Anthony v. United States

REVISED APRIL 15, 2008
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 4, 2008
No. 07-30089
Charles R. Fulbruge III
Clerk
TINCY ANTHONY, Administratrix of the Succession of
James Louis Bankston, Sr.
Plaintiff-Appellant
v.
UNITED STATES OF AMERICA
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-transferrable 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
No. 07-30089
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
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.
2
No. 07-30089
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.
Comm’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
3
No. 07-30089
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). 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
4
No. 07-30089
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
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.
5
No. 07-30089
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 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
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 . . . .”).
6
No. 07-30089
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,
7
No. 07-30089
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.
The Estate is correct that Cook did not, indeed, could not properly consider
Section 20.7520-3(b). Accordingly, we should re-evaluate the issue discussed in
Cook in light of the later regulation. We now turn to that analysis.
a. Regulation’s Language and Structure
We interpret regulations in the same manner as statutes, looking first to
the regulation’s plain language. Lara, 207 F.3d at 787. Where the language is
unambiguous, we do not look beyond the plain wording of the regulation to
determine meaning. Copeland v. Comm’r, 290 F.3d 326, 332-33 (5th Cir. 2002).
A “regulation should be interpreted in a manner that effectuates its central
purposes.” Jochum v. Pico Credit Corp. of Westbank, Inc., 730 F.2d 1041, 1047
(5th Cir. 1984). Further, “courts should not interpret an agency regulation to
thwart the statutory mandate it was designed to implement.” Id.
The language of Section 20.7520-3(b)(1)(ii) is broad: “[a] restricted
beneficial interest is 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.” In effect, the Estate asks this
Court to begin and end our analysis of Section 20.7520-3(b)(1)(ii) by reading only
three words of the regulation – “any . . . other restriction.” As we will explain,
we find more to be required, namely, a consideration of the regulation as a whole
and interpreting that phrase in context. Lara, 207 F.3d at 787; see Malacara v.
Garber, 353 F.3d 393, 400 (5th Cir. 2003).
First, we note that the “other restriction” language follows two specific
types of restrictions, a “contingency” and a “power.” Both are restrictions that
might undermine the fundamental assumptions supporting the valuation of an
8
No. 07-30089
“ordinary beneficial interest” under the tables. See Treas. Reg. § 20.7520-
3(b)(1)(i).5 For example, the right to receive annuity payments may be
contingent on the survival of a person who is terminally ill. See Treas. Reg. §
20.7520-3(b)(4) (Example 1); Estate of Jennings v. Comm’r, 10 T.C. 323 (1948).
Or a trustee may exercise a power to invade the corpus and, thereby, exhaust or
diminish the income stream. See Treas. Reg. § 20.7520-3(b)(2)(v) (Example 4);
Froh v. Comm’r, 100 T.C. 1 (1993). These restrictions, unlike the one on
assignability with which we are concerned in this appeal, threaten to end an
annuitant’s right to receive any future payments.
Next, the structure of the regulation also suggests a narrow definition of
“other restriction.” Subparagraph (ii) of Section 20.7520-3(b)(1) defines
“restricted beneficial interest.” However, subparagraph (iii) does not repeat the
term “restricted beneficial interest” but instructs the taxpayer that “[i]f, under
the provisions of this paragraph (b), the interest rate and mortality components
prescribed under section 7520 are not applicable in determining the value of any
annuity . . . the actual fair market value of the interest (determined without
regard to section 7520) is based on all of the facts and circumstances . . . .”
Treas. Reg. § 20.7520-3(b)(1)(iii) (emphasis added). Again, emphasis is placed
on the two assumptions underlying the tables, not more broadly on any factor
that might affect the value.
A reading of the entirety of Section 20.7520-3(b) discloses an emphasis on
the fundamental assumptions – the interest rate and mortality components –
when determining whether departure from the tables is warranted.
Subparagraph (2) is replete with illustrations of circumstances under which its
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).
9
No. 07-30089
exceptions are applicable. The regulation explains that a standard Section 7520
annuity factor should not be used where an annuity is expected to exhaust the
fund before the last possible payment is made (Treas. Reg. § 20.7520-3(b)(2)(i)),
where the trust corpus may be invaded without the beneficiary’s consent (Treas.
Reg. § 20.7520-3(b)(2)(ii)), or where an individual who is a measuring life is
terminally ill (Treas. Reg. § 20.7520-3(b)(3)). In addition, the regulation provides
examples of its applications. These are examples in which either the interest
rate or mortality component is inapplicable, or the corpus that funds the
payments is subject to diversion or exhaustion. See Treas. Reg. § 20.7520-
3(b)(2)(v), (b)(4). The regulation offers no examples of “marketability” or
“transferability” restrictions.
b. Regulation’s Promulgation
We also find it useful to examine Treasury Decision 8630 (“T.D. 8630"),
which accompanied the final publication of Section 20.7520-3(b). See 60 Fed.
Reg. 63913 (Dec. 13, 1995). T.D. 8630 summarizes the new regulation as being
“necessary in order to provide guidance consistent with court decisions
concluding that the valuation tables are not to be used in certain situations.” 60
Fed. Reg. at 63913 (emphasis added). In response to comments regarding the
application of the tables, T.D. 8630 states that “these regulations generally adopt
principles established in case law and published IRS positions.” 60 Fed. Reg. at
63914. The only comments to which T.D. 8630 responded concerned exhaustion
or underfunding of the trust corpus or a terminally ill measuring life. 60 Fed.
Reg. at 63913-14.
Like the regulation itself, T.D. 8630 makes no mention of marketability or
transferability restrictions and provides no examples that would invoke such
restrictions. The Estate directs our attention to T.D. 8630's declaration that “the
tables cannot be used if the instrument of transfer does not provide the
beneficiary of the annuity, income interest, or remainder interest with the
10
No. 07-30089
degree of beneficial enjoyment that is consistent with the traditional character
of that property interest under applicable local law.” 60 Fed. Reg. at 63913. The
Estate argues that the right to market or alienate a private annuity is essential
to the beneficial enjoyment of such an interest. Perhaps to show that
marketability of such annuities is traditional and not aberrational, counsel for
the Estate at oral argument asserted that marketing of structured settlement
rights is so common that the value can be easily determined.
It is true that the “beneficial enjoyment” language on which the Estate
relies appears in the regulation itself. See Treas. Reg. § 20.7520-3(b)(2)(ii)(A).
However, the final regulation elaborates on T.D. 8630's language, stating that
“beneficial enjoyment is provided only if it was the transferor’s intent, as
manifested by the provisions of the governing instrument and the surrounding
circumstances, that the trust provide an income interest for the income
beneficiary during the specified period of time that is consistent with the value
of the trust corpus and with its preservation.” Treas. Reg. § 20.7520-
3(b)(2)(ii)(A). Consistently with what we have already said about the regulation,
this language emphasizes preservation of the trust corpus. This comports with
Cook’s recognition that an annuity, unlike many other assets, grants the
beneficiary the “right, independent of market forces, to receive a certain amount
of money annually for a certain term.” Cook, 349 F.3d at 856 (emphasis added).
We find that “beneficial enjoyment,” in the context of an annuity, refers to the
ability of the corpus to support the periodic payments, not to the ability of the
annuitant to transfer his interest in those payments.6
4. Summary of regulation
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.
11
No. 07-30089
By promulgating Section 20.7520-3(b), the Treasury Department
formalized existing case-law exceptions that applied to valuation under the
annuity tables – exceptions that were only applicable in cases that presented
“facts that disproved assumptions underlying the tables.” Cook, 349 F.3d at 856.
Cook concluded that the “non-marketability of a private annuity is an
assumption underlying the annuity tables.” Id. Thus, the marketability
restrictions on the Estate’s annuities do not disprove a relevant assumption. We
do not find the post-December 1995 regulation to be a basis on which to reject
the Cook conclusion about non-marketability and the tables, which is the law in
this Circuit. We continue to hold that the Tax Court was correct when it stated
that “the intent of this provision [in Section 20.7520-3(b)] was to formalize the
existing case law regarding the validity of the tabular assumptions in situations
where facts show a clear risk that the payee will not receive the anticipated
return.” Estate of Gribauskas v. Comm’r, 116 T.C. 142, 164 (2001), rev’d, 342
F.3d 85 (2d Cir. 2003).7 That risk does not arise in the facts before us today.
Requiring valuation of non-marketable annuities under the tables, absent
“facts substantially at variance with factual assumptions underlying the tables,”
respects Congress’s “preference for convenience and certainty over accuracy in
the individual case.” Cook, 349 F.3d at 854-55. As the Tax Court noted:
the enactment of a statutory mandate in section 7520 reflects a
strong policy in favor of standardized actuarial valuation of these
interests which would be largely vitiated by the estate’s advocated
approach. A necessity to probe in each instance the nuances of a
payee’s contractual rights, when those rights neither alter or
jeopardize the essential entitlement to a stream of fixed payments,
would unjustifiably weaken the law.
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.
12
No. 07-30089
Gribauskas, 116 T.C. 163-64.
The Estate at oral argument asserted that there exists a market for
structured settlement annuities, a market that it alleges is as predictable and
more accurate than the Section 7520 tables. Regardless of the precise details,
we accept that there is a market-recognized and discounted value to the right to
transfer an income stream. There certainly are individuals who will wish to sell
at a discounted price their inherited right to receive a guaranteed amount of
money that is paid out over a term of years. What Cook held and what we
conclude was unchanged by anything relevant since Cook, is that for tax
purposes, the annuity tables are not concerned about the difference in market
value between an inherited, non-transferable right to receive periodic payments
of this sort and an inherited, transferable right to receive such payments. Only
if the successor to the decedent desires to assign the annuity is there a practical
difference to what that successor has received. Though markets value
assignable and non-assignable annuities differently, we continue to conclude
that for purposes of Section 7520, the Tax Code does not.
As interpreted in Cook, Section 7520 demonstrates Congress’s intent that
current tables govern the valuation of annuities unless the factual assumptions
underlying those tables are disproved. Those assumptions hold in this case.
In light of its language, structure, and purpose, we do not read Section
20.7520-3(b) so broadly as to require a non-marketability exception from the
annuity tables. To the extent the Estate argues that, notwithstanding Cook, the
language of Section 20.7520-3(b) is broad enough to permit this Court to adopt
a non-marketability exception, we decline to do so. This exception was rejected
by Cook. The principles that guided Cook also guide us even with a new
regulation as part of the direction given. Instead, we follow the Tax Court’s
rationale in Gribauskas, endorsed by Cook, that “a restriction within the
meaning of the regulation is one which jeopardizes receipt of the payment
13
No. 07-30089
stream, not one which merely impacts on the ability of the payee to dispose of his
or her right thereto.” Gribauskas, 116 T.C. 165.
We affirm the district court’s decision that Bankston’s annuities were not
“restricted beneficial interests” under Section 20.7520-3(b).
B. Unreasonable and Unrealistic Results
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 more 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
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.
14
No. 07-30089
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.
AFFIRMED.
15