Under Texas law interest began accruing at a 6% annual rate one year from the date the state issued testamentary letters to Turner. She funded the bequest on October 19, 1999, in the amount of $11,052,055, including interest. On September 13, 2000, Turner filed a refund claim seeking $450,108 based on an estate tax deduction of $1,052,055 in statutory interest. The IRS rejected the claim, arguing the estate should deduct the interest on its income tax return.
Note: The deduction was worth more on the estate tax return than on the income tax return since, in 2000, the top estate tax rate was 55% while the top individual tax rate was only 39.6%.
Result. For the taxpayer. For an administrative expense to be deductible under IRC section 2053, it must be (a) incurred in the administration of the decedent’s estate, (b) actually and necessarily incurred and (c) allowable by the laws of the jurisdiction under which the estate is being administered. The IRS challenged Turner’s assertion that the estate had met the second criteria. The IRS argued Turner had enough information (for example, church publications) from Fowler Homes to fund the bequest at an earlier point in time, and therefore, the interest paid was not “actually and necessarily incurred.”
The court disagreed, stating that given the size of the bequest and the explicit requirement in the decedent’s will that Fowler Homes be a charitable organization, Turner had “prudently determined” that the available information “was not reliable enough to permit funding of the bequest.”
This case illustrates that as long as an estate takes reasonable steps to fulfill and document a decedent’s instructions, IRS challenges should prove unsuccessful.
Estate of Sally C. Jackson v. United States, 306 FSupp2d 668, 93 AFTR2d 686.
Prepared by Michael H. Brown, CPA, PhD, assistant professor of accounting, Millikin University, Decatur, Illinois.