Sunday, October 08, 2006

HOW NOT TO GET AN ESTATE TAX DEDUCTION FOR A FUNERAL RECEPTION

In calculating federal estate taxes, a deduction for funeral expenses is generally allowed. Code Sec. 2053(a)(1) provides for the deduction from the gross estate for such funeral expenses as are allowed by the laws of the jurisdiction under which the estate is being administered.

Michigan allows reasonable funeral and burial expenses as a charge against the estate. A recent Tax Court case involving a Michigan estate demonstrates how NOT to qualify for the deduction in regard to expenses of a post-funeral reception.

In Estate of Sarah Davenport, TC Memo 2006-215, the estate claimed total funeral expenses of $7,796, which included amounts paid for the funeral home, cremation, obituary notice, other items and a funeral luncheon costing $3,639. The IRS allowed all of the funeral expenses, except the amount paid for the funeral luncheon.

Neither the Code nor the regs define "funeral expenses." Reg. § 20.2053-2 states that "[a] reasonable expenditure for a tombstone, monument, or mausoleum, or for a burial lot, either for the decedent or his family, including a reasonable expenditure for its future care" and "the cost of transportation of the person bringing the body to the place of burial" are examples of deductible costs.

At trial, the Estate representatives testified that the purpose of the luncheon was in large part to thank family, teachers and professionals who worked with the decedent over the years. These individuals were invited to the funeral. The Tax Court determined that no deduction would be allowed for this type of reception.
Does this mean that post-funeral receptions will not be deductible in the future? Probably not, since there were a number of mistakes made by the estate in this case that may be overcome in other cases.

First, the Court noted that the "necessity" of the expense must be demonstrated. A purpose to "thank and recognize third parties for their support" did not demonstrate this necessity. A focus on eulogizing and laying to rest the deceased would have been more helpful and may have satisfied the Court.

Second, the Court noted that the "reasonableness" of the expense must be demonstrated. Here, the estate did not provide enough information to determine reasonableness. The Court noted that insufficient evidence was provided as to what the expended amounts were for - the Court did not know whether and how much was for for the venue, decorating, catering, entertainment, or a combination of supplies and services. It also did do not know who received the claimed payment or payments. If such information had been provided, the Court could then have ruled on reasonableness.

The Court also noted other facts that would have helped demonstrate "necessity" and "reasonableness" such as having the reception at the same location as the funeral service, and being able to demonstrate an overlap in attendance between the funeral service and the reception (elements that were absent in this case).

Consequently, even with this adverse case, future expenses for post-funeral events may still be allowable if the exact charges are provided, if they are reasonable, and the event has more of the traditional funeral focus so that "necessity" can be demonstrated.
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