Hibernia Bank v. United States

Celia Clark died with a substantial estate that included a mansion and a large number of shares of Hibernia Bank (Hibernia) (plaintiff). The will was probated in California and called for transfer of Clark’s assets to four trusts, which would benefit her children and grandchildren. The will appointed Hibernia as both the trustee of these trusts and the administrator of Clark’s estate. Approximately 15 months after Clark’s death, all major claims and bequests of the estate had been played out, and Hibernia had the option of closing the estate. Instead, Hibernia sought to sell the mansion before closing the estate. The mansion proved difficult to sell, and Hibernia held the estate open for an additional five and a half years seeking a buyer. During this time, Hibernia caused the estate to take out loans, often from Hibernia itself, to cover the cost of maintaining the mansion. The California probate court found the interest paid on the loans to be administrative expenses under state law. Hibernia filed a claim with the Internal Revenue Service (IRS) (defendant) for a refund of estate taxes, arguing that the interest payments on the loans were deductible administrative expenses. The IRS denied the claim, and Hibernia sued for the refund in district court. The district court upheld the IRS’s refusal of the refund claim, and Hibernia appealed.