## Facts

- A decedent’s will left the residuary estate to four testamentary trusts for her children (income) and grandchildren (remainders).
- Hibernia Bank was appointed administrator with the will annexed.
- By late 1967, the estate had paid specific bequests and virtually all claims and could have sought distribution of remaining assets and closure.
- The residuary estate primarily consisted of a Hillsborough, California mansion on substantial acreage and approximately 10,000 shares of Hibernia Bank stock.
- The mansion was costly to maintain (about $60,000 annually), and Hibernia opted to keep the estate open while attempting to sell it; the sale did not occur until 1972.
- To fund maintenance and related costs, the estate borrowed funds via four commercial loans from 1966–1969 totaling $775,000 in net proceeds; Hibernia itself was the lender for two loans totaling $625,000.
- Total interest paid on the loans was $196,210, and the state probate court approved the interest as an administration expense under state law.
- The IRS disallowed an estate tax deduction for the interest under I.R.C. § 2053(a)(2); Hibernia sued for a refund and lost in district court.

## Issues

1. Whether state probate-court approval of loan interest as an administration expense is conclusive for deductibility under I.R.C. § 2053(a)(2).
2. Whether interest on loans used to fund ongoing costs during a prolonged estate administration is “actually and necessarily incurred” in administering the estate and therefore deductible.

## Decision

- The Ninth Circuit affirmed the judgment denying the refund.
- State probate-court characterization of an expense as administrative is not controlling for § 2053 deductibility; federal law requires an independent inquiry.
- The loan interest was not deductible because it was not shown to be a necessary expense of administration under the federal standard.

## Legal Principles

- Deductibility of administration expenses under I.R.C. § 2053(a)(2) is governed by federal law, informed but not determined by state law or probate-court approvals.
- Under Treasury regulations, administration expenses must be “actually and necessarily incurred” in collecting assets, paying debts, and distributing property.
- Interest incurred as a consequence of discretionary asset-management decisions that prolong administration, rather than necessities of settling and distributing the estate, may be nondeductible under § 2053 even if allowed in state probate proceedings.

## Conclusion

The court held that federal estate tax deductibility under § 2053 depends on an independent federal determination of necessity and reasonableness, and it rejected a deduction for interest on loans used to keep an estate open to maintain and sell a costly property.


Hibernia Bank v. United States, 581 F.2d 741 (9th Cir. 1978)