Brief Fact Summary. Respondent Commissioner (Respondent) determined a deficiency in Petitioner Estate Administrator’s (Petitioner) estate tax payment of $118, 709.31, attributable to deducted attorney’s fees. Petitioner challenged the alleged deficiency, claiming that the attorney’s fees were deductible under local law and the Internal Revenue Code (IRC) regulations.
Synopsis of Rule of Law. Attorney’s fees are deductible under IRC 2053(a)(2) so long as the fees are allowable under local law and the regulations and are accordingly reasonable and necessary for the administration of the estate.
In determining a reasonable attorney's fee, the court will in each case consider the following factors: time and labor required; the difficulty of questions involved; the skill required to handle the problems presented; the attorney's experience, ability, and reputation; the benefits resulting to the client from the services; the customary fee for similar services; the contingency or certainty of compensation; the results obtained; and the amount involved.View Full Point of Law
Issue. Whether Petitioner, pursuant to Section 2053(a)(2) of the Internal Revenue Code, was entitled to deduct from the gross estate of Decedent an amount paid for attorney’s fees?
Held. Yes. Petitioner, pursuant to IRC Section 2053(a)(2), was entitled to deduct from the gross estate of Decedent the amount paid for attorney’s fees. Section 2053(a)(2) allows for the deduction of an administration expense that is allowable under both local law and the regulations. Here, New York local law allows for the deduction of attorney’s fees that are reasonable. Taking into account, in accord with New York law, (1) the time and labor required for the estate; (2) the difficulty of questions involved in the estate planning and skills required to solve any problems presented; (3) the lawyer’s experience, ability, and reputation; (4) the amount involved and benefit derived from the services; (5) the attorney’s fees generally charged within the community; (6) the contingency of compensation; (7) the results obtained; and, (8) responsibility involved, we find that the attorney’s fees were reasonable. The IRC regulations provide that the amounts deductible are limited to those ex
penses that are actually and necessarily incurred in the estate administration. Here, the fees attributable to the work performed for selling Decedent’s residence are not deductible because the sale was not necessary for the administration of the estate. The sale was not necessary to pay debts or satisfy will distribution. Likewise, the fees related to the advance payment of the executor’s commissions are not deductible, because the advance commissions were not necessary for estate administration. Nonetheless, the remaining services paid for in attorney’s fees were essential to the estate administration and are therefore deductible under IRC 2053(a)(2).
Discussion. Under federal tax law, fees paid for attorney’s services are deductible from the gross estate tax. However, these fees are only deductible insofar as local law allows the deduction (and here, this means that the fees must be reasonable in light of relevant factors) and the regulations allow the deduction (meaning the fees must be necessary for estate administration). Because the sale of Decedent’s residence and advance payment of executors’ commissions were not required for the estate administration, federal tax law forbade deduction of attorney’s fees paid for these services. The remaining attorney’s fees, however, were deductible.