Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-32

1959-1 C.B. 245

Sec. 265

Sec. 642

Caution: Clarified by Rev. Rul. 63-27

IRS Headnote

The portion of any administration expenses attributable to the earning of tax-exempt income, which is not deductible by a decedent's estate for income tax purposes, is allowable as a deduction for estate tax purposes.

Full Text

Rev. Rul. 59-32

Advice has been requested whether the portion of any administration expenses attributable to the earning of tax-exempt income, which is not deductible by an estate for Federal income tax purposes, is allowable as a deduction for Federal estate tax purposes.

The decedent died in 1956. For the current taxable year, his estate received income of approximately $200,000. $25,000 of that was derived from interest on municipal bonds and is exempt from income tax. The value of the bonds is includible in the gross estate for Federal estate tax purposes. In this same period, the estate disbursed $50,000 for attorneys' fees and $30,000 for miscellaneous administration expenses neither of which are attributable to either the taxable or the tax exempt income. The executor desires to deduct the maximum amount allowable on the income tax return and to deduct the balance from the decedent's gross estate on the estate tax return.

In computing the taxable income of the estate for purposes of filing the income tax return, the maximum amount deductible from gross income, assuming the disbursements of $80,000 to be otherwise deductible, is limited by virtue of the provisions of section 265(1) of the Internal Revenue Code of 1954 to that portion of such expenses which is attributable to includible gross income. Thus, of the total amount of $80,000, the taxpayer will comply with section 265(1) by apportioning to the exempt income the expenses attributable to that income ($10,000), this will leave a maximum deduction of $70,000 for income tax purposes and is computed in the following manner:

$200,000-25,000/$200,000 x 80,000 = $70,000

Under the provisions of section 642(g) of the Code, the amount of $70,000 will be deductible by the estate for income tax purposes, provided there is duly filed (1) the statement therein required, to the effect that such amount has not been allowed as a deduction under section 2053(a)(2), relating to administration expenses, in computing the taxable estate of the decedent, and (2) the required waiver of the right to such deduction at any time.

It is recognized that for estate tax purposes, the entire amount of the $80,000 would be allowable as a deduction from the decedent's gross estate, whereas, for income tax purposes, only $70,000 is deductible. To hold that the filing of the statement of waiver under section 642(g) of the Code constitutes a relinquishment of the right to deduct, for estate tax purposes, the balance of $10,000 in administration expenses would not give proper effect to the intent of Congress in enacting the statute. Section 642(g) of the Code is primarily concerned with the prohibition of double deductions, i.e. , disallowing the same deduction for the estate tax return and the income tax return. As was stated in Revenue Ruling 240, C.B. 1953-2, 79,

In the event that administrative expenses are such that they would be allowable for either income or estate tax purposes, the taxpayer may allocate the expenses to either the estate tax return or the income tax return for the year in which payment is made, or to both in such proportions as he desires, provided there is no duplication of deduction and provided the terms of section 162(e) of the Code section 642(g) of the 1954 Code  are complied with.

The facts herein are different from the factual situations on which Revenue Ruling 240 is based, but the rationale of the ruling is considered in point. It is held, therefore, that the $10,000 of disbursements not allowable as a deduction for income tax purposes are deductible from the gross estate under section 2053 of the Code.