## Facts

- Cecil Graegin died in 1981, leaving an estate dominated by illiquid assets, including substantial closely held business interests, with insufficient cash to pay federal estate tax without a distress sale.
- The co-executors filed a federal estate tax return and faced the need to raise liquidity to satisfy estate tax liabilities.
- Before marriage, the decedent and his spouse executed an antenuptial agreement incorporating a revocable inter vivos trust created for the spouse’s benefit; the spouse received trust income and a right to occupy the marital residence subject to terminating conditions (e.g., remarriage), and principal invasion was limited.
- The decedent retained interests in the trust that caused trust assets to be included in the gross estate.
- To avoid selling illiquid assets quickly, the estate borrowed funds to pay estate tax through a note structured with a fixed interest rate, a fixed term, no current interest payments, a prohibition on prepayment, and a single balloon payment of principal plus accrued interest at maturity.
- The estate claimed an administration-expense deduction under I.R.C. § 2053(a)(2) for the entire projected interest due at maturity, though unpaid as of filing.
- The estate also claimed a deduction for the actuarial value of the spouse’s beneficial interest in the inter vivos trust.
- The IRS disallowed both deductions and determined an estate tax deficiency; after concessions, the dispute centered on these two items.

## Issues

1. Whether a fixed, balloon-payment interest obligation on a loan incurred to pay estate tax is deductible as an administration expense under I.R.C. § 2053(a)(2) when the interest is unpaid but determinable.
2. Whether the estate may deduct the actuarial value of the surviving spouse’s beneficial interest in an inter vivos revocable trust created by the decedent and included in the gross estate.

## Decision

- The court allowed the deduction for the full projected interest on the estate’s loan as an administration expense under § 2053(a)(2).
- The court denied a deduction for the actuarial value of the surviving spouse’s interest in the inter vivos trust.

## Legal Principles

- Interest on a loan may qualify as a deductible administration expense under I.R.C. § 2053(a)(2) if the borrowing is actually and necessarily incurred to administer the estate, including avoiding a forced sale of illiquid assets to pay estate tax and related costs.
- An administration expense may be deductible even if not yet paid when the amount is fixed or reasonably ascertainable and the obligation is noncontingent and certain to be paid.
- A fixed-rate note with a fixed term and terms preventing early payoff can support deductibility by making total interest determinable and payment effectively mandatory at maturity.
- A surviving spouse’s beneficial interest in a decedent-created inter vivos revocable trust included in the gross estate is not, merely by its actuarial value, a deductible claim against the estate or administration expense under § 2053.

## Conclusion

The Tax Court treated the estate’s fixed, nonprepayable balloon-interest loan as a necessary, bona fide financing method to pay estate tax without sacrificing illiquid holdings, permitting an immediate § 2053(a)(2) deduction for the total determinable interest, while rejecting an attempt to reduce the taxable estate by deducting the actuarial value of the widow’s trust benefit.


Estate of Graegin v. Commissioner, 56 T.C.M. (CCH) 387 (T.C. 1988)