Substantiating Deductions Taken on Estate Tax Return

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By Kathleen Ford Bay, Esq.  

Richards Rodriguez & Skeith LLP, Austin, TX

In Olivo Est. v. Comr.,1 an attorney (with an LLM in Taxation) had taken care of his mother for years before her death (a chore that adversely affected his ability to practice law, reportedly), then served as Administrator of her estate, and also served as attorney for the estate. The IRS had asserted an estate tax deficiency of about $349,000, with penalties of about $13,300. At issue were deductions for the following: (1) services of such son in caring for mother before her death — he said he was owed $1.24 million per an alleged, oral agreement or per quantum meruit; (2) Administrator's commissions calculated per the New Jersey statute; and (3) CPA and attorneys' fees.

Perhaps the lack of any credible evidence on the existence of an agreement to pay for services after the mother died, or the failure to abide by New Jersey's statutory equivalent of quantum meruit, affected other aspects of this case. In any event, the son did not do too well with his arguments: First, nothing was allowed for the son's $1.24 million claim for services rendered before death. Second, a statutory fee for the Administrator's commissions was allowed; however, the son had miscalculated the statutory fee, which was about $10,000 more than what he has paid himself.

The deduction was limited to what he had received or would be receiving and there was no evidence he would receive anything more. Third, there was no evidence that the son had paid any accounting fees, so no deduction was allowed for those. The son had kept no records for any legal fees and only estimated what they might be based on a rate of $150 an hour. Thus, while there would be a deduction for actual fees paid to the court, for example, there was no deduction for most of the claimed attorneys' fees.

Moral: Keep good records of all expenses for which a deduction will be claimed, have those records ready to show the IRS, and be cooperative when requested to provide back-up information.

 For more information, in the Tax Management Portfolios, see Peebles and Janes, 822 T.M., Estate, Gift, and Generation-Skipping Tax Returns and Audits, and Beckwith and Berry, 840 T.M., Estate Tax Deductions—Sections 2053 and 2054, and in Tax Practice Series, see ¶6260, Expenses, Debts, Taxes and Losses (Estate Tax Deductions). 

  1 T.C. Memo 2011-163.

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