## Facts

- Marguerite S. Millikin, an Ohio resident, died testate in 1989.
- Her late husband had created several inter vivos trusts, including a marital-deduction trust (“Trust B”) over which Marguerite held a general power of appointment.
- Trust B’s assets included publicly traded securities (about $9 million) and “Ripplestone,” a 150-acre residential estate where Marguerite lived.
- Because of Marguerite’s general power of appointment, Trust B’s assets were included in her federal gross estate under 26 U.S.C. § 2041(a)(2), though Trust B assets were not probate assets and were not subject to creditors’ claims against her estate.
- Marguerite’s will partially exercised the power of appointment by directing (i) $2 million to charity and (ii) an additional appointment to her estate of assets equal to the incremental estate tax attributable to inclusion of Trust B in the gross estate; the remainder of Trust B would pass to another trust for distribution to designated beneficiaries.
- The estate tax return valued Ripplestone at $3.2 million and claimed a deduction for estimated selling costs.
- During administration, the estate and Trust B spent about $750,000 to maintain Ripplestone (taxes, insurance, upkeep, security, and related costs).
- The estate sought to deduct these Ripplestone expenses as administration expenses under 26 U.S.C. § 2053(a)(2), asserting it reasonably retained the property to preserve assets for potential tax liabilities pending an anticipated audit.

## Issues

1. Whether deductibility of administration expenses under 26 U.S.C. § 2053(a)(2) turns solely on state probate law “allowability,” or also requires an independent federal standard that the expenses be actually and necessarily incurred in administering the estate.
2. Under the proper standard, whether the Ripplestone maintenance expenses are deductible administration expenses.

## Decision

- The Sixth Circuit (en banc) overruled its prior precedent treating state law as dispositive of § 2053(a) deductibility.
- The court held that state law is a threshold requirement (the expense must be allowable under the jurisdiction’s law), but federal law independently governs whether the expense is deductible for federal estate tax purposes.
- The court vacated the Tax Court’s decision and remanded because the record and findings were insufficient to decide deductibility under the correct federal standard.

## Legal Principles

- For § 2053(a)(2), an expense must be allowable under applicable state law, but state law does not control the ultimate federal deductibility determination.
- Treasury regulations require that deductible administration expenses be actually and necessarily incurred in administering the estate (including collecting assets, paying debts, and distributing property).
- Prior circuit precedent treating state probate law as the exclusive test for federal deductibility under § 2053(a) is incorrect and is rejected.

## Conclusion

The Sixth Circuit held that § 2053(a)(2) requires both state-law allowability and an independent federal inquiry into whether expenses were actually and necessarily incurred for estate administration, and it vacated and remanded for further fact-finding and application of that federal standard to the Ripplestone maintenance costs.


Estate of Millikin v. Commissioner, 125 F.3d 339 (6th Cir. 1997) (en banc)