Shackleford v. USA.

Decision Date28 August 2001
Docket NumberPLAINTIFFS-APPELLEES,No. 99-17541,DEFENDANT-APPELLANT,99-17541
Citation262 F.3d 1028
Parties(9th Cir. 2001) ROSA SHACKLEFORD, PERSONAL REPRESENTATIVE OF THE ESTATE OF THOMAS J. SHACKLEFORD, DECEASED,v. UNITED STATES OF AMERICA,
CourtU.S. Court of Appeals — Ninth Circuit

Counsel: Annette M. Wietecha and Jonathan S. Cohen, Assistant United States Attorneys, Tax Division, Washington D.C., for the defendant-appellant.

Linda L. Goodman and Steven S. Richter, Goodman & Richter, Llp, San Diego, California, for the plaintiffs-appellees.

Appeal from the United States District Court for the Eastern District of California Lawrence K. Karlton, District Judge, Presiding D.C. No. CV-96-01370-LKK

Before: Diarmuid F. O'Scannlain, A. Wallace Tashima and Sidney R. Thomas, Circuit Judges.

Thomas, Circuit Judge

OPINION

This appeal presents the question of whether a statutory anti-assignment restriction on lottery payments justifies departure from the Department of Treasury's annuity tables when determining the asset's present value in calculating estate tax. Under the circumstances of this case, we conclude that it does and affirm the judgment of the district court.

I.

Fran Lebowitz may have rightly observed that a person has the same chance of winning the lottery whether one plays or not. However, contrary to Steve Martin's early comedy routine,1 the probability of tax imposition on the prize is almost 100%.

Like most lottery winners, retired Air Force officer Thomas J. Shackleford probably wasn't thinking of tax consequences when he hit the $10 million California Lotto in 1987. Nor were his heirs. However, the estate tax problem became abundantly clear upon Shackleford's untimely death after receiving only three of twenty $508,000 annual payments. At that time, California law prohibited any assignment of lottery payments. Cal. Gov't Code §§ 8880.32(g). On death, future payments were to be made to a deceased winner's estate according to the annuity terms. Id. However, the payment of federal estate tax is not similarly structured. Thus, although the estate was limited to receiving annual installments, the estate tax was calculated based on the present value of the income stream, due on a much shorter schedule. Under the present value annuity tables in the Treasury regulations, 26 C.F.R. §§ 20.2031-7, the present value of the remaining payments was calculated to be $4,023,903. This meant that the estate owed $1,543,397 in federal estate taxes without any concomitant source of revenue to fund the payment.

The estate initially filed a return that reported the federal estate tax liability in accordance with the Treasury regulation tables and paid a total federal estate tax liability in the amount of $1,543,397. After auditing the return, the Internal Revenue Service ("IRS") found no error in the reported tax. Subsequently, the estate filed both amended tax returns and claims for refund, asserting that the value of the future payments was improperly reported. The last of the claims for refund argued that the proper value of the lottery payments was zero. In the alternative, the estate argued that use of the annuity tables to value the payments resulted in an unrealistic and unreasonable value because it did not reflect the fair market value of the asset. The IRS rejected the final refund claim, and the estate filed its claim for refund in district court.

The government filed a motion for summary judgment arguing that the estate was not entitled to a refund because the payments were an annuity for a term of years, the value of which was properly determined under the tables in 26 C.F.R. §§ 20.2031-7. The district court denied the motion, holding that if the estate could prove that the true value of the interest was substantially below the value attributed by the tables then departure would be warranted. Shackleford v. United States, No. 98-105580, 1998 WL 723161 (E.D. Cal. July 29, 1998). After a bench trial, the district court found that the lack of a market must be considered in determining a fair valuation of property for estate tax purposes and that because marketability is not a factor considered by the tables, using them would result in "a substantially unrealistic and unreasonable result." Shackleford v. United States, No. Civ. S-96-1370, 1999 WL 744121, *3 (E.D. Cal. August 6, 1999). The court thereupon departed from the tables and valued the payments at $2,012,500. Id. Based on this valuation, the parties stipulated to a judgment for the estate in the amount of $1,622,674.86 ($1,104,156.27 in tax and $518,518.59 in interest).

The government timely appealed the district court's statutory interpretation, which is a question of law that we review de novo. Leicester v. Warner Bro, 232 F.3d 1212, 1225 (9th Cir. 2000).

II.

The Internal Revenue Code imposes an estate tax on the "taxable estate of every decedent who is a citizen or resident of the United States." 26 U.S.C. §§ 2001. The "taxable estate" is calculated by subtracting any allowable deductions from the value of the gross estate. 26 U.S.C. §§ 2051. The gross estate includes the total "[v]alue at the time of his death of all property, real or personal, tangible or intangible, wherever situated[,]" to the extent the decedent had an interest in the property. 26 U.S.C. §§§§ 2031, 2033. This includes the value of annuities; thus, the value of the future lottery payments is included in Shackleford's gross estate. 26 U.S.C.§§ 2039.

The "value" of property to be included in the gross estate is the fair market value of the item at the time of the decedent's death. 26 C.F.R. §§ 20.2031-1(b).

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate. . . . All relevant facts and elements of value as of the applicable valuation date shall be considered in every case. 26 C.F.R. §§ 20.2031-1(b).

Non-commercial annuities, such as the lottery payments at issue, are valued pursuant to tables promulgated by the Secretary of the Treasury, except when another regulatory provision applies. 26 U.S.C. §§ 7520. The general"fair market value" regulation quoted above, 26 C.F.R. §§ 20.2031-1(b), is such a provision, allowing departure from the tables"where they do not produce a value that reasonably approximates the fair market value . . . ." O'Reilly v. Comm'r , 973 F.2d 1403, 1407 (8th Cir. 1992).

The IRS has explained that the "[v]aluation factors for determining the present value of interests measured by a term certain are based on two components: a term of years component and an interest rate component." Notice 89-24, 1989-1 C.B. 660. Although the tables provide the presumptive valuation of non-commercial annuities, courts have long recognized that a table-produced valuation is not applicable when the result is unrealistic and unreasonable. See , e.g., Weller v. Comm'r, 38 T.C. 790, 803 (1962). In such cases, a modification to the valuation or a complete departure from the tables may be justified.

As the Eighth Circuit explained:

When use of the tables produces a substantially unrealistic and unreasonable result and when a more reasonable and realistic valuation technique is available, faith that the tables will "average out" in the long run will not suffice. Compliance with the statute and fairness in the particular case require that the reviewing court use that alternative method to determine the fair market value of the gifted property. O'Reilly, 973 F.2d at 1409. See also Estate of Christ v. Comm'r, 480 F.2d 171, 172 (9th Cir. 1973) (approving of tax court's adoption of Hanley v. United States, 63 F. Supp. 73, 81 (Ct. Cl. 1945), which held that the tables are to apply unless the result would be "substantially at variance with the facts"); Froh v. Comm'r, 100 T.C. 1, 3-4 (1993) ("use of the actuarial tables is presumptively correct unless it is shown that such use is `unrealistic and unreasonable' ").

For these reasons, although the general rule requires that the tables be used because they provide both certainty and convenience when applied in large numbers of cases, see Bank of California v. United States, 672 F.2d 758, 759-60 (9th Cir. 1982), exceptions have been made when the tables do not reasonably approximate the fair market value of the asset. However, because the table-produced valuation is presumed correct, the party who desires to use an alternative method to value an estate's interest bears the "considerable burden of proving that the tables produce such an unrealistic and unreasonable result that they should not be used." O'Reilly, 973 F.2d at 1408.

III.

In this case, the...

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