Rev. Rul. 80-250

ISSUE

When does interest expense charged pursuant to the executor's election to extend payment of the estate tax liability become deductible under section 2053(a)(2) of the Code?

FACTS

The decedent, D, died in 1978. The executor of D's estate elected to pay a portion of the estate tax liability in installments in accordance with the provisions of section 6166A of the Code. In preparing the federal estate tax return for D's estate, the executor estimated the total amount of interest expense that would be incurred by the estate in the future with respect to the section 6166A election. The exector claimed a deduction for this estimated amount of future expense as an expense of administration under section 2053(a)(2) of the Code.

LAW AND ANALYSIS

Section 2053(a)(2) of the Code and section 20.2053-3(a) of the Estate Tax Regulations provide an estate tax deduction for administration expenses that are actually and necessarily incurred in the administration of the decedent's estate and are allowable by the laws of the jurisdiction under which the estate is being administered.

Sections 20.2053-1(b)(3) and 20.2053-3(a) of the regulations provide that if the amount of an expense otherwise deductible under section 2053 of the Code is not actually incurred (i.e. accrued) at the time of the final audit of the estate tax return, then no deduction will be allowed for the expense at that time, unless the expense is ascertainable with reasonable certainty. No deduction can be taken based on a vague or uncertain estimate.

Interest expense payable incident to the extension of the time for payment of tax under section 6166A is deductible as an expense of administration under section 2053(a)(2) of the Code, if the expense is allowable under the laws of the jurisdiction in which the estate is being administered. Estate of Bahr v. Commissioner, 68 T.C. 74 (1977), acq. 1978-1 C.B. 1. See also, Rev. Rul. 78-125, 1978-1 C.B. 292.

In situations where the executor elects to extend the time for the payment of the estate tax under section 6166A the executor has the option to accelerate payment, and in certain circumstances must accelerate payment. See section 6166A(h) of the Code. The possibility that payment may be accelerated renders any estimate of future interest charges vague and uncertain, within the meaning of section 20.2053-1(b)(3) of the regulations.

Accordingly, interest expense incurred under section 6166A is deductible when the interest accrues. When the interest becomes deductible and the estate claims the deduction under section 2053(a)(2), the estate tax is recomputed. The recomputation will result in a reduction of the estate tax and previously accrued interest. Installments due will be recomputed accordingly. However, no refund will be made until the entire tax liability has been paid. Interest accrues daily. However, for purposes of administrative convenience taxpayers should claim the deduction at the time of the annual dates prescribed for payment under section 6166A. If the entire tax balance and accrued interest is prepaid at one time, the accrued interest is deductible at that time.

HOLDING

Interest expense charged pursuant to the executor's election to extend payment of the estate tax liability is deductible when the interest accrues. Therefore, no deduction is allowable on D's estate tax return for the estimate of interest expense to be incurred in the future.

The conclusion of this revenue ruling applies as well to interest on estate tax, the payment of which is extended under sections 6161, 6163 or 6166 of the Code.