Fiorini v. Comm'r of Internal Revenue (In re Estate of Bailly), Docket No. 9487–81.
| Citation | 81 T.C. No. 18,81 T.C. 246 |
| Decision Date | 06 September 1983 |
| Docket Number | Docket No. 9487–81. |
| Parties | ESTATE OF PIERRE L. BAILLY, DECEASED, DANTE M. FIORINI, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Petitioner elected under section 6166, I.R.C. 1954, to defer payment of Federal and Florida estate tax. Petitioner deducted on the initial Federal estate tax return an estimate of the interest to be accrued over the ten-year deferral period.
Held: Due to the considerable fluctuation in interest rates and the possibility that payment can be accelerated, or that portions of the payment can be prepaid, a reasonable estimate of unaccrued interest cannot be made. Bahr v. Commissioner, 68 T.C. 74 (1977), distinguished. Therefore, “accrued interest on Federal and Florida estate tax liability is not deductible as an administration expense under section 2053(a)(2). James Curtis Wood, for the petitioner.
Kathleen E. Whatley, for the respondent.
Respondent determined a deficiency in Federal estate tax against the Estate of Pierre L. Bailly, deceased, in the amount of $380,373.
After concessions by the parties, the issue for decision is whether an estate that has properly elected under section 61661 to pay its estate tax liability in ten equal annual installments can deduct unaccrued interest on that liability and on state estate tax liability as an administration expense under section 2053(a)(2).
This case was submitted fully stipulated pursuant to Rule 122.2 The stipulation of facts and joint exhibits are incorporated herein by reference. The pertinent facts are summarized below.
Pierre L. Bailly (decedent) died on November 24, 1976. At the time of his death the decedent was a resident of Miami, Florida. Dante M. Fiorini, the petitioner herein, is the personal representative of the decedent's estate. At the time that he filed the petition in this case, petitioner resided in Miami, Florida.
A Federal estate tax return was filed for the decedent's estate with the Internal Revenue Service Center in Chamblee, Georgia on February 17, 1978. This filing was timely made pursuant to a request for extension of time to file.
Petitioner made the following payments on the decedent's Federal estate tax liability:
+-------------------+
¦Date ¦Payment ¦
+-------+-----------¦
¦2/17/78¦$89,434.00 ¦
+-------+-----------¦
¦8/20/78¦16,987.12 ¦
+-------+-----------¦
¦8/27/79¦15,911.11 ¦
+-------+-----------¦
¦8/ 8/80¦17,815.47 ¦
+-------+-----------¦
¦8/10/81¦18,491.29 ¦
+-------+-----------¦
¦8/10/82¦19,616.44 ¦
+-------------------+
The applicable interest rates pursuant to section 6621(b) are as follows:
+--------------------------------------+
¦ ¦ ¦ ¦Annual ¦
+--------------------+-----------------¦
¦Date ¦percentage rate ¦
+--------------------+-----------------¦
¦11/24/76¦to¦1/31/78 ¦7 ¦
+--------+--+--------+-----------------¦
¦2/ 1/78 ¦to¦1/31/80 ¦6 ¦
+--------+--+--------+-----------------¦
¦2/ 1/80 ¦to¦1/31/82 ¦12 ¦
+--------+--+--------+-----------------¦
¦2/ 1/82 ¦to¦12/31/82¦20 ¦
+--------+--+--------+-----------------¦
¦1/ 1/83 ¦to¦12/31/83¦16 ¦
+--------------------------------------+
The applicable interest rates for Florida estate taxes are:
+-------------------------------------+
¦ ¦Annual ¦
+-------------------+-----------------¦
¦Date ¦percentage rate ¦
+-------------------+-----------------¦
¦11/24/76 to 6/30/77¦6 ¦
+-------------------+-----------------¦
¦7/ 1/77 to present ¦12 ¦
+-------------------------------------+
The parties agree that the interest incurred on liabilities for both Federal estate tax and state death tax constitutes an expense necessarily incurred in the administration of the estate and is deductible under section 2053(a)(2) to the extent allowable under local law.3
The parties disagree, however, as to the timing and method by which petitioner may claim an administration expense deduction for interest on the Federal estate tax and Florida estate tax liabilities.
To be deductible by the decedent's estate, the interest at issue must meet the requirements of section 2053. Under section 2053(a)4 the value of the taxable estate is determined by deducting from the gross estate certain items allowable by the law of the jurisdiction where the estate is administered.
Subject to limitations, interest paid on estate taxes is deductible as an administration expense under section 2053(a)(2). Bahr v. Commissioner, 68 T.C. 74 (1977). See also Estate of Webster v. Commissioner, 65 T.C. 968 (1976); Estate of Todd v. Commissioner, 57 T.C. 288 (1971); see section 642(g). At issue is whether an estimate of the interest to accrue on petitioner's Federal and state estate tax liability over the ten-year deferral period meets the requirements of section 20.2053–1(b)(3), Estate Tax Regs.
Section 20.2053–1(b)(3), Estate Tax Regs. provides that
[a]n 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. * * *
Petitioner contends that an estimation of the entire amount of interest to be paid over the deferral period can be determined with reasonable certainty in accordance with the requirements of section 20.2053–1(b)(3), Estate Tax Regs. He contends that unfairness will result if he is required to periodically deduct the interest expense through the filing of annual supplemental returns. Petitioner asserts that a taxpayer would be unable to claim a tax refund for after-incurred interest expense for earlier payments on which the limitations period had already expired.
Respondent contends that petitioner cannot claim an administration expense deduction based upon interest which has not yet accrued. He asserts that an estimate of the interest to be incurred by the estate cannot meet the requirements for deductibility under section 20.2053–1(b)(3), Estate Tax Regs., i.e., that the payment will be made or that the interest to be deducted be ascertainable with reasonable certainty. Respondent contends that it is uncertain that the estate will pay the interest because the estate will always have the option under section 6166(g) of prepaying the estate tax still owing. Respondent also questions the certainty with which petitioner can estimate the interest to be paid. He notes that the interest rate on estate tax liabilities is subject to considerable fluctuation because section 6621(b) requires a semi-annual adjustment of the interest rate. Respondent asserts that because the interest at issue has not yet accrued, it fails to meet the requirements of section 20.2053–1(b)(3), Estate Tax Regs. Hence, respondent concludes that petitioner can only deduct the interest as it accrues by filing annual supplemental returns.
Petitioner has the burden of establishing that he is entitled to the deductions claimed. Welch v. Helvering, 290 U.S. 111, 115 (1933); Rule 142(a). To support his claim for a deduction, petitioner must prove that (1) the unaccrued interest can be ascertained with reasonable certainty and (2) that the interest will be paid. Section 20.2053–1(b)(3), Estate Tax Regs.
Petitioner urges this Court to consider its decision in Bahr v. Commissioner, 68 T.C. 74 (1977), as controlling in the instant case. He contends that this Court was not troubled in Bahr by a fluctuating interest rate or by the possibility of an acceleration of payment of estate tax liabilities.
We think this Court's opinion in Bahr is distinguishable from the instant case. Although Bahr dealt with a claimed deduction for “projected” interest, the opinion did not focus on the precise issue here, i.e., the deductibility of estimated interest. Rather, Bahr focused on the pure question of whether interest incurred on the unpaid balance of the estate tax liability was deductible as an administration expense under section 2053(a)(2) and also on the distinction between taxes and “interest on a tax” under section 6601(e)(1). The problem raised in the instant case of estimating fluctuating interest rates with reasonable certainty was not addressed in Bahr because the applicable law, section 6601(b), provided for an interest rate of 4 percent for deferred payments of estate tax liabilities, without any requirement for periodic adjustments of that rate to reflect fluctuations in the current prime rate. In contrast, the section applicable in the instant case, section 6621, 5 provides in subsection (b) for periodic adjustments of the applicable rate to reflect the adjusted prime rate charged by banks, recognizing the considerable fluctuation in the rate of interest. See S. Rept. No. 1357, 93d Cong., 2d Sess. 19–20, 1975–1 C.B. 517, 528.
In Bahr, we did not envision the problems faced in this case of estimating an interest rate that has fluctuated from 6 percent to 20 percent in the last five years. No statutory requirement of a periodic adjustment of the applicable interest rate was provided in section 6601 because the interest rate was not subject to fluctuation in the early 1970's as it is today. The interest rate was 6 percent and had remained between 5 and 6 percent for several years.6
Accordingly, we view the issue in the instant case as one of first impression and hold that petitioner may deduct interest on his Federal and state estate tax liabilities only as it accrues and becomes certain.
We agree with respondent that the interest rate is subject to such fluctuation that it is not possible to estimate with “reasonable certainty” the amount of interest to be incurred on petitioner's Federal estate tax liability. Under the present provisions of section 6621(b), the interest rate...
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