The Second Circuit handed down a decision on March 13, 2019, in the case of Harrell v. Commissioner. Mrs. Harrell had received distributions from the New York City Employees’ Retirement System in 2009 and 2010, as the beneficiary of Howard Wilkerson who died in 1994. The benefits were payable to her as an annuity, which she had elected to be payable for her life. During 1994 and 1996, Mrs. Harrell had paid some expenses, including funeral and professional fees related to her father’s death and the administration of his estate. A New York State Estate Tax Return was filed reporting the present value of the annuity and the estate tax due. $27,400 was deducted on the return for, among other things, funeral, estate administration and debts. No federal return was required. For 2009, Mrs. Harrell filed her income tax return jointly with her husband, and then later decided to claim the funeral and estate administration expenses from 1994 and 1996 as deductions from her income tax.
The Tax Court denied the deductions and Mrs. Harrell appealed. The Second Circuit affirmed. One part dealt with rules for taxation of annuities, which is not covered in this report. Turning to the attempt to deduct funeral and estate administration expenses on the Harrell’s income tax return for 2009, the Second Circuit said it’s very clear in the law that funeral expenses are personal or family expenses, which are allowable only to the estate under Section 2053. The court also said that the claimed deductions of estate administration expenses against income in respect of a decedent (the retirement plan distributions) was also disallowed because Section 691 (b) limited those deductions to trade or business expenses, interest, taxes, investment expenses and depletion. The court also cited Section 262 which says that unless the Code says otherwise, there is no deduction for personal, living or family expenses. And finally, the court said the Harrells were not entitled to deduct any claimed “net operating loss carry forward” with respect to the funeral and estate administration expenses because those expenses are nondeductible personal or family expenses which are not allowable in computing NOLs.