Rev. Rul. 84-75

1984-1 C.B. 193, 1984-21 I.R.B. 5.

                       Internal Revenue Service
                                 Revenue Ruling

          ADMINISTRATION EXPENSES;  ESTIMATED FUTURE INTEREST PAYMENTS

                            Published: May 21, 1984

Section 2053. - -Expenses, Indebtedness, and Taxes, 26 CFR 20.2053.1:  Deductions for expenses, indebtedness, and taxes;  in general.

  Administration expenses;  estimated future interest payments. A deduction is not allowable for the estimated amount of interest that will accrue upon funds borrowed by an executor on behalf of an estate to pay the federal estate tax if repayment of the loan can be accelerated.

ISSUE

  For purposes of section 2053 of the Internal Revenue Code, is a current deduction allowable for the estimated amount of interest that will accrue upon funds borrowed by an executor on behalf of an estate to pay the federal estate tax?

FACTS

  The decedent D, died in 1982.  D's estate consisted almost entirely of stock of a closely held corporation.  No election to extend the time for payment of the estate tax was made pursuant to Code section 6166.  There was an insufficient amount of funds available to pay the federal estate tax, and a forced sale would have been required to convert estate assets into sufficient cash. Therefore, the executor borrowed funds, on behalf of the estate, to pay the tax obligation.

  The principal amount of the loan is to be repaid over a period of six years, with ten percent interest payable annually.  The loan could be fully repaid at any time at the executor's option, without penalty.  If the executor fails to timely make any payment, the remaining payments can be accelerated at the lender's option.

  On the federal estate tax return filed for the estate, the executor deducted 25x dollars as the estimated total amount of future interest to be paid during the loan term.  The 25x dollars will be allowed as an administrative expense under applicable local law.

LAW AND ANALYSIS

  Section 2053(a)(2) of the Code provides that the value of the 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.

  Section 20.2053-1(b)(3) of the Estate Tax Regulations provides that an item may be entered on the return for deduction, though its exact amount is not then known, provided it is ascertainable with reasonable certainty, and will be paid.  No deduction may be taken upon the basis of a vague or uncertain estimate.

  Section 20.2053-3 of the regulations provides that the amounts deductible 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.

  Interest on a loan, obtained by an executor for an estate, is a deductible administration expense, provided the loan was reasonably and necessarily incurred in the administration of the estate. Estate of Todd v. Commissioner, 57 T.C. 288 (1971), acq. 1973-2 C.B. 4; Hibernia Bank v. United States, 581 F.2d 741 (9th Cir.1978); see Estate of Bahr v. Commissioner, 68 T.C. 74 (1977), acq., 1978-1 C.B. 1.

  In this case, because the loan was obtained to avoid a forced sale of assets, the loan was reasonably and necessarily incurred in administering D's estate.  Therefore, interest incurred on the loan is deductible as an expense of administration under section 2053(a)(2).

  In situations where the estate's obligation to make installment payments may be accelerated, the amount of future interest that will be paid is indefinite because a premature repayment will stop the accrual of interest.  See Rev. Rul. 80-250, 1980-2 C.B. 278. Consequently, for section 2053(a)(2) deduction purposes, the possibility of prepayment renders any estimate of future interest vague and uncertain within the meaning of section 20.2053-1(b)(3). In this case, because accelerated payment could be made at the executor's option or could be required upon failure to make a timely scheduled payment, the 25x dollars estimated future interest expense is not allowable as a deductible administrative expense.  Rather, the future interest expense will become deductible only as it accrues.  See, for example, Rev. Proc. 81-27, 1981-2 C.B. 548, explaining the procedure for claiming interest deductions in situations where the estate tax liability has not been fully paid when the interest accrues.  In those situations where a deduction is sought for interest that has accrued after the federal estate tax liability has been paid, a refund of tax may be requested by filing a claim for refund of tax on Form 843 within the applicable period of limitation set forth in section 6511 of the Code.

HOLDING

  For purposes of section 2053 of the Code, a deduction is not allowable for the estimated amount of interest that will accrue upon funds borrowed by an executor on behalf of an estate to pay the federal estate tax if repayment of the loan could be accelerated. The interest is deductible as an administrative expense only to the extent it has accrued.

Rev. Rul. 84-75, 1984-1 C.B. 193, 1984-21 I.R.B. 5.