Administrative expense deduction for interest on inheritance.
Author | O'Driscoll, David |
A district court allowed an estate tax administrative expense deduction for interest that accrued on a bequest--as required under state law--while the executrix waited for the IRS to issue a closing letter.
Facts
M was appointed independent executrix of A's estate under A's will. The will included a $10 million pecuniary bequest to H, Inc., dependent on H's status as a charitable organization at A's death. M waited to receive a closing letter from the IRS before funding this bequest. Under Texas Probate Code Section 378B(f), interest began to accrue on the bequest to H at a 6% annual rate, beginning one year after letters testamentary were issued to M. M sought an estate tax refund based on a deduction for payment of the interest. The IRS rejected the refund claim, arguing that M was not entitled to deduct the interest expense on A's estate tax return.
Analysis
An expense is deductible as an administration expense under Sec. 2053(a) and Regs. Sec. 20.2053-3(a) if it is: (1) incurred in the administration of a decedent's estate, (2) actually and necessarily incurred and (3) allowable by the laws of the jurisdiction under which the estate is being administered.
The first criterion permits estate tax deductions for expenses incurred in estate administration. Expenses facilitating a property distribution to the persons entitled to it are deductible administration expenses (Regs. Sec. 20.2053-3(a)). Here, the issue is simple: A's will mandated that H possess tax-exempt status as a charitable organization before the bequest to it was funded. In discharging her duties as the estate's personal representative, M was specifically required to ascertain H's status. Any expenses, including statutory interest expenses, incurred by H in making this determination--if actual, necessary and allowable under Texas law--were thus incurred in the administration of the decedent's estate.
The second criterion permits estate tax deductions actually and necessarily...
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