ANTHONY v. U.S.
520 F.3d 374 (2008)
United States Court of Appeals, Fifth Circuit.
March 4, 2008.
The Estate argues that even if the "restricted beneficial interest" exception does not encompass a non-marketability exception to valuation under the tables, valuation under the tables in this case is still inappropriate because the tables yield an "unreasonable and unrealistic" result. While annuities should generally be valued under the Section 7520 tables, the applicability of the annuity tables is not unassailable. Cook, 349 F.3d at 850. The tables must be used to value annuities "unless it is shown that the result is so unrealistic and unreasonable that either some modification in the prescribed method should be made, or complete departure from the method should be taken, and a more reasonable and realistic means of determining value is available." Id. at 854. Further, "[t]he party challenging applicability of the tables has the substantial burden of demonstrating that the tables produce an unreasonable result." Id. at 854-55.
The district court held that use of the annuity tables did not create an "unrealistic or unreasonable" result even though the table valuation was substantially less than the Estate's purported free market valuation. Here, the Estate has alleged a $1,176,810 disparity (roughly fifty percent less than the value prescribed by the tables).8 In Cook, valuation of the non-transferable lottery payments under the annuity tables exceeded the highest expert valuation by $2,504,661 (a twenty-nine percent disparity) and the lowest by $3,982,850 (a forty-seven percent disparity). Cook, 349 F.3d at 852 n. 2, 856. Yet, this Court refused to depart from the tables. Id. at 856-57. Adherence to the tables in the face of even greater disparities has occurred. E.g., Estate of Donovan v. United States, 2005 WL 958403, **3-5 (D.Mass. April 26, 2005) (unpublished) (finding sixty-six percent disparity was not unreasonable, citing Cook).
More importantly, the Estate relies solely on marketability restrictions to demonstrate a disparity between the alleged fair market value and the value under the tables. This basis for departure under the "unrealistic and unreasonable" standard — for purposes of valuing a private annuity — is foreclosed by Cook. 349 F.3d at 856 ("The result produced by the valuation tables is not unreasonable because the factor accounting for the disparity between the expert and the table valuation, i.e., a marketability discount, is not properly applied to the lottery prize."). Cook refused to depart from the annuity tables despite a significant disparity between the result under the tables and the alleged market value. The refusal was because that disparity arose from the same non-marketability factor that explains the disparity before us today. We continue to follow Cook's lead.
The district court correctly determined that the results yielded by the tables were not "unrealistic and unreasonable" in this case.
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.