Rev. Rul. 82-6

ISSUE

In computing the amount of the estate tax charitable deduction under section 2055 of the Internal Revenue Code for a residuary charitable bequest, what reduction is to be made for interest payable on estate taxes deferred under section 6166A? FACTS

D died testate on January 1, 1978. After certain specific bequests, D bequeathed the entire residue of the estate to charity. D's will further provided that all debts, expenses and taxes are to be paid out of the residuary estate.

More than 35 percent of D's gross estate consisted of the value of a closely held business. Therefore, the executor of the estate elected, under section 6166A of the Code, to make 10 annual installment payments of that portion of the federal estate tax liability that is attributable to the closely held business.

LAW AND ANALYSIS

Section 2055(a) of the Code provides that the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises or transfers, for exclusively religious, charitable, scientific, literary, or educational purposes. The amount deductible from the gross estate, however, may not be greater than the value of what charity is actually entitled to and does in fact receive.

If, under the terms of the will, the federal estate tax, or any estate, succession, legacy, or inheritance tax is payable out of property transferred to charity, section 2055(c) of the Code requires the value of the charitable bequest to be reduced by the amount of such taxes in determining the amount deductible from the gross estate. Similarly, if administration expenses are payable out of a bequest to charity, only the net amount received by charity is deductible by the decedent's estate. The reduction for administration expenses must be made whether the deduction for those expenses is taken on the estate tax return or on the estate's income tax return. See Rev. Rul. 73-98, 1973-1 C.B. 407.

The interest payable on the federal estate tax deferred under section 6166A of the Code is an administration expense, and, under the terms of D's will, is payable out of D's residuary estate. The residuary charitable bequest, therefore, must be reduced by an estimate of the maximum amount of interest that will be payable on the deferred estate tax over the 10 year period of deferment in order to determine the amount of the charitable deduction allowable under section 2055.

HOLDING

The value of D's residuary charitable bequest must be reduced by an estimate of the maximum amount of interest that will be payable on federal estate taxes deferred under section 6166A of the Code to determine the amount of the charitable deduction allowable under section 2055. The charitable deduction must be reduced by the interest whether the deduction for this administration expense will be taken on the estate's federal income tax return or the federal estate tax return.

Section 6166A of the Code has been repealed by the Economic Recovery Tax Act of 1981, section 422(d), with respect to estates of decedents dying after December 31, 1981. Nevertheless, the conclusion of this revenue ruling applies as well when the payment of estate tax is extended under section 6166.