After Decedent’s death, his trust borrowed $1.5 million from Decedent’s Foundation to pay his estate tax liabilities (aka a “Graegin” loan). The trust claimed deductions for the interest on the loan under IRC §2053.

The IRS would not allow the deductions because the estate had sufficient liquid assets to pay its estate tax liabilities and the Regulations only allow deductions of administrative expenses that are actually and necessarily incurred in the administration. The Court agreed that since there were sufficient liquid assets, it was not necessary to take out the loan and the interest was therefore nondeductible.