Anthony v. U.S.

• Decision Date: 04 March 2008
• Docket Number: No. 07-30089.,07-30089.
• Citation: 520 F.3d 374
• Parties: Tincy ANTHONY, Administratrix of the Succession of James Louis Bankston, Sr., on behalf of James Louis Bankston, Sr., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

520 F.3d 374

Tincy ANTHONY, Administratrix of the Succession of James Louis Bankston, Sr., on behalf of James Louis Bankston, Sr., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 07-30089.

United States Court of Appeals, Fifth Circuit.

March 4, 2008.

Walter C. Antin, Jr. (argued), John Gerhardt Toerner, Antin Law Firm, Hammond, LA, for Plaintiff-Appellant.

Francesca Ugolini Tamami, Jonathan S. Cohen (argued), U.S. Dept. of Justice, Tax Div. Appellate Section, Washington, DC, James L. Nelson, Asst. U.S. Atty., Baton Rouge, LA, for Defendant-Appellee.

Appeal from the United States District Court for the Middle District of Louisiana.

Before BARKSDALE, DENNIS and SOUTHWICK, Circuit Judges.

SOUTHWICK, Circuit Judge:

A decedent's administratrix seeks our reversal of the district court's conclusion that a non-transferable private annuity must be valued, for estate tax purposes, in accordance with certain tables set out in the Internal Revenue Code. Because we conclude that this case presents no applicable exception to valuation of the relevant annuities by use of the tables, we affirm.

I. FACTS AND PROCEEDINGS

James Louis Bankston, Sr., sustained serious injuries in an automobile accident in 1990. He filed suit seeking damages from various defendants. In May 1991, Bankston agreed to a structured settlement of his claims and thereby became the beneficiary of three annuities. The annuities were owned by three separate insurance companies. Each annuity guaranteed monthly or annual payments for a period of at least fifteen years.¹ The payments due under two of the annuities could not be "anticipated, sold, assigned or encumbered." The third annuity provided that payments were "non-assignable." The prohibitions on assignment form the foundation for the arguments made by the taxpayer.

Bankston died on July 30, 1996. At the time of his death, Bankston was scheduled to receive ten additional annual payments from one annuity and monthly payments until July 2006 from the other two. Bankston's estate ("the Estate") initially estimated the present value of Bankston's right to the guaranteed payments to be $2,371,409, using the tables prescribed by 26 U.S.C. § 7520 and the accompanying regulations (the "annuity tables" or "Section 7520 tables"). In April 1997, the Estate reported a tax liability on the annuities in the amount of $468,078. An audit by the Internal Revenue Service resulted in an additional tax of $142,605. The Estate paid its total tax liability ($610,683) plus interest in monthly installments between May 1997 and March 2001.

In September 2001, the Estate claimed that it had overvalued the annuities in its initial filing and was due a refund of estate taxes in the amount of $427,620 plus interest.² According to the Estate, the annuities should have been assigned their "fair market value" without regard to the annuity tables because the non-transferability clauses rendered the annuities subject to a restriction under 26 C.F.R. § 20.7520-3(b)(1)(ii). The IRS denied the claim.

The Estate filed suit against the United States in March 2002. Both parties moved for partial summary judgment on the issue of the proper method of valuation for the annuities. The district court ruled in favor of the government, finding that the prohibitions on assignment of the annuities did not justify a departure from the tables. The district court also found that the result produced by the annuity tables was not unreasonable or unrealistic. Therefore, the district court found that the annuities were properly valued under the tables and no tax refund was due. The Estate appealed.

II. DISCUSSION

While the mathematical computation of fair market value is an issue of fact, determination of the proper valuation method under the Internal Revenue Code is a question of law that this Court reviews de novo. Estate of Dunn v. C.I.R., 301 F.3d 339, 348 (5th Cir.2002). We also review the district court's interpretation of a regulation de novo, applying the rules of statutory construction. Lara v. Cinemark USA, Inc., 207 F.3d 783, 786-87 (5th Cir. 2000).

A. The "Restricted Beneficial Interest" Exception to the Annuity Tables: Treasury Regulation § 20.7520-3(b)

1. General Estate Tax Principles

The United States imposes a tax on the taxable portions of the estates of all decedents who are citizens or residents. 26 U.S.C. § 2001. A decedent's estate is composed of "all property, real or personal, tangible or intangible." 26 U.S.C. § 2031(a). Private annuities, like those payable to Bankston, fall within this definition of a taxable estate. See Treas. Reg. § 20.2039-1(b)(1)(I).

Treasury regulations provide that "the value of every item of property includible in a decedent's gross estate . . . is its fair market value at the time of the decedent's death." Treas. Reg. § 20.2031-1(b). Fair market value is defined as "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." Id. The fair market value of an annuity is generally determined by resort to annuity tables prescribed by the IRS. See 26 U.S.C. § 7520(a); Treas. Reg. § 20.7520-1. These tables provide a factor composed of an interest rate component and a mortality component that is used to determine the present value of an annuity. Treas. Reg. § 20.7520-1.

This Court has recognized that "[i]n enacting § 7520(a)(1) and requiring valuation by the tables, Congress displayed a preference for convenience and certainty over accuracy in the individual case." Cook v. Comm'r, 349 F.3d 850, 854 (5th Cir.2003). While the tables inevitably lead to departures from true value, whatever that might be, the error costs are perceived as small in the aggregate. Id. The tables provide some measure of certainty and administrative convenience that would be disrupted if every attempt to value an annuity deteriorated into a battle of experts regarding market value.

However, there are limited situations in which the values determined by application of the annuity tables need not be used. When the tables result in a value that is unrealistic and unreasonable, other valuation methods should be employed. See Cook, 349 F.3d at 855 (citing O'Reilly v. Comm'r, 973 F.2d 1403, 1407 (8th Cir. 1992)). This case-law exception to the tables has existed for some time. See Weller v. Comm'r, 38 T.C. 790, 802, 1962 WL 1155 (1962). Effective with estates of decedents who died after December 13, 1995, the Treasury Department promulgated regulations that provide an explicit exception to the tables for "restricted beneficial interests." Treas. Reg. § 20.7520-3(b)(ii) & (c).

The regulations define a "restricted beneficial interest" as "an annuity, income remainder, or reversionary interest that is subject to any contingency, power, or other restriction, whether the restriction is provided for by the terms of the trust, will, or other governing instrument or is caused by other circumstances." Treas. Reg. § 20.7520-3(b)(ii). Generally, a restricted beneficial interest should be assigned its fair market value without regard to the annuity tables. Treas. Reg. § 20.7520-3(b)(ii) & (iii).³ In Cook, this Court analyzed the case law exception to the tables, not this regulation. We have yet to interpret or apply the regulatory "restricted beneficial interest" exception.

To understand this regulation and its application, we look first at the law applicable to estates that were not subject to the regulation, then seek to determine the change, if any, that the regulation wrought.

2. The Law for Estates with pre-December 14, 1995, Valuations

This Court in 2003 addressed the proper method for valuing an estate's interest in non-transferable lottery payments; the right to the payments was determined to be a private annuity that could be valued under the tables. Cook, 349 F.3d at 855. The death of the Cook decedent occurred prior to the 1995 effective date of the regulation that we will later analyze.

The Cook estate argued that the annuity tables did not account for the lowered present value of the right to these payments caused by marketability restrictions; thus, departure from the tables was necessary to avoid an unreasonable result. Id. at 855-57. The annuity-table valuation of the right to the payments exceeded by almost four million dollars the lowest valuation by an expert, and exceeded the highest by over two and a half million dollars. The court found that the disparity between the value reached under the tables and the valuation by experts was attributable to a reason that was irrelevant to the valuation, namely, the non-marketability of the right to receive the lottery payments. Id. at 856. Therefore, Cook held that departure from the tables was not necessary because "the non-marketability of a private annuity is an assumption underlying the annuity tables." Id.

Marketability is important to the valuation of an asset when capital appreciation is an element of value or when the value would otherwise be difficult to ascertain. Other kinds of private annuities are valued under the tables despite being non-marketable. . . . [N]on-marketability does not alter or jeopardize the essential entitlement to a stream of fixed payments.

Id. at 857 (citations and quotation marks omitted). Cook analyzed two other circuits' precedents that recognized a non-marketability exception to the annuity tables, then rejected their rationale and holdings. Id. at 855-57 (citing Estate of Gribauskas v. Comm'r, 342 F.3d 85 (2d Cir.2003); Shackleford v. United States, 262 F.3d 1028 (9th Cir.2001)).

Cook is important here for two reasons.⁴ First, the opinion is this Circuit's definitive interpretation of the law governing departure from the annuity tables as it existed prior to December 13, 1995, the effective date of Section 20.7520-3(b). As Cook noted, courts had departed from the...