ANTHONY v. U.S.
520 F.3d 374 (2008)
United States Court of Appeals, Fifth Circuit.
March 4, 2008.
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 valuation tables under the "unrealistic and unreasonable" standard "only when individual cases involved facts substantially at variance with factual assumptions underlying the tables." 349 F.3d at 854-55. Even courts that have recognized a non-marketability exception to the tables agree with Cook's interpretation of prior case law. See e.g., Gribauskas, 342 F.3d at 88 ("The Commissioner is correct in characterizing the case law up to this point — excluding, of course, Shackleford — as authorizing departures only when the actual facts are inconsistent with the assumptions underlying the tables."). Prior to Shackleford and Gribauskas, the "unrealistic and unreasonable" exception was a narrow one. Its application was confined to a limited set of circumstances, such as cases where the actual rate of return was lower than the assumed rate of return in the tables, the death of the measuring life was imminent due to a terminal illness, or the income stream would be exhausted before expiration of the income term. Cook, 349 F.3d at 855; Gribauskas, 342 F.3d at 88. Second, Cook presented this Court with an opportunity to recognize a new, non-marketability exception to the annuity tables. Such an extension of the law was rejected. Cook found the Second and Ninth Circuits' rationale unpersuasive in the context of valuing a private annuity:
We agree that the right to alienate is necessary to value a capital asset; however, we think it unreasonable to apply a non-marketability discount when the asset to be valued is the right, independent of market forces, to receive a certain amount of money annually for a certain term.
Cook, 349 F.3d at 856. The Court refused to depart from the "longstanding trend" of requiring valuation under the tables unless a case involved facts that disproved assumptions underlying those tables. Id.
3. Treasury Regulation § 20.7520-3(b)
In its brief, the Estate concedes that Cook addressed a nearly identical issue of law as presented in this appeal. However, it argues that this appeal is governed by the "restricted beneficial interest" exception to the Section 7520 tables — an exception that was not considered in Cook because
it was not in effect as to Cook's estate. The Estate argues that all estates with a valuation date after December 13, 1995, are governed by the language of Section 20.7520-3(b)(1)(ii), which precludes the use of annuity tables in valuing a "restricted beneficial interest," that is "an annuity . . . that is subject to any contingency, power, or other restriction. . . ." The Estate would have us read the term "other restriction" broadly, to create an exception to the tables based on the type of marketability restrictions placed on Bankston's annuity interest.
1. The Transamerica annuity (owned by Transamerica Occidental Life Insurance Company) guaranteed Bankston fifteen annual lump sum payments, ranging from $25,000 in 1992 to $150,000 in 2006. The MetLife annuity (owned by MetLife Security Insurance Company) guaranteed Bankston monthly payments for fifteen years and life thereafter, beginning with $9,350 in July 1991 and increasing three percent annually. The Jamestown annuity (owned by Jamestown Life Insurance Company) guaranteed Bankston monthly payments for fifteen years and life thereafter, beginning with $7,000 in July 1991 and increasing 3 percent annually.
2. The Estate estimated that the fair market value of the annuities at the time of Bankston's death was $1,198,900, not the $2,371,409 figure provided under the annuity tables.
3. The regulations note that a "special" Section 7520 annuity factor may be used to value a restricted beneficial interest in some circumstances. Treas. Reg. § 20.7520-3(b)(ii). Under those circumstances, a party may request a special annuity factor from the IRS. Id. The "special" annuity factor is not an issue in this case.
4. The Estate suggests that Cook is distinguishable from the present case because the Cook annuitant was also the owner of the annuity. Cook, 349 F.3d at 851-52. In the present case, other entities owned the Bankston annuities. We do not find this to be a significant distinction. The interest to be valued is the right to receive payments from an annuity, regardless of who owns the annuity. See Treas. Reg. § 20.2039-1. Both here and in Cook, the interest rendered non-transferable by agreement (be it a true ownership interest or merely a contractual right to receive payments) would otherwise be transferable. See 29 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 74.10 (4th ed.2000) ("Generally, all contract rights may be assigned in the absence of clear language expressly prohibiting the assignment. . . . ").
5. A "contingency" is defined as "[a]n event that may or may not occur; a possibility" or "[t]he condition of being dependent on chance; uncertainty." BLACK'S LAW DICTIONARY 338 (8th ed.2004). A "power" is defined as "[t]he legal right or authorization to act or not act; a person's or organization's ability to alter, by an act of will, the rights, duties, liabilities, or other legal relations either of that person or of another." BLACK'S LAW DICTIONARY 1207 (8th ed.2004).
6. The Estate argues it was error for the district court to cite two Technical Advice Memorandums ("TAMs") issued by the IRS; the lower court stated, though, that the TAMs had no precedential value. See 26 U.S.C. § 6110(k)(3). We do not rely on these TAMs.
7. The Second Circuit's reversal of the Tax Court came as the result of that Circuit's expansion of the law under the "unrealistic and unreasonable" standard. Gribauskas, 342 F.3d at 88. The Second Circuit did not interpret Section 20.7520-3(b) and did not criticize the Tax Court's interpretation of that regulation. Id. We find the Tax Court's interpretation of Section 20.7520-3(b) persuasive.
8. The $1,198,900 alternative valuation figure appears to be derived solely from a "fair market value analysis" offered as an exhibit to the Estate's original refund request. This analysis applies a twenty-five percent discount factor when valuing the annuity interest. It is unclear from the record who prepared the analysis or how the preparer arrived at the discount factor. Neither party offered an expert valuation during proceedings before the district court.