Operating Expenses of a Business Not Deductible as an Administrative Expense

By De Rosa, Albert | The CPA Journal, March 1992 | Go to article overview

Operating Expenses of a Business Not Deductible as an Administrative Expense


De Rosa, Albert, The CPA Journal


Technical Advice Memorandum (TAM) 9132003 (CCH para. 12,302) examines the deductibility of expenses, incurred in operating a business, as an administration expense.

THE FACTS

D, the decedent, passed away in April 1988, leaving a gross estate that included a motel and restaurant business (M). The value of M, including real Property and the net value of M's assets used in its operation, was approximately 54% of the value of D's gross estate. The representatives of D's estate filed with the estate tax return an election under IRC Sec. 6166 to pay the federal estate tax attributable to the business in 10 equal annual installments.

Representatives of D's estate listed the business for sale during July 1988, and it was eventually sold in January 1990. The personal representatives of D's estate operated M as an ongoing concern from D's death until the sale.

The personal representatives of D's estate wanted to deduct operating expenses incurred in the operation of M from the period of D's death to the date of sale of M as expenses of administration under Sec. 2053(a)(2).

ESTATE TAX LAW

Sec. 20.2053-3(a) of the Estate Tax Regulations provides generally that amounts deductible from a gross estate as "administration expenses" are limited to expenses that are actually and necessarily incurred in the administration of the decedent's estate; i.e., collection of assets, payment of debts, and distribution of property to the persons entitled to it. The expenses contemplated in the law are those only that attend settlement of an estate and the transfer of the property of the estate to individual beneficiaries or to a trustee. Expenses that are incurred for the individual benefit of heirs, legatees or devices, are not deductible. Administrative expenses include executive commissions, attorney's fees, and miscellaneous expenses.

Reg. Sec. 20.2053-3(d) states that miscellaneous administration expenses include such expenses as court costs, surrogates' fees, appraisers' fees, clerk hire, etc. Expenses necessarily incurred in preserving and distributing the estate are deductible, including the cost of storing or maintaining property of the estate, if it is impossible to effect immediate distribution to the beneficiaries. Expenses for preserving and caring for the property may not include outlays for additions or improvements. Statutory commissions and expenses paid by an estate that are allocable to services performed by the estate representatives after the decedent's death and that are incurred for the purpose of distribution of trust assets under a decedent's will and settling the estate are deductible as administration expenses under Sec. 2053(a)(2).

PRIOR CASE LAW

In Estate of Papson v. Commissions 73 T.C. 290(1979), the decedent owned a shopping center comprising over 35% of the gross estate. The estate hired a real estate broker to find a new tenant after a major tenant of the shopping center was adjudicated bankrupt and vacated the premises. In holding that the broker's commission qualified as deductible administration expense under Sec. 2053(a)(2), the Tax Court emphasized that, due to the exceptional circumstances in the case, "...where not only did the assets involved represent a very large portion of the estate but also the tenant occupied such a significant portion of the premises, and its occupancy was so abruptly and unexpectedly terminated,. …

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