, September, Pg. 69. Estate Administrative Expenses and the Personal Representative

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69

Vol. 29, No. 9, Pg. 69

The Colorado Lawyer
September 2000
Vol. 29, No. 9 [Page 69]

Specialty Law Columns
Estate and Trust Forum
Estate Administrative Expenses and the Personal Representative
by Harmon S. Graves

Reluctant to surrender any federal fisc to probate courts federal courts have closely examined the personal representative?s decision to sell assets during administration when an administrative expense deduction is claimed on an estate tax return. An assault on the validity of the applicable regulation1 imposing a standard of "necessity"2 not found in 26 U.S.C. § 2053(a) has failed.3 Therefore, personal representatives are confronted with the axiom that, when dealing with the government on tax matters, they "must turn square corners to achieve literal compliance"4 with 26 U.S.C. § 2053 and related regulations. However, the route is marked so that some rounded corners may be taken to meet deductibility requirements

This article addresses estate tax return deductibility of administrative expenses incurred in the sale of assets by the fiduciary during administration. The author concludes that a refusal by a beneficiary to accept a distribution in kind may qualify a sale of assets as necessary to effect distribution of the estate, which otherwise might be assailed as a sale for the individual benefit of a beneficiary and therefore may be nondeductible

Applicable Statute and Regulations

IRC § 2053(a) provides, in pertinent part:

. . . For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts . . . for administrative expenses . . . as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.

No definition of "administrative expenses" is given in IRC § 2053, but reference is made to expenses that are allowable under applicable state law. Colorado recognizes expenses of administration as claims of the second class5 that are permitted under the Allowance of Claims statute.6 Moreover, the personal representative is authorized to engage persons to perform specialized services in the administration of the estate for reasonable compensation.7

It is clear, however, outside the Seventh Circuit,8 that notwithstanding the straightforward language of IRC § 2053, allowability under state law of administrative expenses associated with the sale or property held by the personal representative alone will not satisfy deductibility requirements on the estate tax return.9 Treas. Reg. § 20.2053-3 requirements also must be met. In pertinent part, this regulation provides:

Deduction for expenses of administering estate.

(a) In general. The amounts deductible from a decedent?s gross estate as ?administration expenses? . . . are limited to such expenses as are actually and necessarily incurred in the administration of the decedent?s estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it. . . .

(d) Miscellaneous administration expenses. . . .

(2) Expenses for selling property of the estate are deductible if the sale is necessary in order to pay the decedent?s debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution. The phrase "expenses for selling property" includes brokerage fees and other expenses attending the sale. . . .

From the Commissioner?s construction of "administrative expenses" through this regulation, a two-part test for deductibility has emerged.

Two-Part Test for Deductibility

First, the expenses must be allowable as administrative expenses under the applicable state probate law. Second, such expenses must include only those actually and necessarily incurred in the administration of the decedent?s estate.10 As one court observed, "[T]he state law may be relied upon as a guide to what deductions may reasonably be permitted for federal estate tax purposes."11 Another court observed that deductibility is "ultimately a question of federal law."12

Under Treas. Reg. § 20-2053-1(b)(2), a...