Rev. Rul. 69-402

Advice has been requested whether interest on income tax deficiencies, which accrued after a decedent's death and was paid by the executor of his estate, is deductible under section 2053(a)(2) of the Internal Revenue Code of 1954 as an administration expense.

At the time of the decedent's death, his Federal income tax returns for prior years had been audited and a tax deficiency proposed. The decedent died while still in disagreement as to the amount of the assessment of the proposed deficiency. After contesting the proposed deficiency, the executor of the estate reached a settlement agreeing to an assessment in an amount that included interest accruing after the decedent's death. In addition, the executor paid to the state in which decedent resided at the time of his death, an income tax deficiency and post-death interest thereon that resulted from adjustments in the Federal income tax liability. Under the laws of that state reasonable and necessary expenses actually paid by an executor are allowable by the court on the settlement of his account.

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 as are paid out for administration expenses provided that the expenses are allowable by the law of the jurisdiction where the estate is being administered. In defining "administration expenses," section 20.2053-3 of the Estate Tax Regulations limits the term 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 to the persons entitled to it. The expenses contemplated in the law are such only as attend the settlement of an estate and the transfer of the property of the estate to individual beneficiaries or to a trustee * * *

In Robert D. Maehling v. United States, 20 AFTR 2d 5997 (1967), 67-2 USTC part. 12,486, it was held that interest on a Federal income tax deficiency that accrued after the decedent's death was an allowable expense under state law and therefore was a deductible expense under section 2053(a) of the Code, not as a claim against the estate, but as an administration expense. The court in Maehling based its conclusion on the fact that under applicable state law the executor has a duty to contest the imposition of additional taxes if he could do so in good faith; therefore, he properly permitted interest to accrue while he contested for the benefit of the estate the claim for additional income taxes by the Federal Government.

It is held that the post-death interest on Federal and State income tax deficiencies incurred while the executor of the decedent's estate was contesting imposition of the taxes is deductible as an administration expense under section 2053(a)(2) of the Code to the extent allowable under local law. However, the estate may waive the right to deduct the interest on its Federal estate tax return in order to deduct it on the fiduciary income tax return as provided by section 642(g) of the Code.