The opinion
T.C. Memo. 1999-307
UNITED STATES TAX COURT
ESTATE OF DELORES E. LASARZIG, DECEASED,
WELLS FARGO BANK, TRUSTEE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17956-97. Filed September 16, 1999.
P moved to stay the proceedings (delay entry of
decision) for up to 20 years so that the estate’s
beneficiaries, who were already in possession of the
estate’s assets, could borrow against, as opposed to
selling, the assets because the beneficiaries believed
that market conditions were unfavorable. The delay was
to permit the deduction of interest on a loan incurred
by the estate’s beneficiaries (or by their trusts) in
order to pay the estate tax owed by the estate. In all
other respects, the parties had agreed on all of the
issues raised, and a decision could be entered. At the
time of P’s motion the estate tax liability had been
paid. R objects to P’s motion on the ground that the
interest in question is not deductible by the estate
under sec. 2053, I.R.C., and the underlying
regulations.
Held: P’s motion is denied because of failure to
show entitlement to interest deductions under sec.
2053, I.R.C. Estate tax cases involving borrowing to
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pay estate tax and involving delay in entry of decision
reviewed.
Gregory Arnold and John W. Ambrecht, for petitioner.
Donna F. Herbert, for respondent.
MEMORANDUM OPINION
GERBER, Judge: Petitioner moved to stay the proceedings
(delay entry of decision) in order to be able, under section
2053,1 to deduct interest on a loan that was incurred to pay the
estate tax. Petitioner also seeks to deduct the attorney’s and
trustee’s fees incurred in the pursuit of resolving the
stay/interest issue.2 The interest is payable over 20 years.
Although there is no objection to the deduction of the fees,
respondent objects to the deduction of the interest because
“Petitioner has not proven or demonstrated that the interest
expense which it seeks to deduct over a twenty year time period
is properly deductible under the Internal Revenue Code.”
1
Section references are to the Internal Revenue Code as
amended and in effect for the period under consideration.
2
With the exception of the current controversy, all other
issues have been agreed on by the parties. The estate tax
liability has been paid, and this case is ready to be finalized
by the entry of a decision. Petitioner claims that the allowance
of deductions for the interest in question will result in a
refund of estate tax already paid.
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Background
Delores E. Lasarzig (decedent) died on March 14, 1993, and
her gross estate primarily consisted of interests in two trusts.
One trust was decedent’s living trust, and the other was a
qualified terminal interest property (QTIP) trust established
under decedent’s predeceased husband’s will. Other than the two
trusts, decedent’s sole assets were those that had been in her
conservatorship estate prior to death. The estate was granted a
6-month extension to June 14, 1994, for payment of the Federal
estate tax. The estate had paid $500,000 with the first request
for extension and estimated that a $3,151,785 estate tax was due.
Because the estate had a $2,735,537 cash shortfall, a second
extension was requested, and, at the time of the request, another
$416,248 in tax plus $14,784 interest was paid. By means of an
October 13, 1994, letter, respondent denied the estate’s request
for a second extension.
The estate administratively appealed respondent’s denial,
explaining that the estate involved two trusts, a family trust
and a QTIP testamentary trust established under decedent’s late
husband’s will. The family trust had paid its portion of the
estate tax, but the QTIP trust was unable to pay currently its
remaining share ($2,700,275). The QTIP trust had sold all of its
assets with the exception of three parcels of realty. One
property, an automobile service station, was chemically
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contaminated, affecting its marketability. The other two
properties had been leased to a third party who had developed
them into a shopping center. It appears that the shopping center
properties were the most significant assets held in the QTIP
trust and the only potential source for the payment of the QTIP’s
agreed portion of the estate tax liability. The estate explained
to respondent that because of a depressed real estate market and
for various other reasons these properties were not expected to
“bring a very good price” at that time. On November 15, 1994,
respondent approved a second extension to June 14, 1995.
Thereafter, on September 27, 1995, the QTIP trustee
distributed the two shopping center parcels to decedent’s
beneficiaries as tenants in common, who in turn transferred the
property to the beneficiaries’ respective personal family trusts.
The trustees of the personal family trusts and the beneficiaries
of decedent’s estate are the same persons (the children of
decedent). The personal family trust of each beneficiary was
separate from the two trusts that made up the bulk of the
estate’s assets. The estate’s request for a third extension was
filed and denied during 1995, and in the appeal it was explained
that the service station was under contract whereby it would be
sold, and the transaction was expected to close in about 60 days.
Respondent granted the third extension until June 14, 1996.
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On June 12, 1996, and December 30, 1997, fourth and fifth
extensions were requested and granted until January 31, 1997, and
December 30, 1998, respectively. All five extensions were
granted pursuant to respondent’s discretionary authority under
section 6161(a). On December 3, 1998, respondent served Stewart
Title Co. a notice of lien for the estate’s tax liability with
respect to the shopping center properties. On December 31, 1998,
the balance of the outstanding estate tax liability was paid with
the proceeds of a loan secured on a parcel of the shopping center
property. The loan was for 20 years with 7-percent interest and
a $26,361 monthly payment. The borrowers were the personal
family trusts of the beneficiaries. The borrowers may prepay the
loan after the third year, and the lender has the option to
accelerate the outstanding balance after 10 years if certain
conditions exist at that time. The term of the loan will end
December 30, 2018. We assume that to the extent the estate is
paying the interest on the loan, such payment is on behalf of or
to reimburse the beneficiaries’ family trusts.
Discussion
The threshold question underlying the parties’ controversy
is whether, under the circumstances of this case, the interest on
debt obtained to pay estate tax is an expense of administration
of the estate within the meaning of section 2053(a). The parties
interpret the existing case law as favoring their respective
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positions. Petitioner’s argument is that the circumstances of
this case should logically be allowed as a natural extension of
the existing precedent. Respondent’s argument is that the
interest being paid here is not being incurred in the
administration of the estate and, in addition, that petitioner
has not shown that it is allowable under local law.
The parties agree that the interest here is an otherwise
nondeductible personal obligation that could not have been
claimed by the trustee/beneficiaries or their respective family
trusts, which obtained the loan. Both parties also agree that,
under appropriate circumstances, an otherwise nondeductible
interest expense may be deductible as an administration expense
in an estate tax setting. Finally, respondent also agrees that
“an estate may [,under certain circumstances,] borrow money from
a private lender to satisfy its Federal estate tax liability and
deduct the interest on the debt as an administration expense
under section 2053”. Accordingly, we consider whether the
interest paid is deductible under section 2053. If we decide
that the interest is deductible, then we must decide whether it
would be appropriate to permit this proceeding to be stayed for
as long as 20 years to permit the payment and deduction of the
interest before entry of a decision.
To be deductible under section 2053, expenditures must be
actually and necessarily incurred in the administration of the
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estate and allowable under local law. Section 20.2053-3(a),
Estate Tax Regs., provides the following interpretation of the
above-stated requirement:
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.
The expenses contemplated in the law are such only as
attend the settlement of an estate and the transfer of
the property of the estate to individual beneficiaries
or to a trustee * * *. Expenditures not essential to
the proper settlement of the estate, but incurred for
the individual benefit of the heirs, legatees, or
devisees, may not be taken as deductions. * * *
Further explanation is provided in section 20.2053-8(b), Estate
Tax Regs., as follows:
The only expenses in administering property not subject
to claims which are allowed as deductions are those
occasioned by the decedent’s death and incurred in
settling the decedent’s interest in the property or
vesting good title to the property in the
beneficiaries. Expenses not coming within the
description in the preceding sentence but incurred on
behalf of the transferees are not deductible.
Respondent argues that the last sentence of each of the
above-quoted regulations should govern the situation in this
case. Respondent reasons that the loan proceeds used to pay the
estate tax were “attributable” to assets in or associated with a
QTIP trust. Because the QTIP trust is not subject to the probate
of the estate, section 2053(b) and section 20.2053-8(b), Estate
Tax Regs., govern this situation and prohibit the deduction of
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the interest as an administrative expense of the estate. In this
regard, we note that the trusts that now hold the shopping center
property are unrelated to the estate and to the two trusts that
made up the bulk of the estate’s assets.
Respondent emphasizes the following facts in this case that
he contends support a holding that the interest would not be
deductible under section 2053: (1) The real estate securing the
loans in question was transferred to and is under the control of
the beneficiaries; (2) the beneficiaries’ trusts, not the estate,
chose to secure a loan in 1998 rather than to sell the realty
because of their dissatisfaction with market conditions; (3) the
estate and the underlying trust have already benefited from five
extensions of the time for payment of the estate tax, two before
the property transfer to the beneficiaries’ trusts and three
after the transfer; (4) at the end of the extension period
permitted by respondent, it was the trustees of unrelated trusts
who made the choice to borrow to pay the estate tax, rather than
to sell the property; and (5) the loan is secured by property not
held by the estate and is payable over 20 years. These factors,
contends respondent, indicate that petitioner has not established
that the decision to borrow was necessary to the administration
of the estate.
Petitioner, in an attempt to reconcile respondent’s
contentions, makes the following points: (1) The QTIP trust had
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sold all of its assets, with the exception of the shopping center
parcels, so it did not unreasonably refuse to sell assets; (2) it
is not impermissible for an estate to incur expense (in this case
interest) to preserve property for the benefit of the
beneficiaries; (3) the loan was secured in order to vest good
title in the beneficiaries because the proceeds were used to pay
off the estate tax and remove the Government’s lien from the
shopping center realty; (4) because the shopping center property
had a value of more than double the outstanding tax liability, it
would have been necessary to sell only a fractional interest and
a severe discount would have resulted. If the entire property
had been sold, the expenses of sale would have had to be borne by
the portion that did not go to pay the estate tax, as well as the
portion that was used for that purpose; (5) the trustee/
beneficiaries believed that the shopping center would increase in
value and they should be allowed to borrow against, as opposed to
selling, the property; and (6) the situation here is analogous to
that of a trust holding a family farm for which sections 2032A
and 2057 permit the type of relief petitioner seeks. Those
estate tax provisions indicate a general congressional intent to
preserve estates’ interests in certain family-owned businesses.
Although we consider the cases cited by the parties in order
to reach our conclusion, the parties’ interpretations of the
cases appear generally to favor the allowance of the deduction of
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interest on a loan to an estate to pay estate tax. As we have
explained, the fundamental question we must answer here is
whether, under the circumstances of this case, the estate is
entitled to deduct the interest expense pursuant to section 2053.
We conclude and hold that petitioner has not shown, within the
meaning of section 2053 and the underlying regulations, that it
is entitled to deduct the interest expense in question.
First, the case precedent petitioner relies on in support of
its interest deduction involved circumstances where the expense
(interest) was incurred during the administration of the estate
and before the resolution of the tax controversy.3 Petitioner
seeks to keep this case open for up to 20 years after the parties
have resolved all controversies that were initially placed in
issue. Second, after several extensions of time, the QTIP trust,
in 1995, transferred the shopping center property to the
beneficiaries who, in turn, transferred the property to their
family trusts, of which they were the trustees. In this regard,
petitioner’s contentions that the QTIP trust did not unreasonably
delay are irrelevant.
The QTIP trust was obligated to pay its share of the Federal
estate tax over to the estate and failed to do so because the
QTIP trustee (who was also a beneficiary of the estate) made the
3
A more complete discussion of the cases appears later in
this opinion.
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decision that the value of the realty was depressed, and it was
not a good time to liquidate. Instead, the realty was
distributed to the beneficiaries, and they placed the property
into their own family trusts. Thereafter, the beneficiaries
continued to believe that market conditions were not right, and
so they borrowed (through their family trusts) the money to pay
the QTIP’s share of the estate’s tax burden.4 Respondent had
filed a notice of his lien in 1998, and the lien was satisfied
from the proceeds of the beneficiaries’ family trusts’ loan at
the loan settlement/closing. After the payment of the
outstanding estate tax liability, there remained no disputes
concerning the estate tax liability that had been reported on the
estate’s return. Likewise, at that juncture, there remained no
assets in the estate to administer on behalf of or to distribute
to the estate's beneficiaries. Under these facts, it is
difficult to see how the estate could meet the requirement of
section 2053 and the underlying regulations.
Although we have found that petitioner has not shown that
the interest on the loan meets the statutory requirements, we
4
We note that it is within respondent’s discretion, as
provided by Congress in sec. 6161, to extend the period for
payment of the tax for up to 10 years. In that regard, under the
circumstances of this case, respondent was not unreasonable in
the exercise of his discretion. Respondent granted five
extensions, and the payment of the tax was delayed for about 5
years, which seems to be a sufficient time to raise the funds to
pay an agreed tax obligation.
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review the cases cited by the parties in order to complete our
review of the parties’ arguments. Petitioner’s argument relies
on a number of cases where this Court addressed the question of
whether a Tax Court proceeding could be prolonged or extended to
accommodate various types of deductions sought by taxpayers
(usually estates). In Estate of Bahr v. Commissioner, 68 T.C. 74
(1977), the Court considered a question analogous to the one
under consideration. That case involved the question of whether
the Bahr estate was entitled to deduct (under section 2053)
estate tax interest being paid to the Federal Government under
the deferred payment provisions of section 6161. In holding that
such interest was deductible as an administration expense under
section 2053(a)(2), the Court focused on the question of whether
interest on tax liability is, in effect, part of the tax. If so,
it was unquestioned that the estate tax was not deductible.
However, the Court agreed with earlier cases that had held that
the “‘interest on a tax is not a tax, but something in addition
to a tax.’” Id. at 79-80 (quoting Capital Bldg. & Loan
Association v. Commissioner, 23 B.T.A. 848, 849 (1931), and
Pearson v. Commissioner, 4 T.C. 218 (1944), affd. 154 F.2d 256
(3d Cir. 1946)). Under the circumstances of that case, the
interest was otherwise deductible because it met the requirements
of section 2053. Petitioner focuses on Estate of Bahr v.
Commissioner, supra, because, ultimately, the Court permitted the
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estate to deduct “projected interest payments” it had claimed.
Id. at 83.5 The Estate of Bahr case, however, involved a
situation where the taxpayer (estate) was paying interest to the
Government pursuant to the Commissioner’s approval to permit the
Bahr estate to defer payment under section 6161. That is not the
situation here. Respondent, after a succession of five
extensions, filed a lien, and the tax was paid. It is after the
payment, not during its deferral, that petitioner seeks to deduct
interest incurred by the beneficiaries and/or their own family
trusts because of their choice to hold the property for
appreciation and, instead, borrow against it to meet their
obligation to pay an agreed estate tax liability.
Petitioner asks us to use Estate of Bahr v. Commissioner,
supra, as a platform from which to extend relief to it. Although
this Court has accommodated taxpayers in circumstances where
their delay was either approved by the Commissioner or
statutorily mandated,6 it is not within our province to create a
5
Petitioner has argued that if we do not permit the stay
of these proceedings for the requested period (up to 20 years),
that it should be able to deduct a present value estimate of the
interest. In that regard, respondent has indicated that it would
be impossible to estimate the interest because the loan could be
prepaid and/or the lender could, under certain circumstances
accelerate the outstanding balance.
6
See, e.g., Estate of Wetherington v. Commissioner, 108
T.C. 49 (1997), where this Court deferred entry of decision
during the pendency of the Commissioner’s consideration of
(continued...)
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remedy that is clearly within the province of Congress. There
has been no case like the present one where: (1) The parties
have resolved the estate tax liability by agreement; (2) no
section 6161 extension is in effect or application pending; (3)
no deferred payment under section 6166 is in effect; and (4) the
taxpayer seeks an extended delay (up to 20 years) so that a
nonparty (family trusts of beneficiaries) can benefit from
improved market conditions that may or may not occur.
The result in the Estate of Bahr case was distinguished in
Estate of Bailly v. Commissioner, 81 T.C. 246 (1983) (Bailly I),
where the Court noted that in Estate of Bahr the interest rate
was constant, whereas in Bailly I the interest rate fluctuated
(from 6 to 20 percent). Because the amount of interest on an
estate tax liability could not be estimated with reasonable
certainty, in Bailly I the estate was not allowed to deduct the
estimated or future payments of interest. In Bailly I, the Court
also refused to permit relief to the estate by allowing it to
vary from the Commissioner’s procedure of the filing of an
6
(...continued)
whether to permit an extension under sec. 6161. In that case,
the Court specifically noted that the circumstances were
different from one where the parties had agreed to a stipulated
decision, and a 5-year delay was sought and denied. See Estate
of Nevelson v. Commissioner, T.C. Memo. 1996-361. The Court also
noted that “the parties have not agreed to a date to file a
stipulated decision.” Estate of Wetherington v. Commissioner,
supra at 53.
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amended estate tax return and claiming a refund, ostensibly in
another Federal tax forum.
The Bailly estate moved for reconsideration of the holding
in Bailly I, seeking to have this Court defer entry of a decision
so as to permit payments under section 6166 and, after the
payments were completed, to then enter a decision reflecting the
interest that had been paid. In Estate of Bailly v.
Commissioner, 81 T.C. 949 (1983) (Bailly II), the relief was
granted to the estate, in that it was held that the entry of
decision was to be postponed or deferred until the final
installment of tax was due or paid, whichever occurred first. An
unpaid estate tax liability and its deferral are not elements
present in the circumstances presently before the Court. It is
noted that in Bailly II the Commissioner had no objection to the
delay in entry of decision until the taxpayer completed the
payments under section 6166. The Court in Bailly II expressed
concerns about inconvenience, hardship, and administrative
expense to the Court and the parties, suggesting that a
legislative solution was needed. After the issuance of the
Bailly II opinion, Congress enacted section 7481(d), which,
effectively, permits this Court to reopen section 6166 cases to
consider interest issues after a decision has been entered.
Subsequently, in Estate of Wetherington v. Commissioner, 108
T.C. 49 (1997), the practice of delaying entry of decision was
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extended to section 6161 situations were the estates are given
additional time to pay the estate tax liability and interest
accrues in the same manner as in the section 6166 situations.
Petitioner argues that the facts in this case present an
opportunity for a logical extension of the practice of delaying
decisions to permit the deduction of interest that has been
permitted for sections 6166 and 6161 situations. Petitioner
contends that the only difference7 between Estate of Bailly and
Estate of Wetherington and this case is that in the prior cases
the estates were, in effect, borrowing from the Government and
here the borrowing is from a private source. As to that point,
petitioner refers to Estate of Bahr v. Commissioner, 68 T.C. 74
(1977), where the Court permitted interest deductions for the
estate’s borrowing from a private source to pay the estate tax
liability. Respondent addresses petitioner’s arguments by
explaining that, unlike Estate of Bahr v. Commissioner, supra,
here the estate did not borrow to pay its estate tax liability.
Instead, the loan proceeds were obtained by the family trusts of
the trustee/beneficiaries. As we have already found, petitioner
7
Another substantial difference is that prior cases
involved situations where the taxpayer was either permitted to
extend, in the process of seeking extension, or making deferred
payments under statutory provisions where Congress had provided
specific relief, an element clearly lacking in our factual
situation.
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has not shown entitlement to the interest deduction under section
2053. Accordingly, respondent’s argument is well taken.
In the same vein, the parties each relied on Estate of Todd
v. Commissioner, 57 T.C. 288 (1971), and Estate of Huntington v.
Commissioner, 36 B.T.A. 698 (1937). Those cases involved
situations where estates were permitted to deduct the interest on
borrowing to pay the estate tax. Respondent agrees that under
certain circumstances an estate is entitled to deduct interest on
a loan used to pay estate tax. Respondent, however, points out
that it was the estate that borrowed in those cases and that
petitioner has not shown entitlement to a section 2053 deduction.
Respondent further points out that in Estate of Huntington, the
Board referenced the fact that the loan transactions were
sanctioned by the California State probate court, which found the
loans to be for the benefit of the estate. We observe that in
Estate of Huntington the Board also noted that at all times the
individuals who incurred the related expenses were acting in
their capacity as executors.
In Estate of Todd v. Commissioner, supra, the Court noted
that Texas law granted the estate fiduciary authority to borrow
funds for payment of Federal estate and State inheritance taxes.
See id. at 294. The Court, in Estate of Todd, also found it
important that because the estate did not have any liquid assets,
the estate borrowed to pay its estate tax. In sum, these cases
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presented factual circumstances where the estates met the
requirement of section 2053 or its predecessor sections.
Petitioner cites a few other cases where estates were allowed to
deduct interest or sell assets because of a lack of liquidity,
but in each instance, unlike the circumstances we confront, the
entity borrowing funds or selling assets was the estate.
Finally, petitioner, in response to respondent’s argument
that petitioner has not shown that the interest here would be
allowable under State law, refers us to California trust law at
probate code section 16241, which provides: “The trustee has the
power to borrow money for any trust purpose to be repaid from
trust property.” Cal. Prob. Code sec. 16241 (West 1991).
Petitioner contends that the above language unambiguously permits
the trustees to borrow for any trust purpose. Petitioner,
however, misses the point. The trusts petitioner references are
the family trusts of the beneficiaries. Those family trusts were
the recipients of the shopping center property after the property
had first been distributed from the QTIP trust to the
beneficiaries. Although the QTIP trust, created in decedent’s
husband’s will, did have a nexus to decedent’s estate because the
value of the assets was part of the gross estate, the family
trusts of the beneficiaries are merely their personal
instrumentalities of which they are the respective trustees. For
those trusts to borrow funds to pay off the QTIP’s obligation for
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the estate tax is far removed from the administration of the
estate, which was without assets to pay the liability and which,
accordingly, did not require any further administration or
expense thereof. Moreover, the estate tax liability was
determined and paid and was only to be affected to the extent
that petitioner could show that the interest was allowable under
section 2053.
After a review of case precedent and the parties’ arguments,
we agree with respondent that petitioner has not shown that the
interest here is deductible under section 2053. Accordingly, we
leave for another day the question of whether 20 years is too
long a period to delay entry of decision to accommodate allowable
after-occurring deductions of an estate.
To reflect the foregoing,
An appropriate order will be
issued.