                         T.C. Memo. 2004-286



                       UNITED STATES TAX COURT



               ESTATE OF HOWARD GILMAN, DECEASED,
  BERNARD D. BERGREEN AND NATALIE MOODY, EXECUTORS, Petitioner
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10748-02.            Filed December 28, 2004.


     Thomas H. Moreland, Jeffrey S. Boxer, Jerome J. Caulfield,

and Richard B. Covey, for petitioner.

     Milan K. Patel, Frank J. Jackson, and Gerard Mackey, for

respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:    Respondent determined a $30,475,381.13

deficiency in the Federal estate tax of the Estate of Howard

Gilman (the estate).
                                 - 2 -

     When Howard Gilman (decedent) died in 1998, his estate

consisted primarily of stock of Gilman Investment Co., Inc.

(GIC), a holding company for decedent’s businesses and other

assets (the Gilman assets).   Before he died, decedent formed the

Howard Gilman Foundation (the foundation).      Decedent bequeathed

the residue of his estate to the foundation.

     Bernard D. Bergreen (Bergreen) and Natalie Moody (Moody)

were coexecutors of the estate, the managers of a limited

liability company named HG Estate, LLC (HG), officers of GIC, and

members of the board of directors of the foundation.

Bergreen and Moody hired William Davis (Davis) to serve as chief

operating officer of Gilman Paper Co. and Gilman Building

Products, effective June 1998.

     In 1999, as part of a tax-free reorganization under section

368,1 the executors transferred the GIC stock and all of GIC’s

assets to HG and its subsidiaries.       The foundation was the only

member of HG.   Bergreen received tax advice that, if the

restructuring were completed by January 28, 1999, and the assets

then sold, HG would save $160 million in tax on capital gains

which would been have resulted if the estate had sold the assets.




     1
        Section references are to the Internal Revenue Code in
effect as of the date of decedent’s death. Rule references are
to the Tax Court Rules of Practice and Procedure. Amounts have
been rounded to the nearest dollar.
                               - 3 -

     The estate received $143 million in promissory notes from

some of HG’s businesses when the assets were transferred to HG.

The notes were scheduled to pay interest from 1999 to 2004, and

to be fully repaid in January 2004.

     The financial condition of HG’s businesses declined in 2001.

In October 2002, which was 15 months before the estate was

scheduled to receive repayment of the $143 million in notes, the

estate borrowed about $38 million (the Farm Credit loan),

repayable over 10 years.   The estate agreed to pay almost $16

million in closing costs and interest, which it seeks to deduct

as an administration expense under section 2053.    The estate also

seeks to deduct administration expenses which it paid from the

estate’s income.

     After concessions, the issues for decision are:

     1.   Whether (or to what extent) the estate may deduct as

administration expenses under section 2053(a)(2) interest and

closing costs for the $38 million Farm Credit loan.    We hold that

it may to the extent described herein.

     2.   Whether, in addition to the $1 million respondent

conceded, the estate may deduct $3,507,723 as additional

administration expenses (additional expenses) which it paid from

income of the estate.   We hold that the estate may deduct

additional administration expenses of $1,803,939.
                                 - 4 -

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Decedent and the Executors of Decedent’s Estate

     Decedent resided in New York, New York, when he died on

January 3, 1998.    Bergreen and Moody, the executors of decedent’s

estate, lived in New York, New York, when the petition was filed.

Bergreen is an attorney and was decedent’s close business

adviser.   Bergreen is an officer and director of decedent’s

corporations.   Moody was decedent’s administrative assistant and

vice president and secretary of decedent’s corporations.

     In 1981, decedent formed the foundation to support the

performing arts, wildlife conservation, and cardiovascular

disease research.   The foundation is tax exempt under section

501(c)(3).   Bergreen was a director of the foundation.   Moody

became a director of the foundation in 2000.

     Decedent owned all of the outstanding stock of Gilman

Investment Co. (GIC), some apartments, and $702,890 in cash or

cash equivalents when he died.    The fair market value of

decedent’s estate was more than $611 million when he died.

B.   The Gilman Businesses and the Hiring of Davis

     Decedent was chairman of the board of directors of GIC when

he died.   GIC owned about 50 businesses, including Gilman

Building Products, Gilman Paper Co., Gilman Timberlands, and

Gilman Financial Services.   GIC’s holdings included timberland,
                                - 5 -

sawmills, a railroad, rail cars, and a financial services

company.   Gilman Building Products produced lumber.

     Gilman Building Products had net positive cashflows which

averaged more than $42 million per year in 1994-99.    The GIC

businesses, including Gilman Paper Co., Gilman Timberlands, and

Gilman Financial Services had net negative cashflows of at least

$40 million in 1998.   GIC used the net positive cashflow of

Gilman Building Products to pay operating expenses of the GIC

businesses.

     GIC also owned the White Oak Plantation (White Oak), an

8,000-acre estate that has a conference center and a wildlife

conservation center with a scientific breeding program for

endangered animals and birds.   White Oak houses decedent’s

collection of about 6,000 photographs, which, according to one

appraisal obtained by Bergreen, was worth $80 million in 1998.

Gilman Building Products used about one-third to one-half of its

annual net positive cashflow to maintain White Oak and to fund

the operations and grants of the foundation.

     Davis was the chief operating officer of Gilman Paper Co.

and Gilman Building Products until he retired in February 1996.

His successor died of cancer in June 1998.   Early in 1998, while

Bergreen and Moody were officers of GIC and coexecutors of

decedent’s estate, Bergreen, Moody, and Davis agreed that Davis

would be paid $5 million to resume his duties as chief operating
                                 - 6 -

officer of Gilman Paper Co. and Gilman Building Products in June

1998.     Bergreen and Moody wanted Davis to help revive the Gilman

businesses.     Davis was paid $1.5 million in 1998, $1.2 million in

1999, and $1.2 million in 2000.

C.   Decedent’s Will

     Article 10 of decedent’s will provides that his executors

were not to receive executor’s fees or commissions, but that they

would continue to receive compensation from Gilman Paper Co. or

Gilman Investment Co. (GIC) as they had when decedent was alive.

Decedent directed that Gilman Paper Co. be sold.     Article 12 of

decedent’s will provides:

     if the * * * [Gilman Paper Co.] is sold by my executors
     while Bernard D. Bergreen is acting as an executor,
     Bernard D. Bergreen, P.C. shall be entitled to
     compensation for services rendered in connection with
     such sale * * *.

     Article 13 of decedent’s will provides that the executors

may decide whether receipts were income or principal and whether

expenses were paid from income or principal.     Article 8 provides

that the foundation was to receive the residue of the estate

after payment of estate taxes and administration expenses.

D.   Administration of Decedent’s Estate in 1998-99

     1.      Loans, Payment of Expenses, Bequests, and Estate Taxes

     The executors paid estate administration expenses including

more than $150,000 for funeral expenses and perpetual care and

more than $4 million in legal fees.      The executors also paid 26
                                - 7 -

cash bequests totaling $30,565,000 in May 1998.    GIC borrowed

$30,565,000, which the estate borrowed from GIC to pay the cash

bequests.    GIC and the estate were illiquid at that time.

     Several months after decedent died in 1998, Bergreen

arranged for a $90 million line of credit so GIC could

consolidate loans to help sell the GIC businesses.    GIC and the

estate were still illiquid in October 1998.    On October 3, 1998,

GIC borrowed $6 million, which it gave to the estate to pay some

of its Federal and State estate taxes.

     2.     Transfer of GIC Stock, Assets, and Liabilities to HG
            and HG Subsidiaries

     Late in 1998, Bergreen received tax advice that, by

transferring stock, assets, liabilities, and businesses of GIC

and its subsidiaries from the estate to a newly organized limited

liability company and its subsidiaries through a series of

mergers tax free under section 368 (the restructuring), the

estate could save $160 million in capital gains tax that would

result if the estate sold GIC’s assets and businesses.    To

accomplish those tax savings, (1) the restructuring had to be

completed before January 28, 1999, see sec. 1.337(d)-4(e), Income

Tax Regs.; and (2) Gilman Building Products could not be sold for

5 years because of the continuity of business requirement, see

sec. 1.368-1(d), Income Tax Regs.
                                - 8 -

     The executors and the foundation decided to implement the

restructuring plan.    HG was organized on January 13, 1999.   The

foundation became its only member.

     The restructuring was completed on January 14, 1999.      As a

result of the restructuring: (a) The Gilman businesses, except

for 77,000 acres of timberland already under contract of sale,2

were transferred from GIC to HG; (b) GIC, the sole member of HG,

merged into the foundation, making the foundation the sole member

and sole owner of HG; (c) Bergreen and Moody were the sole

managers of HG, which gave them exclusive control over HG’s

assets and their subsequent sale; and (d) HG and its subsidiaries

had legal title to all the assets previously held by GIC and its

subsidiaries other than 77,000 acres of timberland held by the

foundation.3

     HG obtained a $250 million line of credit from NationsBank

to refinance and consolidate debt and to provide working capital

for the Gilman businesses.    After the restructuring, HG and its

subsidiaries began to sell the GIC assets and businesses except

for Gilman Building Products.




     2
       Before the restructuring, GIC transferred title to 77,000
acres of timberland to the foundation.
     3
         The foundation sold the 77,000 acres of timberland in Jan.
1999.
                               - 9 -

     3.    The Notes

     As part of the restructuring, the estate received $143

million in notes (subordinated to the $250 million line of

credit) from subsidiaries of Gilman Building Products and from

Gilman Paper Co.’s railroad.   All of the notes were due to be

paid in full on January 31, 2004.4

     Interest but not principal was payable annually beginning

January 31, 2000.   However, on January 28, 2000, the executors

and obligors of the $143 million in notes agreed that interest on

the notes could be deferred at the option of the obligors.    The

total amount of interest to be paid by 2004 was about $46.5

million.   The executors expected to use the interest and

principal payments on the notes to pay estate expenses including

Federal and New York State estate taxes.

     After the restructuring, the estate held $183 million in

assets, including the notes in the amount of $143 million, and

apartments and cash.

     4.    Election To Defer Tax Payments

     On April 1, 1999, the executors elected under section 6166

to pay Federal estate tax in 10 annual installments, beginning on




     4
       As part of the sale of Gilman Paper Co. in Dec. 1999, a
debt of $5 million (part of the $143 million in notes) was
cancelled.
                                - 10 -

October 3, 2003.5    The executors also elected under New York Tax

Law section 997 (McKinney 1999) to pay New York estate tax in 10

annual installments.

E.   HG and Foundation Finances

     1.   HG’s Cash Requirements in 2000-02

     Beginning in 2000, there was a reduction in the net positive

cashflow of Gilman Building Products.    Gilman Building Products’

net positive cashflow decreased from an average of more than $42

million per year in 1994-99 to $3.5 million in 2000, $19 million

in 2001, and $9.2 million in 2002.

     By the end of 2001, HG needed $30 to $40 million in cash and

cash equivalents as working capital to pay operating expenses of

its businesses.     At that time, HG had cash and cash equivalents

of $36.3 million.    On October 18, 2002, HG had cash and cash

equivalents of $16.7 million.

     HG received more than $287 million from the sale of Gilman

assets and businesses from 1999 to 2002.    HG used most of those

receipts to repay the $250 million line of credit from

NationsBank.   HG used the remainder as working capital and to pay

other expenses.




     5
        The estate paid four installments of interest only,
beginning Oct. 3, 1999.
                              - 11 -

      2.   The Foundation’s Compensation Committee

      In 2001, the foundation’s compensation committee, which was

formed at the request of the attorney general of New York

pursuant to the attorney general’s supervisory authority over

charitable foundations in the State of New York,6 hired a

compensation consultant, Pearl Meyer & Co. (Pearl Meyer), to

evaluate reasonable compensation for Bergreen, Moody, and Davis

and six other executives of the foundation and its subsidiaries.

In October 2001, the compensation committee reviewed Pearl

Meyer’s report and recommended that the foundation pay Bergreen

$17 million as compensation for services he provided to HG under

article 10 and for selling Gilman Paper Co. under article 12.

Bergreen and Moody requested, and the compensation committee

recommended, that Davis receive $5 million for his return from

retirement and the successful turnaround and sale of Gilman Paper

Co.   The foundation’s board of directors approved the committee’s

recommendation.

F.    Administration of the Estate in 2000-03

      1.   Allocation of $1 Million in Expenses to Income

      On November 6, 2001, the executors reported to respondent

that they had agreed to pay legal fees totaling $3.6 million,


      6
        See N.Y. Est. Powers & Trusts Law sec. 8-1.4 (McKinney
2003) (attorney general has enforcement and supervisory powers
over nonprofit entities); In re Estate of Shubert, 442 N.Y.S.2d
703, 712-713 (N.Y. Sur. 1981).
                              - 12 -

$3,038,000 of which had been paid.     The executors elected to pay

$1 million of these expenses from income by executing Form 4421,

Declaration--Executor's Commissions and Attorney’s Fees.

     2.   The Executors’ Decision To Pay the Estate Tax in Full

     During the examination of this case, which began in 2001,

the Internal Revenue Service (IRS) examiner told the tax counsel

for the estate that, because the estate had transferred assets to

HG, the estate’s ability to continue to defer estate tax under

section 6166 was doubtful, and acceleration of payment of all

estate tax under section 6166(g) would likely result.

     In January and February 2002, the executors obtained written

opinions from tax attorneys recommending that the estate pay its

estate tax in full to avoid the risks of acceleration under

section 6166(g).   The executors decided to follow that advice.

     3.   Farm Credit Loan

     The executors estimated that the estate needed $38 million

to pay: (a) $9,797,400 for Federal estate tax and interest; (b)

$2,915,900 for New York State estate tax and interest; (c)

$19,470,525 for compensation for Bergreen; (d) $5 million for

compensation for Davis; and (5) $816,175 for other miscellaneous

administration expenses.

     On October 18, 2002, Bergreen and Moody, acting as

executors, borrowed $38 million from Farm Credit Bank of North

Florida, CA (Farm Credit loan).   The loan was secured by a
                                - 13 -

mortgage on White Oak and guaranteed by HG.     HG pledged

collateral for the Farm Credit loan.     The Farm Credit loan is

payable over 10 years with a fixed schedule for payment of

principal and interest.     The total amount of interest to be paid

on the Farm Credit loan is $15,734,293.     Closing costs for the

Farm Credit loan were $200,000.

     On November 1, 2002, the estate used proceeds from the Farm

Credit loan to pay $9,610,302.91 in Federal estate tax and

$2,805,802.13 in New York estate tax.     The estate retained the

rest of the proceeds from the Farm Credit loan to pay

compensation to Bergreen and Davis and certain administration

expenses.

     As of February 1, 2004 (the day after the due date for

repayment of the $143 million in notes), the estate was scheduled

to have paid interest on the Farm Credit loan totaling $2,665,850

and principal in the amount of $742,448.47, leaving a principal

balance of $37,257,551.53.

     4.      Income Tax Returns and Administration Activities in
             2003

     From March 1999 to January 2003, the estate received

$23,617,031 cash from HG as interest payments on the $143 million

in notes.7    On July 1, 2002, HG gave the estate a $22.9 million

note for unpaid, accrued interest due through January 31, 2002.


     7
          The estate received $4,705,631 from HG in 2003.
                              - 14 -

However, the estate reported total income of only $2,844,738 for

1998-2002 on its Forms 1041, U.S. Income Tax Return for Estates

and Trusts, for tax years 1998-2002.

     On May 1, 2003, the estate prepared a draft fiduciary

accounting which states that the estate paid $37 million from

principal to administer the estate.    As of October 8, 2003, the

executors had paid legal expenses to three law firms and

consulting fees to two firms totaling $4,507,723.

     On November 24, 2003, the executors changed the amount of

administration expenses allocated to estate income from $1

million to $4,507,723.

G.   Surrogate’s Court Proceeding With Respect to Amount of
     Compensation Due to Bergreen

     Bergreen and Moody as executors filed a petition on a date

not specified in the record in the Surrogate’s Court of the

County of New York seeking approval of the amount of Bergreen’s

compensation.   The Surrogate’s Court supervised negotiations in

May 2003 between the State attorney general’s office, Bergreen,

and the independent directors of the foundation, in which the

parties agreed that Bergreen would be paid $12.5 million.
                               - 15 -

                               OPINION

A.   Whether the Estate May Deduct Interest and Closing Costs
     Paid on the Farm Credit Loan

     1.     Contentions of the Parties and Background

     The estate contends that all of the Farm Credit loan

proceeds were borrowed for the purpose of paying estate taxes and

deductible administration expenses of the estate including (a)

Bergreen’s compensation of $19,470,525;8 (b) Davis’s compensation

of $5 million; and (c) miscellaneous administration expenses of

$816,175.

     Respondent contends that none of the interest paid on the

Farm Credit loan is deductible under section 2053.      Respondent

contends that the loan was unnecessary because the estate had

enough liquid assets when it borrowed about $38 million from Farm

Credit to pay its taxes and administration expenses.      Respondent

alternatively contends that, if the estate was illiquid when it

obtained the Farm Credit loan, the loan was unnecessary because:

(a) Some of the estate’s planned uses of the loan proceeds (e.g.,

compensation for Bergreen and Davis) are expenses of HG and are

not administration expenses of the estate; (b) the estate has not

substantiated miscellaneous administration expenses of $816,175;

(c) the executors caused the estate’s illiquidity by distributing


     8
       The estate concedes that $2.4 million to be paid to
Bergreen as compensation for 1996 and 1997 is not an
administration expense.
                               - 16 -

the estate’s principal assets to the foundation in the

restructuring; (d) the estate should have retained enough assets

to sell to pay its expenses; (e) the executors had elected to pay

the estate tax in 10 annual installments; and (f) the executors

could have demanded that the foundation return some of the

proceeds from HG’s sale of assets transferred from the estate.

The estate disputes respondent’s contentions.

     An estate may deduct administration expenses allowable under

the probate law of the jurisdiction where the estate is being

administered, sec. 2053(a)(2), and which are actually and

necessarily incurred in administering a decedent’s estate, Estate

of Grant v. Commissioner, 294 F.3d 352, 353 (2d Cir. 2002), affg.

T.C. Memo. 1999-396; sec. 20.2053-3(a), Estate Tax Regs.9

     Interest on funds borrowed to pay taxes or other debts of

the estate while the estate is illiquid (i.e., while the estate


     9
         Sec. 20.2053-3(a), Estate Tax Regs., provides in part:

          The amounts deductible from a decedent’s gross
     estate as “administration expenses” * * * are limited
     to such expenses as are actually and necessarily
     incurred in the administration of the decedent's
     estate; that is, in the collection of assets, payment
     of debts, and distribution of property to the persons
     entitled to it. The expenses contemplated in the law
     are such only as attend the settlement of an estate and
     the transfer of the property of the estate to
     individual beneficiaries or to a trustee * * *.
     Expenditures not essential to the proper settlement of
     the estate, but incurred for the individual benefit of
     the heirs, legatees, or devisees, may not be taken as
     deductions.
                               - 17 -

can obtain funds to pay those expenses only through sale of

estate assets at a price below the normal market price) may be

deductible as an administration expense under section 2053(a)(2).

Estate of Todd v. Commissioner, 57 T.C. 288 (1971) (9-month

loan); Estate of Thompson v. Commissioner, T.C. Memo. 1998-325

(series of five 1-year notes); McKee v. Commissioner, T.C. Memo.

1996-362 (note with term of 85 days); Estate of Graegin v.

Commissioner, T.C. Memo. 1988-477 (loan with balloon payment in

15 years, which was the life expectancy of decedent’s surviving

spouse, the beneficiary of a trust the assets of which could be

used to repay part of the loan); see also Estate of Sturgis v.

Commissioner, T.C. Memo. 1987-415 (term of loan not stated in the

opinion; it was at least 3 years).

     Under New York law, interest incurred on a loan may be

deductible as an administration expense if it is necessary and

the estate lacks sufficient liquid assets.      See, e.g., N.Y. Est.

Powers & Trusts Law, sec. 11-1.1(b)(22) (McKinney 2003).

     The estate bears the burden of proof on all issues in

dispute in this case.10   See Rule 142(a)(1).


     10
       We treat the estate’s failure to respond in answering
brief to respondent’s argument in opening brief as the estate’s
concession as to burden of proof. We agree with respondent’s
contentions that (1) respondent raised no new matter in its
answer; (2) the litigation guideline memo (Mar. 14, 1989) cited
by respondent does not shift the burden of proof, see sec.
6110(k)(3); (3) Rauenhorst v. Commissioner, 119 T.C. 157 (2002),
relating to the effect of a revenue ruling, is distinguishable;
                                                   (continued...)
                              - 18 -

     As discussed next, we hold that (a) it was not necessary for

the estate to borrow funds to pay Bergreen or Davis because their

compensation was an expense of HG and was not an administration

expense of the estate, (b) it was not necessary for the estate to

borrow funds to pay administration expenses of $816,175, (c) it

was necessary for the estate to borrow funds to pay Federal and

state estate taxes, and (d) it was not necessary for the estate

to borrow funds for a term extending beyond January 31, 2004,

which is the date the estate was due to receive repayment of the

$143 million in notes.

     2.   Whether Compensation Paid to Bergreen and Davis Is an
          Estate Expense

          a.   The Relationship Between the Estate and HG

     The estate contends that expenses incurred relating to the

GIC assets after the estate transferred those assets to HG and

its subsidiaries in the restructuring are estate expenses.    The

estate points out that, after the restructuring, (i) it continued

to exist and Bergreen and Moody retained the same control over

the sale of the GIC assets as they had before the restructuring;

(ii) the Gilman assets were not transferred to the foundation;

and (iii) the HG agreement gave exclusive management and control

over the Gilman assets to Bergreen and Moody, who were also the

executors of the estate.   The estate contends that, by virtue of


     10
      (...continued)
and (4) the estate does not contend that sec. 7491 applies.
                               - 19 -

Bergreen’s and Moody’s power over HG, expenses relating to the

Gilman assets were estate expenses.     The estate also contends

that Bergreen and Moody acted primarily as executors in

facilitating HG’s sale of Gilman assets, and that they did so to

benefit the estate.    We disagree.

     Bergreen and Moody wore many hats:    they were executors of

the estate, managers of HG, and members of the board of directors

of the foundation.    As part of the restructuring, the estate

transferred GIC assets to HG and its subsidiaries.     As a result,

the GIC assets, including the Gilman businesses, ceased to be

estate assets, and Bergreen’s and Moody’s management services

related to those assets were performed for HG and its

subsidiaries.   The transfer of assets from the estate to HG and

its subsidiaries severed the relationship the executors had with

the transferred assets in their capacity as executors.     Insofar

as Bergreen and Moody had the same duties and responsibilities as

managers of HG with respect to those assets as they had as

executors, it does not follow that their actions for HG were

taken in their capacity as executors.     The estate claims both the

tax benefits resulting from transferring the Gilman assets to HG

and its subsidiaries (estimated by its tax advisers to be a tax

savings of $160 million), and all of the deductions that would

have been available to the estate if it had not transferred those

assets.   Using executors to run a commercial enterprise does not
                                   - 20 -

convert expenses of the enterprise to estate expenses.      The

estate cannot have it both ways.       See Sharvy v. Commissioner, 67

T.C. 630, 641-642 (1977), affd. 566 F.2d 1118 (9th Cir. 1977);

L & L Marine Serv., Inc. v. Commissioner, T.C. Memo. 1987-428;

Biggs v. Commissioner, T.C. Memo. 1968-240, affd. 440 F.2d 1 (6th

Cir. 1971).     Expenses related to the GIC assets were not estate

expenses after the estate transferred those assets to HG.      See

Deputy v. Du Pont, 308 U.S. 488, 493-494 (1940) (taxpayer may

deduct own expense and not that of another); Estate of Grant v.

Commissioner, 294 F.3d at 354 (Court of Appeals denied deduction

under section 2053 of administration expenses incurred to

administer assets of a trust but allowed deduction of

administration expenses incurred to administer assets of the

estate).

           b.     Whether Bergreen’s Compensation Was an Obligation
                  of the Estate

     The estate contends that $17 million of the Farm Credit loan

was borrowed to compensate Bergreen for services performed for

the estate.     The estate also contends that amount was an

administration expense of the estate and was owed to Bergreen

under the will.     We disagree.

     Article 10 provides that Bergreen is not to receive

commissions or other fees for acting as executor and that he was

to continue to be compensated by the Gilman businesses for

services rendered after decedent died as he had been before
                              - 21 -

decedent died.   Bergreen was not entitled to compensation by the

estate under article 10.

     Article 12 provides that, if the executors sell Gilman Paper

Co. while Bergreen is an executor, Bernard D. Bergreen, P.C., is

to be compensated for services rendered in connection with that

sale.   The estate contends that Bergreen is entitled to be paid

by the estate under article 12 because the executors agreed to

act as managers of the assets of HG and its subsidiaries to allow

the executors to maintain control over the Gilman assets.   The

estate also contends that HG and its subsidiaries were created to

effect the executors’ sale of the Gilman assets, and that

Bergreen retained complete control over the sale of those assets

after their transfer to HG and its subsidiaries.   We disagree.

     As a result of the transfer of assets from the estate to HG

and its subsidiaries, the estate no longer owned the Gilman

assets; HG and its subsidiaries did.   Because the sale occurred

after the restructuring, Gilman Paper Co. was sold by HG (not the

estate).   Bergreen and Moody rendered services in connection with

its sale in their capacity as managers of HG, not as executors of

the estate.   Thus, Bergreen was performing services for HG, not

the estate.   Bergreen was not entitled to compensation by the

estate under article 12.
                                 - 22 -

     We conclude that Bergreen is not entitled to compensation by

the estate.      Thus, it was not necessary for the estate to borrow

funds to compensate him.

            c.     Whether Davis’s Compensation Was an Obligation of
                   the Estate

     The estate contends that Davis’s $5 million compensation is

an administration expense because Bergreen and Moody, acting in

their capacity as executors, hired Davis to manage Gilman Paper

Co. and to help Bergreen sell the Gilman assets, and that his

work for the GIC businesses benefited the estate.      We disagree.

     Bergreen and Moody were officers of GIC (as well as

executors of the estate) when they hired Davis to help revive the

Gilman businesses.      Davis was rehired to serve as chief operating

officer of Gilman Paper Co. and Gilman Building Products in June

1998.   The foundation’s compensation committee approved

Bergreen’s and Moody’s request to pay Davis $5 million for his

return from retirement and his turnaround and sale of the Gilman

Paper Co.     Davis was paid $1.5 million in 1998, and $1.2 million

in 1999 and 2000.      It appears from the foundation compensation

committee report that those payments were not part of the $5

million that Bergreen and Moody offered him and that the

compensation committee in October 2001 recommended that he be

paid.   The accounting prepared by the estate as of February 28,

2003, does not show that the estate made those payments.      It

appears that Bergreen and Moody hired Davis in their capacity as
                               - 23 -

officers of GIC, and that the Gilman businesses (not the estate)

paid Davis those amounts.

     The estate contends (and Bergreen and Moody testified) that

Davis was rehired to help to sell the Gilman businesses.      We

disagree.    First, Isabella Rossellini (Rossellini), an

independent director of the foundation, testified, and the Pearl

Meyer report states, that Davis was hired to run the businesses.

The Pearl Meyer report states in pertinent part: “Since June

1998, Mr. Davis has devoted his full professional energies and

time to Gilman business matters.”    A document that Bergreen

prepared to justify his compensation to the foundation’s

compensation committee states that he hired Davis to fix the

companies.    Neither the Pearl Meyer report nor Bergreen’s

document indicates that Davis was hired to help sell the Gilman

businesses.   We conclude that Davis performed services for the

Gilman businesses and not for the estate.    Thus, it was not

necessary for the estate to borrow funds to compensate him.

     3.     Miscellaneous Expenses of $816,175

     The estate contends that the executors reasonably estimated

the amount it needed to borrow to close the estate, and that,

after calculating the tax savings resulting from deduction of the

interest on the $38 million loan, the estate estimated that its

tax savings would be enough to fund Bergreen’s and Davis’s

compensation, leaving $816,175 to pay other miscellaneous
                              - 24 -

administration expenses.   The estate contends that a reasonable

estimate satisfies the requirement of section 2053 that expenses

be necessary for the administration of the estate because (a)

only an estimate of the amount of the loan was possible when the

estate obtained the loan, and (b) the estate’s obligation to pay

the $38 million loan and interest thereon is fixed.     Thus, the

estate contends, it may deduct the interest on that portion of

the loan to be used to pay miscellaneous expenses of $816,175.

We disagree because the record does not show what expenses are

included in the $816,175 amount.   Thus, these expenses may no

more be estate expenses than was the compensation for Bergreen

and Davis.   See paragraph A-2, above.

     4.   Whether the Estate Was Illiquid When It Borrowed Funds
          From Farm Credit

     Respondent contends that, after the estate paid the cash

bequests in May 1998, it had enough liquid assets with which to

pay its estate taxes and administration expenses and thus did not

need the Farm Credit loan.   We disagree.

     After payment of the cash bequests and before the

restructuring, the estate had more than enough assets to pay

administration expenses and Federal and State estate taxes.

However, these assets were illiquid.     Every witness, including

respondent’s witnesses Rossellini, Justin Feldman, and John J.

Kennedy (all of whom were independent directors on the board of
                               - 25 -

the foundation), testified that the estate borrowed funds because

it and the Gilman businesses were illiquid.

     Respondent contends that the executors’ decision to transfer

most of the estate’s assets to HG and its subsidiaries on January

14, 1999, caused the estate’s illiquidity.    We disagree.   The

executors’ decision to restructure did not cause the estate’s

illiquidity; the estate was illiquid both before and after the

executors transferred estate assets to HG and its subsidiaries.

     5.     Whether the Estate May Deduct Interest on a Loan That
            Could Have Been Avoided If the Estate Had Sold Illiquid
            Assets To Pay Its Taxes and Expenses

     Respondent contends that the interest on the Farm Credit

loan was not incurred out of necessity within the meaning of

section 20.2053-3(a), Estate Tax Regs., because the executors

could have avoided borrowing the funds by selling enough assets

to pay the estate taxes and administration expenses.    We

disagree.

     The executors acted reasonably in transferring property to

HG and its subsidiaries on the basis of advice they had received

that the restructuring would save the estate $160 million in tax.

See Beard v. Commissioner, 4 T.C. 756, 758 (1945); Hobby v.

Commissioner, 2 T.C. 980, 985 (1943); Tully Trust v.

Commissioner, 1 T.C. 611, 620 (1943) (taxpayer’s bona fide sales

to third persons for sole purpose of reducing his or her tax

liability was for legitimate business purpose; taxpayer was
                                - 26 -

entitled to tax benefit resulting from sale of capital asset);

McKee v. Commissioner, 35 B.T.A. 239, 242 (1937) (trustees who

realized tax savings by selling, rather than redeeming, matured

bonds acted in the best interests of the trusts).     We do not

substitute our judgment for decisions of the executors to

complete the restructuring in January 1999.     See Estate of Todd

v. Commissioner, 57 T.C. 288 (1971); Estate of Thompson v.

Commissioner, T.C. Memo. 1998-325; McKee v. Commissioner, T.C.

Memo. 1996-362; Estate of Sturgis v. Commissioner, T.C. Memo.

1987-415.

     Second, the executors did not foresee the decrease in Gilman

Building Products’ annual net positive cashflow from more than

$40 million per year in years before 2000 to $3.5 million in

2000.     The decline in Gilman Building Products’ financial

condition contributed to HG’s inability to pay the estate nearly

$23 million of interest due in 2002.     In light of the unforeseen

decline in Gilman Building Products’ financial condition and HG’s

and its subsidiaries’ inability to fully pay interest due on the

notes in 2002, it was necessary for the estate to borrow funds in

2002.

     6.      Whether the Farm Credit Loan Was Unnecessary Because
             the Executors Had Elected To Pay Estate Tax in 10
             Annual Installments

     The executors elected on April 1, 1999, to pay Federal and

New York estate taxes in 10 annual installments beginning in
                                - 27 -

2003.     Respondent contends that the Farm Credit loan was

unnecessary because the estate could have paid the annual

installments of estate taxes from the proceeds of the sale of

estate assets or from the interest or principal on the $143

million in notes, due on January 31, 2004, without borrowing

funds from Farm Credit.

     We disagree.    After the executors elected to pay the estate

tax in 10 annual installments, respondent’s examiner told the

estate’s counsel that the estate’s transfer of corporate assets

to HG and its subsidiaries threatened the estate’s ability to

continue to defer payment of estate tax under section 6166, thus

making acceleration of estate tax under section 6166(g) likely.

Subsequently, on the advice of estate tax counsel, the executors

decided to pay the estate tax in full.     Thus, we disregard the

fact that the estate had elected to pay the estate tax in 10

annual installments in deciding whether the Farm Credit loan was

necessary.

     7.      Whether, Under New York Law, the Executors Were
             Required To Have the Foundation Return Assets to the
             Estate To Pay Estate Tax

        Respondent contends that the loan was unnecessary because

the executors were required, under New York law, to demand that

the foundation return to the estate the amount of assets needed

to pay estate taxes and administration expenses.
                               - 28 -

     We disagree.    Under New York law, if an estate is insolvent

and the executor has distributed property from the residue that

the testator designated was to be used to pay estate expenses, a

residuary beneficiary must return that property to the estate to

pay the estate’s expenses.    In re Estate of Schmuckler, 296

N.Y.S.2d 202, 207 (Sur. Ct. 1968); Buffalo Loan, Trust & Safe-

Deposit Co. v. Leonard, 41 N.Y.S. 294, 299 (N.Y. App. Div. 1896).

Under New York law, an estate is insolvent where its liabilities

exceed its assets.    In re Estate of Froehlich, 416 N.Y.S.2d 744,

745 (Sur. Ct. 1979); In re Estate of Jacob, 401 N.Y.S.2d 986

(Sur. Ct. 1978).    An estate may be illiquid but not insolvent.

In re Estate of Froehlich, supra at 746.    Here, as the estate

points out, although it was illiquid, it was not insolvent

because it owned $143 million in notes after the restructuring.

Thus, under New York law, the executors were not required to

demand the return of assets from the foundation, and the

foundation was not required to return assets to the estate.     See,

e.g., In re Estate of Schmuckler, supra; Buffalo Loan, Trust &

Safe-Deposit Co. v. Leonard, supra.11




     11
       Respondent contends that Bergreen and Moody had conflicts
of interest among their roles as executors of the estate,
managers of HG, and members and directors of the foundation, and
that the conflicts caused them to fail to demand the return of
the estate assets. In light of the fact that the executors were
not required to demand the return of assets from the foundation,
we need not consider respondent’s conflicts of interest argument.
                               - 29 -

     8.    Whether the Estate Established Its Illiquidity After
           January 2004

     As part of the restructuring, the estate received $143

million in notes (subordinated to the $250 million line of

credit) from subsidiaries of Gilman Building Products and from

Gilman Paper Co.’s railroad.    All of the notes were due January

31, 2004, after the record closed in this case.     The $38 million

Farm Credit loan was made in October 2002, with repayment to be

completed in 10 years.

     The estate contends that it was financially protected by the

notes.    The estate does not contend, and the record does not

show, that the obligors would refuse to make arrangements to

fulfill their obligation to repay the $143 million in notes in

2004, or that the estate lacked legal recourse if HG refused to

do so.    Respondent argued in the opening brief that the estate

could have paid its taxes and expense from repayment of the $143

million in notes.    The estate did not respond to this argument.

We cannot conclude on this record that the estate needed to

borrow funds past January 31, 2004.     Thus, we conclude that

interest accruing after that date on the Farm Credit loan is not

deductible.

     9.     Conclusion

     We accept as reasonable the decision of the executors to

implement the restructuring and to borrow funds for a short

period to pay estate taxes.    However, we also conclude that the
                              - 30 -

loan was not necessary to the extent that funds were borrowed

beyond January 2004, or were to be used to pay unidentified

miscellaneous administration expenses or Bergreen’s and Davis’s

compensation.   Thus, the estate may deduct a portion of the

interest and closing costs that accrued from October 18, 2002, to

January 31, 2004; the deductible portion of the interest and

costs is allocable to the portion of the loan used to pay the

estate’s Federal and State estate taxes.

B.   Whether the Estate May Deduct $3,507,723 in Additional
     Administration Expenses

     1.   Contentions of the Parties and Background

     The executors paid administration expenses of: (a) $244,074

in legal fees to Cullen & Dykman; (b) $1,556,164 in consulting

fees to Price Waterhouse; (c) $633,347 in legal fees to

Fensterstock & Partners; (d) $826,364 in consulting fees to Pearl

Meyer; and (e) $1,247,775 in legal fees to Carter Ledyard,

counsel for the estate, for a total of $4,507,723.    The executors

allocated those expenses to income.    Respondent does not dispute

that these amounts were paid to lawyers, accountants, and Pearl

Meyer, or that the estate had income of $2,844,738.   Respondent

concedes that the estate may deduct legal expenses of $1 million

that the executors paid from income.

     The estate contends that it may deduct additional expenses

of $3,507,723 (i.e., that much more than the $1 million

respondent concedes) because those expenses are administration
                                 - 31 -

expenses under section 2053 paid by or on behalf of the estate

and the estate had enough income with which to pay the additional

expenses.

     2.     Whether the Additional Expenses Were Paid on Behalf of
            the Estate

     Respondent contends that the additional expenses are not

administration expenses because they were not paid on behalf of

the estate.      The estate points out that Bergreen testified that

the estate paid $4,507,723 to Cullen & Dykman, Price Waterhouse,

Fensterstock & Partners, Pearl Meyer, and Carter Ledyard for

necessary services provided to the estate.     The estate contends

that the additional expenses were paid on its behalf.     We agree

in part and disagree in part with both parties.

            a.     Payments to Pearl Meyer

     Bergreen’s memorandum, Exhibit 48-R, states that the

foundation hired Pearl Meyer.     The estate points out that it paid

Pearl Meyer and contends that respondent reads Bergreen’s

memorandum out of context.     We disagree.

     Bergreen’s memorandum is consistent with the objective facts

of this case, including:     (1) The New York State attorney

general’s office asked the foundation, not the estate, to

evaluate reasonable compensation of nine foundation executives

including Bergreen and Moody; (2) the Pearl Meyer findings with

respect to Bergreen and Moody are based primarily on Bergreen’s

and Moody’s activities for the businesses and the foundation, not
                               - 32 -

their duties as executors; (3) decedent’s will provided that the

executors were not to receive executor’s fees or commissions; and

(4) the payments to Pearl Meyer were made long after the

restructuring.   We give more weight to these facts and to

Bergreen’s memorandum than to Bergreen’s testimony and the fact

that the estate paid Pearl Meyer.

     We conclude that the $826,364 paid to Pearl Meyer was not an

administration expense under section 2053.

          b.     Payments to Price Waterhouse, Cullen & Dykman,
                 Fensterstock & Partners, and Carter Ledyard

     It appears from the record that the estate paid substantial

administration expenses, including payments to Price Waterhouse,

Cullen & Dykman, Fensterstock & Partners, and Carter Ledyard.     We

accept the estate’s claim that the payments to Price Waterhouse

and Carter Ledyard, totaling $2,803,939, are expenses of the

estate.   However, the estate failed to show that the payments to

Cullen & Dykman and Fensterstock & Partners were administration

expenses under section 2053; i.e., for the benefit of the estate

and not for the benefit of the foundation.   The estate offered no

evidence other than Bergreen’s testimony on this point.    We give

less weight to that testimony because of his less-than-convincing

testimony regarding the Pearl Meyer expenses.   Because we believe

that the estate incurred substantial expenses for necessary

services provided to the estate, we allow the estate to allocate
                              - 33 -

expenses of $1,803,939 to income in addition to the $1 million

that respondent has conceded.12

     3.   Conclusion

     We conclude that the estate may deduct additional

administration expenses of $1,803,939 paid from income.

     To reflect concessions and the foregoing,


                                             Decision will be

                                        entered under Rule 155.




     12
        We need not decide whether the estate had enough income
to pay all of its deductible administration expenses from income
because the amount we allow and the amount respondent concedes is
less than the $2,844,738 of income respondent concedes the estate
received.
