Wills and Trusts

Wyatt, Tarrant & Combs, LLP

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Graegin Loan Interest Not Deductible

In Estate of John F. Koons v. Commissioner, T.C. Memo 2013-94, Judge Morrison disallowed the deduction of $71,419,497 of interest on a $10,750,000 loan from CI LLC to the John F. Koons III Revocable Trust. At the decedent’s date of death the estate had an estate tax liability of about $21 million, plus a generation skipping tax liability of $5 million. It had about $19 million in liquid assets by the time the estate tax was due. In order to meet the short-fall, the revocable trust borrowed $10,750,000 from CI LLC which had over $200 million in liquid assets. The loan would not be repaid for over 18 years and interest would accumulate during that time (thus increasing the estate tax deduction).

The Tax Court found that the revocable trust had a 70.42% voting interest in CI LLC and thus could have compelled a distribution or a partial liquidation as easily as a loan. The court rejected the argument that the loan allowed the LLC to preserve cash, noting that the only way the revocable trust could ever pay back the LLC would be to get distributions from the LLC. Thus the loan was not necessary to the administration of the estate and the interest was not deductible. Interestingly, at the decedent’s death, the revocable trust’s voting interest was only 46.94% but a redemption of certain interests of the children before the estate tax was paid increased the trust’s voting interest.

The court also made a comment about the length of time, stating that the estate would have to remain open long enough for the loan to be repaid, which meant 18 to 25 years after the death of the decedent. The court stated that keeping the estate open that long hinders the “proper settlement” of the estate. That conclusion can be questioned; presumably the estate could have been settled had proper provision been made for its creditors.

Turney P. Berry

Louisville, Kentucky