Despite contrary holdings by other circuits, the Fifth Circuit recently held fast to its earlier decision in Cook v. Commissioner to once again overrule an estate’s discounting of an annuity interest and restrict it to the valuation tables prescribed by IRC § 7520.
The decedent in the recent decision, James Bankston, received three annuities in a settlement resulting from injuries he suffered in an automobile accident. Each annuity guaranteed monthly or annual payments for at least 15 years. Under two of the contracts, payments could not be “anticipated, sold, assigned or encumbered.” The third annuity provided that payments were “non-assignable.” Bankston died in 1996 before receiving all of the payments, so his estate’s administratrix, Tincy Anthony, had to estimate their present value for estate tax purposes. The estate initially used the tables but later requested a refund, arguing that the nontransferability clauses provided for an exception to the tables. The IRS and a district court in Louisiana did not agree ( Anthony , 95 AFTR2d 2005-2905), and the estate appealed.
Estates of decedents who die after Dec. 13, 1995, are governed by Treas. Reg. § 20.7520-3(b)(ii), which provides an exception to using the tables when valuing a “restricted beneficial interest,” that is, an annuity subject to “any contingency, power or other restriction.” The estate interpreted “any … other restriction” broadly and argued it encompassed the marketability restrictions. The regulation provides examples where the annuity tables should not be used, such as where an annuity is expected to exhaust the fund before the last possible payment is made, where the trust corpus may be invaded without the beneficiary’s consent, or where the right to receive payments is contingent on the survival of a terminally ill individual. The Fifth Circuit noted that those examples and other language in the regulation concern only restrictions that threaten the receipt of the payment stream, not those that affect the ability of payees or their heirs to transfer their right to the payment stream.
It also applied its 2003 ruling in Cook (92 AFTR2d 2003-7027). In Cook , the Fifth Circuit held that because nonmarketablility was irrelevant to the right to receive a stream of payments, it could be regarded as underlying the valuation tables. Although the decedent in Cook died in 1993, before the regulation took effect, nothing in the regulation countermands that case’s holding, and it remains applicable, the Fifth Circuit said.
Alternatively, the estate argued that the tables produced an “unreasonable and unrealistic” result. The estate’s claimed value was $1,176,810 less than the table value. The Ninth and Second circuits have upheld departure from the tables on those grounds in Shackleford (88 AFTR2d 2001-5658) and Gribauskas (92 AFTR2d 2003-5914), respectively. Compare also the District Court for the Northern District of Ohio’s decision last year in Negron (99 AFTR2d 2007-3127, discussed in “ Tax Matters: Ohio Court Turns the Tables on Annuities ,” JofA , Jan. 08, page 74). However, the Fifth Circuit in Cook and now Anthony holds that since a lack of marketability does not allow an exception from the table, neither does it render the tables’ result unreasonable.
Anthony, Administratrix of Succession of Bankston v. United States, 101 AFTR2d 2008-983
Prepared by Melanie J. Earles , CPA, DBA, professor of accounting, Tennessee Tech University, Cookeville, Tenn.