Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 63-27

1963-1 C.B. 57

Sec. 265

Sec. 642

IRS Headnote

The allocation of expenses attributable to exempt and nonexempt income is to be based on all the facts and circumstance in each case. Revenue Ruling 59-32, C.B. 1959-1, 245, is merely an example showing that the amount disallowed as a deduction for Federal income tax purposes may be allowed as a deduction for Federal estate tax purposes.

Revenue Ruling 59-32, C.B. 1959-1, 245, clarified.

Full Text

Rev. Rul. 63-27

Advice has been requested whether it is mandatory to allocate expenses attributable to exempt and nonexempt income in the proportion that each class of income bears to the total income.

Revenue Ruling 59-32, C.B. 1959-1, 245, holds that the portion of any administrative expense of an estate or trust attributable to the earning of tax-exempt income, which is not deductible for Federal income tax purposes, is allowable as a deduction for Federal estate tax purposes. The ruling states, `In computing the taxable income of the estate for purposes of filing the income tax return, the maximum amount deductible from gross income 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.'

The ruling further states that the taxpayer will comply with section 265(1) by apportioning to the exempt income the expenses attributable to that income. In the example contained in the ruling, the amount deductible is determined by allocating the expenses to taxable income and nontaxable income in the proportion that each bears to the total income.

Section 1.265-1(c) of the Income Tax Regulations provides that expenses and amounts otherwise allowable which are directly allocable to any class or classes of exempt income shall be allocated thereto; that expenses and amounts directly allocable to any class or classes of nonexempt income shall be allocated thereto; and that if an expense or amount otherwise allowable is indirectly allocable to both a class of nonexempt income and a class of exempt income, a reasonable proportion thereof determined in the light of all the facts and circumstances in each case shall be allocated to each.

In the case of Edward Mallinckrodt, Jr. , v. Commissioner , 2 T.C. 1128, acquiescence, C.B. 1944, 18, it is stated, `Since the parties submitted no evidence bearing directly on the question as to what portion of the expenditures should be allocated to nontaxable income, and in the absence of evidence indicating what would constitute a more reasonable basis for such allocation, we hold such expenditures for the respective years are to be allocated to taxable income and nontaxable income of such years in the proportion that each bears to the total of the taxable and nontaxable income of the petitioner for such years.'

It would appear, therefore, that although in the Mallinckrodt case the court held that a proration on the basis of income was reasonable, it also recognized that such proration was not mandatory and it would have considered some other method if it had been presented.

Accordingly, it is held that the method of allocating indirect expenses to exempt and nonexempt income on the basis that each bears to the total of such income is not mandatory. That method was set forth in Revenue Ruling 59-32 merely as an example for the purpose of showing that the amount disallowed as a deduction for Federal income tax urposes may be allowed as a deduction for Federal estate tax purposes.

Revenue Ruling 59-32, C.B. 1959-1,245, is hereby clarified.