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(1) They may apply to the entire estate
Although applicable to estate loans, these tax obligation, and (2) the interest is a
proposed regulations appear designed to deductible expense. A Graegin loan is
required to be bona fide and “actually
curtail the use of what the estate planning and necessarily” incurred. In recent
area generally calls ‘Graegin loans.’ cases, the IRS has successfully argued
that Graegin loans were not “actually
and necessarily” incurred with regard
to liquid assets or family investment
which is granted by showing reason- income tax regulations and general partnerships (see, e.g., Estate of Koons17
able cause for extending the time for principles of federal law; and Estate of Black18). These proposed
payment. According to the preamble, 2. Both the interest expense and the regulations provide guidance as to when
Treasury and the IRS consider a Sec. underlying loan are bona fide in Treasury and the IRS will respect estate
6163 deferral to be appropriate if the nature; and loan obligations.
value of a reversionary or remainder 3. The underlying loan and its terms
interest is includible in the estate but are actually and necessarily incurred Substantiating certain valuations
is not immediately available to pay the in the administration of the dece- Although an estate generally may
estate tax. dent’s estate and are essential to the deduct only amounts it actually pays
Although non–Sec. 6166 interest proper settlement of the estate. to satisfy a claim, certain exceptions
and the underlying underpayment of The proposed regulations provide a exist. For example, deductions are
tax or deficiency is often attributable to nonexclusive list of factors to consider permitted for the value of (1) claims
executors’ reasonable exercise of their in determining whether interest payable and counterclaims in a related mat-
fiduciary duties — and thus incurred in under an estate’s loan obligation satis- ter,19 and (2) unpaid claims totaling
the administration of the estate — the fies Regs. Secs. 20.2053-1(b)(2) and $500,000 or less.20 For both exceptions,
preamble notes that this is not always 20.2053-3(a) and thus is reasonable and the claim’s value must be determined
the case. The proposed regulations comparable to an arm’s-length loan. from a qualified appraisal performed by
would not consider any non–Sec. 6166 Although applicable to estate loans, a qualified appraiser, as defined under
interest accruing on an unpaid tax or these proposed regulations appear Sec. 170. Noting that qualified apprais-
penalty attributable to an executor’s designed to curtail the use of what the als characterized under Sec. 170 pertain
negligence, disregard of the rules or estate planning area generally calls to charitable contribution deductions,
regulations, or fraud with the intent to “Graegin loans.”16 In Graegin, the the preamble explains that the proposed
evade tax to be: (1) actually or neces- estate was able to deduct on its estate regulations would replace this require-
sarily incurred in the administration of tax return all the interest due on the ment with new requirements.
the estate; or (2) essential to the proper estate loan as an administration expense Specifically, the proposed regulations
settlement of the estate. under Sec. 2053. would require a written appraisal
While the election under Sec. 6166 adequately reflecting the current
Interest on certain estate loan allows estates to defer the payment value of the claim when Form 706
obligations of estate tax up to 14 years, it has two is being completed. The written ap-
Parallel issues apply to interest accrued potential disadvantages: (1) It does praisal should:
on bona fide loan obligations that the not generally apply to a decedent’s ■ Take into account post-death events
estate incurs. The proposed regulations entire estate (just interests in closely occurring before the deduction is
would permit the estate to deduct in- held businesses), and (2) the inter- claimed and reasonably anticipated to
terest expense only if: est charged on the deferred amount occur afterward;
1. The interest accrued under an of estate tax is not deductible as an ■ Consider all relevant facts and
instrument or contract that consti- expense under Sec. 2053. Graegin loans elements of value that are known or
tutes indebtedness under applicable have neither of these disadvantages: can be reasonably anticipated;

16. Referring to Estate of Graegin, T.C. Memo. 1988-477. 19. Regs. Sec. 20.2053-4(b).
17. Estate of Koons, T.C. Memo. 2013-94. 20. Regs. Sec. 20.2053-4(c).
18. Estate of Black, 133 T.C. 340 (2009).

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