Estate of Millikin v. Commissioner

A trust known as Trust B owned property that included liquid assets and a residential estate called Ripplestone. Marguerite Millikin held a power of general appointment over Trust B’s property. Any unappointed Trust B property would go to a trust known as Trust C for the benefit of other family members. When Millikin died, her general power of appointment meant that Trust B’s property was considered nonprobate property, but the property’s value was included in Millikin’s gross estate. In her will, Millikin exercised her power of appointment to direct that her executor use Trust B’s property to pay the estate taxes owed on Trust B’s property. Millikin did not appoint Ripplestone to anyone, but her will left a museum the right to choose art pieces from a collection in Ripplestone’s gallery. Millikin’s estate (plaintiff) paid to maintain Ripplestone for almost a year while the museum chose its pieces. The estate then filed an estate-tax return deducting administrative expenses from Millikin’s gross estate for (1) Ripplestone’s maintenance expenses for the preceding year and (2) the estimated future expenses of selling Ripplestone. After the return was filed, the estate sold Ripplestone. An Internal Revenue Service (defendant) audit led to disputes, including whether the estate could deduct the costs of maintaining and selling Ripplestone as administrative expenses. The estate petitioned the United States Tax Court for relief. Applying Estate of Park v. Commissioner, the Tax Court held that state law controlled whether an estate’s administrative expenses were deductible. Under Ohio law, administrative expenses were deductible if they were necessary, reasonable, and just. The Tax Court ruled that the expense of maintaining Ripplestone during the art-selection process was necessary to distribute Millikin’s estate. However, the Tax Court found that Trust B contained $9 million in liquid assets and, therefore, that the estate did not need to liquidate Ripplestone to pay taxes. Rather, Ripplestone could have been given directly to Trust C. Because the sale was unnecessary, the sale expenses were unnecessary and not deductible. The estate appealed.