Opinion ID: 157391
Heading Depth: 3
Heading Rank: 2

Heading: Deduction for Administrative Expenses

Text: 40 The Estate also argues that the settlement payment was a deductible administrative expense of the Estate under § 2053(a)(2). 8 Treas. Reg. § 20.2053-3(a) limits deductible administrative expenses to 41 such expenses as are actually and necessarily, incurred in the administration of the decedent's estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it.... Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions. Administration expenses include ... attorney[s'] fees.... 42 The Estate reasons that because the settlement avoided the payment of attorneys' fees to defend against the descendants' claims, it was in essence a deductible prepayment of attorneys' fees. 43 We are unpersuaded. Although the settlement payment may have been made to avoid the risk of litigation, it was not actually a payment of attorneys' fees incurred in administering the estate. [A] transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred. National Alfalfa, 417 U.S. at 148, 94 S.Ct. 2129. That the Estate could have chosen to incur deductible attorneys' fees instead of making a nondeductible distribution of estate assets is irrelevant. For purposes of deductibility, avoiding attorneys' fees is clearly not the same as paying attorneys' fees, no matter how strong the courts' preference for settlement of lawsuits. 44 Furthermore, this was not an expense incurred in the collection of assets, payment of debts, and distribution of property to the person entitled to it. It was not paid to avoid or facilitate a distribution of estate property; it was in fact itself a distribution of estate property, as we have explained. Again, the claimants' status as heirs is key. Determining the deductibility of administrative expenses involves substantially the same considerations as interpreting the phrase claims against the estate. United States v. Stapf, 375 U.S. 118, 134, 84 S.Ct. 248, 11 L.Ed.2d 195 (1963). Payments to heir[s] claiming as such cannot qualify as deductible administrative expenses. Pennsylvania Bank & Trust Co. v. United States, 597 F.2d 382, 384 (3d Cir.1979).