Rev. Rul. 81-154

ISSUE

1) For purposes of section 2053(a)(2) of the Internal Revenue Code, is the amount paid as a penalty for the late filing of a federal estate tax return and the late payment of the federal estate tax allowable as a deduction from the gross estate?

2) For purposes of section 2053(a)(2), is the interest incurred as a result of the late payment of the federal estate tax allowable as a deduction from the gross estate?

FACTS

The decedent, D, died on August 1, 1978. Due to the executor's willful neglect, the federal estate tax return was filed more than four months after the time for filing had passed and the federal estate tax was paid at that time. Therefore, late filing and late payment penalties were assessed in accordance with section 6651 of the Code. In addition, because the tax was not timely paid, statutory interest was assessed in accordance with section 6601.

LAW AND ANALYSIS

Section 2053(a)(2) of the Code provides that the value of the taxable estate is determined by deducting from the value of the gross estate such amounts for administration expenses as are allowable under the laws of the jurisdiction in which the estate is being administered. Section 20.2053-3(a) of the Estate Tax Regulations provides that deductible administration expenses are those expenses that are actually and necessarily incurred in the administration of the decedent's estate. 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.

Section 6651 of the Code imposes a penalty for the failure to file a federal estate tax return and for the failure to pay the federal estate tax, unless the failure is due to reasonable cause and not due to willful neglect.

Under general fiduciary rules, an executor must act in good faith to preserve and protect the assets of the estate for distribution to the beneficiaries. As part of this duty, the executor is responsible for the timely payment of taxes chargeable against the estate. 33 C.J.S. Executors and Administrators, sections 184, 235 (1968). In this case, the willful failure to file the estate tax return is a breach of the executor's fiduciary duty and the resulting penalty would not be an expense necessarily incurred in the administration of the decedent's estate. Thus, the penalty payment is not deductible under section 2053(a)(2) of the Code, even if allowable under local law. However, interest incurred on a federal estate tax liability which is a charge for the use of money, rather than a penalty, is a necessary administration expense under section 2053(a)(2) and is deductible to the extent allowable under local law. The interest expense is allowable under section 2053 without regard to the manner in which it was incurred. See Estate of Bahr v. Commissioner, 68 T.C. 74 (1977), acq., 1978-1 C.B. 1; Rev. Rul. 78-125, 1978-1 C.B. 292, Rev. Rul. 79-252, 1979-2 C.B. 333. Thus, the interest incurred as a result of the late payment of tax is deductible under section 2053(a)(2), to the extent it was allowable under local law.

HOLDINGS

1) The penalty imposed on the failure to pay or the failure to file is not deductible as a necessary administration expense under section 2053 of the Code even if the expense is allowable under local law.

2) The interest incurred because of a late payment of tax is deductible under section 2053(a)(2) of the Code to the extent it is allowable under local law.