Estate of Marks v. Commissioner ( 1990 )

PARR, J.,

dissenting: The result reached by the majority may be correct as a matter of tax policy. Since the credit provided by section 2013 was designed “to prevent the diminution of an estate by the imposition of successive taxes on the same property within a brief period” (S. Rept. 1622, 83d Cong., 2d Sess. 122 (1954)), it is questionable whether a transferee of a terminable interest, such as a usufruct, should receive a credit even though that interest is not included in the transferee’s gross estate. See Holbrook v. United States, 575 F.2d 1288, 1290 (9th Cir. 1978), for the apparent reasons the credit is available with respect to terminable interests. Thus, as a matter of policy, it may well be that Everard’s estate should not receive the benefit of the section 2013 credit.

Nevertheless, the law is clear that the credit is available to a transferee, such as Everard’s estate. See sec. 2013(e); sec. 20.2013-4(a) and -5(a), Estate Tax Regs. Our responsibility begins and ends with deciding whether Everard’s estate satisfies the statutory and regulatory requirements for the credit. In the process, the Court should resist the temptation to create judicial exceptions in order to deny the section 2013 credit to Everard’s estate at the expense of disregarding “recognized valuation principles.”

The majority makes a distinction between the valuation of insurance for inclusion in an estate under section 2031 and valuation for computation of the credit under section 2013. I see no rational ground for this distinction. Value is value. Respondent has adopted an “actual knowledge” approach to valuation for purposes of applying section 2013, but steadfastly adheres to the mortality tables for applying sections 2037 and 2042(2). Rev. Rui. 80-80, 1980-1 C.B. 194. See sec. 20.2037-l(b)(3), Estate Tax Regs. The effect is heads, the government wins; tails, the taxpayer loses. Fairness to taxpayers is lost when respondent is permitted to adhere to or depart from the use of the mortality tables as it suits him.

The majority assigns a zero value to the usufruct because Everard and Mary suffered simultaneous deaths. The majority is wrong because they ignore the presumption under Louisiana law that Everard survived Mary, and they deviate from recognized valuation principles in valuing the usufruct.

Section 20.2013-4(a) of the regulations clearly states that “the value of the interest is determined as of the date of the transferor’s death on the basis of recognized valuation principles (see especially secs. 20.2031-7 and 20.2031-10).” If we accept the presumption that Everard survived Mary, which we must, Everard’s death is irrelevant in determining the value of the property as of the instant of Mary’s death. The usufruct should be valued on the basis of “recognized valuation principles” by simply adhering to respondent’s own regulation which expressly refers to the mortality tables at section 20.2031-7, Estate Tax Regs.

The majority states that “it is improper to ignore reality by placing (for tax purposes) a mythical value on the deemed surviving spouse’s usufructuary interest.” But the value determined under the mortality tables is almost always “mythical,” in the sense that the transferee’s actual life rarely is the same as the assumed life provided by the tables. In this sense, the present case probably represents the epitome of “mythical” valuation. The reasoning of the majority is a slippery slope without bounds which invites controversy between taxpayers and respondent by departing from the certainty provided by the mortality tables. Unnecessary litigation is the last thing we ought to encourage.

Justice Holmes eloquently stated regarding the use of mortality tables:

The question is whether the amount * * * is to be determined by the event as it turned out, * * * or by mortality tables showing the probabilities as they stood on the day when the testator died. The first impression is that it is absurd to resort to statistical probabilities when you know the fact. But this is due to inaccurate thinking. * * * Like all values, as the word is used by the law, it depends largely on more or less certain prophecies of the future, and the value is no less real at that time if later the prophecy turns out false when it comes out true. * * * Tempting as it is to correct uncertain probabilities by the now certain fact, we are of the opinion that it cannot be done, but that the value of the * * * life interest must be estimated by the mortality tables. * * * [Ithaca Trust Co. v. United States, 279 U.S. 151, 155 (1929). Citations omitted.]

See also Estate of Lloyd v. United States, 228 Ct. Cl. 10, 650 F.2d 1196 (1981). Similarly, in computing the section 2013 credit, the transferee’s actual life span after the death of the transferor is always known. However, our objective is to determine “the value at which the property was included in the transferor’s gross estate.” See sec. 20.2013-4(a), Estate Tax Regs. (Emphasis added.) The Court should resist the temptation to look at Everard’s actual life span and should instead look to the mortality tables to determine the value of the usufruct from the perspective of Mary’s estate.

The Fifth Circuit addressed this matter, in the context of section 2031, in Estate of Wien v. Commissioner, 441 F.2d 32 (5th Cir. 1971). There the court focused on the impracticalities of administering a rule of valuation based upon determining the actual state of the insured’s health, rather than using standard mortality tables:

We think that the principles of estate taxation preclude consideration of such facts as the actual state of the insured’s health or peril in valuing the owner’s property interest. Indeed it would bring virtual disaster upon the integrity of estate taxation if the value of an ownership interest fluctuated with the probable longevity of the insured. Any valuation method depending upon such an uncertain measure as the day-by-day health of an individual insured would be impossible to enforce accurately. Old Kent Bank & Trust Co. v. United States, 6 Cir. 1970, 430 F.2d 392. There are simply no actuarial computations which can be applied to an individual illness or accidental circumstance which will accurately predict the probability of death. For this reason the standard mortality tables on which the interpolated terminal reserve is based, rather than ad hoc medical prognosis, have always been the norm for estate tax valuations. Yet here because there is a common disaster involved both the Commissioner and the taxpayers suggest that we depart from the norm and value the policy on the basis of the individual insured’s probability of death. We think considerations of this sort are as unmanageable when a common disaster is involved as they are in the ordinary case.

# * # * * * *

There are no actuarial figures to apply to this situation. Both the Commissioner and the taxpayers of necessity took a post mortem look and determined that the insured did die, a fact which no buyer at the instant of the owner’s death could have known. This method of valuation flies in the face of established precepts of appraisal based upon actuarial life expectancies at the instant of death as reflected by the interpolated terminal reserve. Before we would sanction such ad hominem determinations of valuation based on post mortem peeks at individual mortality, congressional authorization would be necessary.

[Estate of Wien v. Commissioner, 441 F.2d at 40.]

The above reasoning applies with equal force to the case before us.

The majority opinion is unfair to taxpayers, departs from recognized valuation principles, is an administrative nightmare, and will invite litigation which the use of mortality tables would avoid. Accordingly, I dissent.