## Facts

- David Smith, a sculptor, died in 1965 owning 425 of his own sculptures.
- Before death, Smith entered a sales agreement with Marlborough-Gerson Galleries to market and sell his work.
- After Smith’s death, the executors continued using Marlborough to sell the sculptures.
- The executors and Marlborough intentionally spread sales over roughly eight years to avoid saturating the market and depressing prices.
- The estate paid Marlborough $1,583,544.67 in sales commissions; the commissions were approved in the estate accounting by a New York Surrogate’s Court.
- For federal estate tax purposes, the estate deducted the commissions as “administration expenses” under I.R.C. § 2053(a).
- The Tax Court allowed only $750,447.74 of the commissions as deductible, corresponding to the amount it found necessary to pay the decedent’s debts, administration expenses, and taxes; it treated the remainder as attributable to conserving or improving the residuary estate for beneficiaries.

## Issues

1. Whether I.R.C. § 2053(a) permits deduction of the full amount of post-death art-sale commissions as “administration expenses,” or only the portion necessary to settle the estate’s debts, taxes, and administration costs.
2. Whether the Tax Court clearly erred in finding that commissions beyond $750,447.74 were not “actually and necessarily” incurred in administration.

## Decision

- The Second Circuit affirmed the Tax Court.
- Only $750,447.74 of the commissions was deductible as an administration expense under § 2053(a).
- The Tax Court’s fact-bound determination of necessity was not clearly erroneous.
- State probate-court approval of the full commissions did not control the federal deductibility question.

## Legal Principles

- Under I.R.C. § 2053(a) and implementing regulations, deductible administration expenses must be “actually and necessarily” incurred and essential to proper estate settlement.
- Expenses incurred to collect, preserve, and distribute the estate (including raising funds to pay debts, taxes, and required administration costs) may be deductible; expenses primarily directed to conserving or increasing value for beneficiaries are not.
- Federal courts apply an independent federal standard for § 2053(a) deductibility; state-court allowance of expenses is relevant but not dispositive.
- Appellate review of the Tax Court’s necessity findings is highly deferential and reverses only for clear error.

## Conclusion

The court upheld a partial disallowance of gallery commissions as estate-tax administration expenses, limiting the § 2053(a) deduction to the amount needed to settle the estate rather than to carry out a longer-term sales strategy aimed at protecting or improving the value of assets for beneficiaries.


Estate of Smith v. Commissioner, 510 F.2d 479 (2d Cir. 1975)