Estate of Graegin v. Commissioner

Cecil Graegin’s gross estate included valuable assets, which caused his estate to be subject to substantial estate-tax liability. Cecil’s gross estate included assets held in one trust established for the benefit of Cecil himself and another trust established for the benefit of his wife, Helen Graegin. Helen’s trust contained substantial liquid assets, but Cecil’s estate would not have access to liquid assets held in Helen’s trust until her death, which was predicted to occur in 15 years. Cecil’s trust did not have many liquid assets but held a substantial amount of stock in a closely held corporation. Because the corporation was closely held, the shares could not easily be sold at their true economic value. Cecil’s estate’s estate-tax liability was much higher than the value of the liquid assets to which the estate had access. Rather than sell shares in the corporation at a loss, the administrator of the estate (plaintiff) caused the estate to take out a loan, the proceeds of which were used to pay the estate-tax liability. The principal and accrued interest on the loan were due in a single payment 15 years after the loan was issued, to coincide with Helen’s life expectancy (and to coincide with the anticipated date on which the estate would have access to Helen’s trust’s liquid assets). The estate claimed the predicted interest payment as a deductible administrative expense, and the Internal Revenue Service (IRS) (defendant) denied the claim. The estate filed a petition in tax court challenging the IRS’s denial.