By De Rosa, Albert
The CPA Journal , Vol. 61, No. 10
The U.S. Court of Appeals for the Fourth Circuit has joined the Second, Fifth, and Ninth Circuits in holding that federal law controls in the determination of whether an expenditure is deductible as an administrative expense (Love Est. v. Comr., 91-1 USTC para. 60,056 (4th Circuit 1991).
The Case of Love
Prior to death, Margaret Love entered into an agreement to have one of her mares bred. The agreement provided that the owner of the stallion was to receive a one-half interest in any offspring instead of a straight fee. The agreement also provided that Love would pay the owner of the stallion a fixed fee in the event of disaster, such as bankruptcy or death, so that the offspring could be sold free of encumbrances. The mare was impregnated shortly after Love's death. Pursuant to the agreement, the estate paid a fixed fee to acquire the remaining interest in the offspring. The payment was deducted on the federal estate tax return as an administrative expense. The estate argued that although the payment was not yet an obligation at the time of death (the mare was not yet pregnant), it was necessary to the administration of the estate. The Commissioner disallowed the deduction.
The court addressed the issue of whether state or local law controls in the determination of what is an administration expense under the IRC. Sec. 2053(a)(2) of the 1954 IRC, which was in effect at date of death, stated:
"...the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts...for administration expenses...as are allowable by the laws of the jurisdiction, whether within or without the U.S., under which the estate is being administered."
Prior case law noted that the federal estate tax is a tax on the transfer of property and not property itself. The estate tax allows deductions for administrative expenses that create an estate consisting only of amounts that actually pass to heirs. It would be unfair to allow deductions of expenditures that are not necessry to the estate. …