Texas Commerce Bank Nat'l Ass'n v. Comm'r of Internal Revenue (In re Estate of Bahr)

• Decision Date: 25 April 1977
• Docket Number: Docket No. 5288—75.
• Parties: ESTATE OF CHARLES A. BAHR, SR., DECEASED, TEXAS COMMERCE BANK NATIONAL ASSOCIATION, CO-INDEPENDENT EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

68 T.C. 74

ESTATE OF CHARLES A. BAHR, SR., DECEASED, TEXAS COMMERCE BANK NATIONAL ASSOCIATION, CO-INDEPENDENT EXECUTOR, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5288—75.

United States Tax Court

Filed April 25, 1977.

Petitioner incurred liability for interest to the Government for deferred payment of estate tax to avoid forced sales of assets to pay the estate tax. The interest was allowable by the law of the State in which the estate was being administered. Held: Interest expense incurred by petitioner on the unpaid balance of its Federal estate tax liability deferred under sec. 6161, I.R.C. 1954, is deductible as an administration expense under sec. 2053(a)(2). Ballance v. United States, 347 F.2d 419 (7th Cir. 1965), not followed. Rev. Rul. 75—239, 1975—1 C.B. 304, is invalid. William C. Griffith, for the petitioner.

William T. Overton, for the respondent.

OPINION

GOFFE, Judge:

The Commissioner determined a deficiency in estate tax due from the Estate of Charles A. Bahr, Sr., in the amount of $476,683.09. The only issue for decision is whether interest expense incurred by petitioner on the unpaid balance of its Federal estate tax liability deferred under section 6161, I.R.C. 1954, ¹ is deductible as an administration expense under section 2053(a)(2).

All of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated by this reference. Only those facts necessary for an understanding of our opinion will be summarized below.

Charles A. Bahr, Sr. (hereinafter decedent), died on August 23, 1971. At the time of his death, the decedent was a resident of Houston, Tex.

Texas Commerce Bank National Association is the co-independent executor of the Estate of Charles A. Bahr, Sr. (hereinafter sometimes referred to as petitioner). At the time the petition was filed, its principal office was Houston, Tex.

On June 16, 1972, prior to the extended filing date, petitioner filed a Federal estate tax return, Form 706, with the Internal Revenue Service Center, Austin, Tex. The return reflected an estate tax liability (after credit for State inheritance taxes of $691,724.71) of $3,395,344.70.

The original due date for the payment of the tax reflected on the estate tax return was May 23, 1972. On or before May 23 of each of the years 1972, 1973, 1974, and 1975, the District Director extended for a period of 1 year from the due date, or the date of the last previous extension, the date for paying the then unpaid portion of the assessed estate tax and interest. Petitioner requested that each extension be granted pursuant to section 6161(a)(2). However, the extension of time for payment of the tax for the period of May 23, 1972, until May 23, 1973, was granted under section 6161(a)(1). For the period May 23, 1973, through May 23, 1976, the extensions of time for payment of the tax reflected on the estate tax return were granted under section 6161(a)(2) and were based upon the District Director's determination that payment on such dates would result in undue hardship to the estate. Petitioner made the following payments to the District Director, Austin, Tex., to be applied against the estate tax shown on the return and interest thereon:

+----------------------------------------------------------+
                ¦Date of payment  ¦Tax         ¦Interest   ¦Total payment  ¦
                +-----------------+------------+-----------+---------------¦
                ¦                 ¦            ¦           ¦               ¦
                +-----------------+------------+-----------+---------------¦
                ¦May 23, 1972     ¦$300,000.00 ¦0          ¦$300,000.00    ¦
                +-----------------+------------+-----------+---------------¦
                ¦May 16, 1973     ¦1,002,515.86¦$121,297.93¦1,123,813.79   ¦
                +-----------------+------------+-----------+---------------¦
                ¦Totals           ¦1,302,515.86¦121,297.93 ¦1,423,813.79   ¦
                +----------------------------------------------------------+
                

On November 29, 1973, the Commissioner assessed a deficiency in estate tax against the estate in the amount of $2,018,049.13 resulting from an agreed increase of $2,702,885.80 in the valuation of decedent's interest in real property and a reduction of $614,547.75 of deductions claimed, neither of which is at issue in this case.

In response to petitioner's written request, the time for payment of the assessment of additional tax was extended by the District Director on November 28, 1973, until May 23, 1974, pursuant to section 6161(b)(2). Two additional 1-year extensions were thereafter granted under this section, extending the time for payment of the additional tax until May 23, 1976. Petitioner made the following payments of the additional tax assessed and interest thereon:

+-----------------------------------------------------+
                ¦Date of payment  ¦Tax     ¦Interest  ¦Total payment  ¦
                +-----------------+--------+----------+---------------¦
                ¦                 ¦        ¦          ¦               ¦
                +-----------------+--------+----------+---------------¦
                ¦May 20, 1974     ¦$250,000¦0         ¦$250,000       ¦
                +-----------------+--------+----------+---------------¦
                ¦May 23, 1975     ¦315,000 ¦0         ¦315,000        ¦
                +-----------------+--------+----------+---------------¦
                ¦May 3, 1976      ¦36,600  ¦$463,400  ¦500,000        ¦
                +-----------------+--------+----------+---------------¦
                ¦Totals           ¦601,600 ¦463,400   ¦1,065,000      ¦
                +-----------------------------------------------------+
                

The executors of the estate have to date sought to pay its estate taxes as soon as possible, consistent with their fiduciary duty to manage the estate in a prudent manner and to prevent waste. Liquid assets of the estate were promptly converted into cash and applied to the payment of taxes, claims against the estate, and expenses of the estate. Substantially all of the other assets of the estate consisted of varying interests in undeveloped and essentially non-income-producing land in Harris and Montgomery Counties, Tex. The executors sold the estate's interest in a number of these tracts and applied substantially all of the proceeds to the payment of taxes and expenses of the estate. Because of various impediments affecting the marketability of the land, the executors have not heretofore been able to sell the remaining assets of the estate except possibly at sacrifice prices which would have caused substantial financial loss to the estate.

On its Federal income tax returns petitioner claimed deductions for interest expense payable on the balance of its Federal estate tax liability as follows:

+-----------------------------+
                ¦TYE NOV. 30—   ¦Amount     ¦
                +-----------------+-----------¦
                ¦                 ¦           ¦
                +-----------------+-----------¦
                ¦1973             ¦$108,813.79¦
                +-----------------+-----------¦
                ¦1974             ¦136,250.00 ¦
                +-----------------+-----------¦
                ¦1975             ¦70,000.00  ¦
                +-----------------------------+
                

Petitioner has not filed a statement pursuant to section 642(g) of the Code waiving the above-listed amounts as deductions against its estate tax liability under section 2053.

On its Federal estate tax return petitioner claimed a deduction for ‘projected interest payments over five years on remaining Estate Tax Payable of $3,095,344.70’ in the amount of $619,068.94. This deduction was disallowed by the Commissioner in his statutory notice of deficiency.

The issue for decision is whether the projected interest payments are deductible for estate tax purposes as administration expense. Respondent recognizes that interest paid on taxes is deductible for income tax purposes under section 163 which specifically provides for the deduction of interest. To be deductible for estate tax purposes, the deduction for interest must be claimed under the general provisions allowing administration expenses. ² Section 2053(c)(1)(B),³ however, provides that taxes are not deductible as administration expenses. Because interest on tax is procedurely assessed, collected, and paid in the same manner as tax pursuant to section 6601(e)(1),⁴ respondent reasons that these sections must be read together and the deduction must, therefore, be disallowed. Respondent distinguishes deductibility for income tax purposes because section 163 is specific and is not burdened with any prohibition against deducting taxes. Respondent relies upon Ballance v. United States, 347 F.2d 419 (7th Cir. 1965), and Leopold v. United States, an unreported case (C.D. Cal. 1972, 29 AFTR 2d 1518, 72—1 USTC par. 12,837). Respondent has issued Rev. Rul. 75—239, 1975—1 C.B. 304, consistent with his position.

The issue is one of first impression in this Court; however, an analysis of some of our decisions of long standing leads us to conclude that respondent's line of reasoning is faulty and will not prevail here. Since 1937 we have held that expenses incurred to prevent financial loss to an estate resulting from forced sales of its assets in order to pay its estate taxes are deductible for estate tax purposes as administration expenses. Estate of Huntington v. Commissioner, 36 B.T.A. 698 (1937). In Huntington, the decedent's estate issued notes to pay assessed estate taxes, claims, and expenses to avoid losses which would have resulted from the forced sale of its assets. In holding that the discount and redemption premiums and the issuance and redemption expenses incurred in connection with the notes were properly deductible in computing the decedent's taxable estate, we stated at page 726:

The issuance of the notes avoided the necessity of sacrificing the assets of the estate by immediate or forced sale of the same, or any part thereof, and the expenditures properly incident thereto were clearly made for the purpose of preserving and preventing waste of the estate, which, as was said in Brown v. Commissioner, 74 Fed. (2d) 281, was ‘one of the first obligations of an executor.’

Similarly, in Estate of Todd v. Commissioner, 57 T.C. 288 (1971), we held that interest incurred upon...