T.C. Memo. 2010-192
UNITED STATES TAX COURT
ESTATE OF HENRY H. STICK, DECEASED,
MARGARET STICK PARISI, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16383-08. Filed September 1, 2010.
D’s trust, the residual beneficiary of his estate,
took out a loan to pay the estate tax liability. The
estate deducted the interest on the loan as an
administration expense under sec. 2053, I.R.C.
Held: The interest is not deductible because the
estate has not shown that the loan was necessary.
Margaret Stick Parisi, for petitioner.
Terry Serena, for respondent.
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MEMORANDUM OPINION
NIMS, Judge: Respondent determined a $371,728 deficiency in
the Federal estate tax of the Estate of Henry H. Stick (estate).
After concessions, the sole issue for decision is whether the
estate is entitled to deduct the interest on a loan incurred to
pay its Federal and State estate tax liabilities.
Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect on the date of the
decedent’s death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Background
This case was submitted fully stipulated pursuant to Rule
122. The stipulations of the parties, with accompanying
exhibits, are incorporated herein by this reference. Ms. Parisi
resided in Massachusetts when she filed the petition.
Henry H. Stick (decedent) died testate on February 12, 2004,
when he was domiciled in Montgomery County, Ohio. Decedent’s
Last Will and Testament named the Henry H. Stick Trust (trust) as
residual beneficiary of his estate.
On November 17, 2004, the trust borrowed $1,500,000 from the
Stick Foundation for the purpose of satisfying the estate’s
Federal and State estate tax liabilities (loan). The principal
of the loan was to be repaid after 10 years with 5.25 percent
interest accruing and to be paid annually.
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On May 17, 2005, the estate filed a Form 706, United States
Estate (and Generation-Skipping Transfer) Tax Return. The
estate’s assets included $850,083 in mutual fund investments
(reported on Schedule B, Stocks and Bonds), $18,144 cash in
decedent’s checking account, $3,799 in refunds of decedent’s
Federal income tax, $12,868 in life insurance proceeds, $318,075
in american depository receipts, and $750,648 in additional
mutual fund investments (reported on Schedule F, Other
Miscellaneous Property Not Reportable Under Any Other Schedule).
The estate also held nonliquid assets totaling $1,088,844 which
included real property worth $422,060 and stock in the Henry H.
Stick L.L.C. worth $475,750. The estate reported funeral and
administration expenses of $818,990, which included $656,250 of
interest on the loan (interest expense). The estate reported a
Federal estate tax liability of $1,046,600.
The trust filed Forms 1041, U.S. Income Tax Return for
Estates and Trusts, for 2004, 2005, and 2006 and also claimed
deductions for the interest on the loans to pay the estate tax.
On April 8, 2008, respondent issued a notice of deficiency
determining an estate tax deficiency. In the notice respondent
disallowed the interest expense, among other things, and
determined a $371,728 deficiency. A timely petition was filed
July 3, 2008.
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Discussion
Section 2053(a)(2) provides that the value of a decedent’s
taxable estate shall be determined by deducting from the value of
the gross estate such amounts for administration expenses as are
allowable by the laws of the jurisdiction under which the estate
is being administered.
Respondent’s first argument is that section 642(g) prohibits
the estate from claiming a deduction under section 2053 for the
interest expense because the trust claimed income tax deductions
for the same expense. Section 642(g), however, was promulgated
to disallow an income tax deduction to an estate or any other
person (which includes a trust) unless the estate waives its
right to the section 2053 estate tax deduction. That section was
not intended to address or pertain to the estate’s entitlement to
an estate tax deduction. See Estate of Keitel v. Commissioner,
T.C. Memo. 1990-416; Rev. Rul. 81-287, 1981-2 C.B. 183, 184.
Respondent next argues that the estate is not entitled to an
interest deduction under section 2053 because it had sufficient
liquid assets to pay its estate tax liabilities and its funeral
and administration expenses (obligations) without borrowing to
pay those obligations.
Section 20.2053-3(a), Estate Tax Regs., provides that the
amount of deductible administration expenses is limited to those
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expenses which are actually and necessarily incurred in the
administration of the estate. See also Estate of Todd v.
Commissioner, 57 T.C. 288 (1971).
The estate did not present evidence as to the amount of its
State estate tax liability and did not provide a computation of
its Federal estate tax liability without the interest expense
deduction. There was no showing that it was actually necessary
to borrow in order to meet its obligations. Having failed to
show the necessity to borrow, the estate has not shown that
respondent’s determination was in error. See Rule 142; Welch v.
Helvering, 290 U.S. 111, 115 (1933).
In addition, on the basis of the information available in
the stipulated record, it appears that the estate did have
sufficient liquidity to meet its obligations. The estate tax
return reported liquid assets totaling $1,953,617. Excluding the
interest expense, the estate reported funeral and administration
expenses of $162,740 and would have had a Federal estate tax
liability approximating $1,367,861. Although the amount of the
estate’s State estate tax liability was not established in the
record, on brief, it was indicated that its liability was
$193,198. Adding these three figures together, the estate would
have had total obligations of only $1,723,799. Thus, the
estate’s liquid assets appear to have exceeded its obligations by
$229,818.
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Accordingly, we hold that the estate is not entitled to an
administration expense deduction for interest under section 2053.
To reflect the foregoing,
Decision will be entered
under Rule 155.