Estate of Judith U. Harrison v. Commissioner , 115 T.C. No. 13 ( 2000 )

115 T.C. No. 13UNITED STATES TAX COURT
ESTATE OF JUDITH U. HARRISON, DECEASED, RICHARD J. TEJEDA,
EXECUTOR, AND ESTATE OF KENNETH R. HARRISON, DECEASED, RICHARD J.
TEJEDA, EXECUTOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16018-98. Filed August 22, 2000.
H and W boarded their private aircraft in July of
1993 but never arrived at their destination.
Subsequently, probate orders were entered presuming
identical April 1, 1994, dates of death and finding it
more probable than not that the airplane crashed en
route. The will of each spouse presumed survival by
the other in circumstances where order of death was
unknown and transferred a life estate to such surviving
spouse. For estate tax purposes, the transferred life
estates were valued on the basis of actuarial tables,
and each estate took a credit for tax on prior
transfers pursuant to sec. 2013, I.R.C. R disallowed
these credits on the grounds that, under recognized
valuation principles, the life estates were not to be
valued by resort to actuarial tables but, rather, must
be accorded no value.
Held: The reciprocal life estates at issue are not
appropriately valued utilizing actuarial tables, must be
- 2 -
deemed without value for estate tax purposes, and,
therefore, will not support allowance of credits for tax on
prior transfers under sec. 2013, I.R.C.
Michael Antin, for petitioners.
Donna F. Herbert, for respondent.
OPINION
NIMS, Judge: Respondent determined a deficiency in Federal
estate tax with respect to the Estate of Judith U. Harrison, in
the amount of $16,457, and a deficiency in Federal estate tax
with respect to the Estate of Kenneth R. Harrison, in the amount
of $16,457. After concessions, the sole issue for decision is
whether the estates of Judith U. Harrison and Kenneth R. Harrison
are entitled to credits for tax on prior transfers pursuant to
section 2013.
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
This case was submitted fully stipulated under Rule 122.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. Executor Richard J.
Tejeda resided in California at the time the petition in this
case was filed.
- 3 -
Background
On or about July 25, 1993, Judith and Kenneth Harrison
boarded their private aircraft in Roosevelt, Utah. The aircraft
thereafter failed to arrive at its destination of Camarillo,
California, and the Harrisons were never again seen or heard
from.
On April 1, 1994, Orders for Probate were issued by the
California Superior Court with respect to the estates of Mr. and
Mrs. Harrison. An attachment to each order recited the court’s
findings and concluded as follows:
It unfortunately appearing that it is more
probable than not that the aircraft crashed en route
and that JUDITH UTZ HARRISON [or KENNETH REED HARRISON]
died as a result thereof, the orders hereinafter set
forth should be made and entered.
IT IS THEREFORE ORDERED that JUDITH UTZ HARRISON
[or KENNETH REED HARRISON] is a missing person who is
presumed dead under P.C. § 12401, that the date of
JUDITH UTZ HARRISON’S [or KENNETH REED HARRISON’S]
death is presumed to be the date hereof and that
RICHARD J. TEJEDA is appointed to act as the Executor
of the Will of JUDITH UTZ HARRISON [or KENNETH REED
HARRISON], as set forth hereinabove.
Subsequently, on May 27, 1994, the California Department of
Health Services entered a Court Order Delayed Registration of
Death for each of the Harrisons. These documents indicated that
the date of death was April 1, 1994, and the cause of death was
“Unknown. Believed to be trauma suffered in crash of small
aircraft.”
- 4 -
The wills admitted to probate pursuant to the April 1994
orders each created a trust in which the surviving spouse was
given a life estate. In addition, for purposes of effectuating
these trusts, the will of each decedent provided that if the
spouses died simultaneously, or under circumstances rendering it
difficult or impossible to determine order of death, the other
spouse would be conclusively presumed to have survived the
decedent. Based on the foregoing provisions, estate tax returns
were prepared which treated each spouse as having passed a life
interest to the other and which claimed a section 2013 credit for
tax on prior transfers with respect to the reciprocal interest so
received. In calculating the amount of the credit, the life
interests were valued utilizing the actuarial formulas and tables
set forth by the Internal Revenue Service in Notice 89-24, 1989-1
C.B. 660, and Notice 89-60, 1989-1 C.B. 700. Respondent’s
disallowance of these credits is the subject of the instant
controversy.
Discussion
Broadly stated, the principal issue in this case is whether
the estates are entitled to credits for tax on prior transfers
pursuant to section 2013. As more narrowly framed by the
contentions of the parties and the facts before us, resolution of
this inquiry turns on whether the estates are entitled to value
- 5 -
the reciprocal life estates for purposes of the section 2013
credit on the basis of actuarial tables promulgated under section
7520.
I. Contentions of the Parties
The estates contend that section 7520 makes use of actuarial
tables mandatory, subject only to narrow exceptions not
applicable here. Specifically, the estates maintain that
judicial decisions and revenue rulings sanctioning departure from
actuarial tables in cases of known simultaneous or clearly
imminent deaths are not controlling here because there exist no
facts to establish the circumstances surrounding the Harrisons’
demise. The spouses were only presumed dead after an absence of
more than 9 months. The estates therefore aver that the life
estates at issue were properly valued on the basis of
transitional rules set forth in section 20.7520-4(a), Estate Tax
Regs., which state that executors may rely on the formulas and
tables in Notice 89-24, 1989-1 C.B. 660, and Notice 89-60, 1989-1
C.B. 700, to value transferred interests if the valuation date is
after April 30, 1989, and before June 10, 1994.
Conversely, respondent asserts that the Harrisons’ life
estates may not be valued through application of actuarial
formulas and tables. Rather, it is respondent’s position that
this case presents a simultaneous death situation governed by
case law and revenue rulings declaring valueless interests
- 6 -
transferred between victims of a common disaster or to an
individual whose death is clearly imminent. Hence, because the
amount of the credit allowed under section 2013 is proportionate
to the value of the transferred interest, respondent avers that
the estates are entitled to no such credit.
On these facts, we conclude that the spouses’ reciprocal
life estates must be deemed to have a value of zero and,
therefore, will not support allowance of a section 2013 credit.
II. Statutory and Regulatory Provisions
Section 2013 provides a credit against estate tax liability
where the decedent has received property in a transfer from a
person who dies within a prescribed period before or after the
decedent, which transfer is itself subject to estate tax in the
transferor’s estate. The credit is intended “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. at 122 (1954). As pertinent herein, the statute
reads:
SEC. 2013. CREDIT FOR TAX ON PRIOR TRANSFERS.
(a) General Rule.--The tax imposed by section 2001
shall be credited with all or a part of the amount of
the Federal estate tax paid with respect to the
transfer of property * * * to the decedent by or from a
person (herein designated as a “transferor”) who died
within 10 years before, or within 2 years after, the
decedent’s death. * * *
(b) Computation of Credit.-- * * * the credit
provided by this section shall be an amount which bears
- 7 -
the same ratio to the estate tax paid * * * with
respect to the estate of the transferor as the value of
the property transferred bears to the taxable estate of
the transferor (determined for purposes of the estate
tax) * * *
Regulations promulgated under section 2013 specify that if
the interest received by the decedent takes the form of a life
estate, “the value of the interest is determined as of the date
of the transferor’s death on the basis of recognized valuation
principles (see §§ 20.2031-7 (or, for certain prior periods, §
20.2031-7A) and 20.7520-1 through 20.7520-4).” Sec. 20.2013-
4(a), Estate Tax Regs.
Section 7520, in turn, states in relevant part:
SEC. 7520. VALUATION TABLES.
(a) General Rule.--For purposes of this title, the
value of any annuity, any interest for life or a term
of years, or any remainder or reversionary interest
shall be determined--
(1) under tables prescribed by the Secretary
* * *
* * * * * * *
(b) Section Not to Apply for Certain Purposes.--
This section shall not apply for purposes of part I of
subchapter D of chapter 1 [relating to deferred
compensation] or any other provision specified in
regulations.
In accordance with the authority granted in section 7520(b)
above, the Commissioner issued section 20.7520-3, Estate Tax
Regs. Paragraph (a) of the regulation begins “Section 7520 of
the Internal Revenue Code does not apply for purposes of” and
- 8 -
then enumerates a series of limitations on the statute’s
application. The list concludes with “Any other sections of the
Internal Revenue Code to the extent provided by the Internal
Revenue Service in revenue rulings or revenue procedures.” Sec.
20.7520-3(a)(9), Estate Tax Regs. Paragraph (a) is effective as
of May 1, 1989. See sec. 20.7520-3(c), Estate Tax Regs.
At the time paragraph (a) was issued, Rev. Rul. 80-80, 1980-
1 C.B. 194, set forth the standard applied by the Commissioner
for determining whether departure from actuarial tables was
warranted. The test therein provided:
In view of recent case law, the resulting
principle is as follows: the current actuarial tables
in the regulations shall be applied if valuation of an
individual’s life interest is required for purposes of
the federal estate or gift taxes unless the individual
is known to have been afflicted, at the time of
transfer, with an incurable physical condition that is
in such an advanced stage that death is clearly
imminent. Death is not clearly imminent if there is a
reasonable possibility of survival for more than a very
brief period. * * * [Id.]
Rev. Rul. 80-80, 1980-1 C.B. 194, was subsequently obsoleted
by Rev. Rul. 96-3, 1996-1 C.B. 348, in conjunction with the
promulgation of section 20.7520-3(b), Estate Tax Regs. This
paragraph (b) is effective with respect to estates of decedents
dying after December 13, 1995. See sec. 20.7520-3(c), Estate Tax
Regs. Among other things, paragraph (b) explicitly precludes use
of actuarial tables prescribed under section 7520 in instances
of: (1) Terminal illness, where there is at least a 50-percent
- 9 -
probability that an individual with a known incurable illness
will die within 1 year, and (2) deaths resulting from a common
accident. See sec. 20.7520-3(b)(3)(i), (iii), Estate Tax Regs.
Although this regulatory text is not applicable here, the
preamble to T.D. 8630, 1996-1 C.B. 339, which adopted paragraph
(b) as an amendment to the final regulations under section 7520,
addressed the relationship of the new provisions to prior law as
follows:
One commentator suggested that the tables
prescribed by the regulations must be used for valuing
all interests transferred between April 30, 1989 (the
effective date of section 7520) and December 13, 1995
(the effective date of the regulations). However,
these regulations generally adopt principles
established in case law and published IRS positions.
* * * There is no indication that Congress intended to
supersede this well-established case law and
administrative ruling position when it enacted section
7520. Consequently, in the case of transfers prior to
the effective date of these regulations, the question
of whether a particular interest must be valued based
on the tables will be resolved based on applicable case
law and revenue rulings.
In addition, the regulations contain a transitional rule
which reads: “If the valuation date is after April 30, 1989, and
before June 10, 1994, an executor can rely on Notice 89-24, 1989-
1 C.B. 660, or Notice 89-60, 1989-1 C.B. 700 * * *, in valuing
the transferred interest.” Sec. 20.7520-4(a), Estate Tax Regs.
The referenced Notices set forth formulas and tables of actuarial
factors intended “to provide guidance to taxpayers in determining
the present value of * * * an interest for life * * * under
- 10 -
section 7520 of the Internal Revenue Code”, Notice 89-24, 1989-1
C.B. 660, during the period between the enactment of section 7520
and the promulgation of final regulations and tables.
III. Case Law
The existing case law as of April 1, 1994, although
involving valuation dates prior to section 7520’s enactment,
specifically dealt with the issue of valuing interests
transferred in simultaneous death situations for purposes of the
section 2013 credit. See Estate of Carter v. United States, 921
F.2d 63 (5th Cir. 1991); Estate of Lion v. Commissioner, 438 F.2d
56 (4th Cir. 1971), affg. 52 T.C. 601 (1969); Estate of Marks v.
Commissioner, 94 T.C. 720 (1990); Old Kent Bank & Trust Co. v.
United States, 292 F. Supp. 48 (W.D. Mich. 1968), revd. on other
grounds 430 F.2d 392 (6th Cir. 1970).
As early as 1968, a U.S. District Court had ruled in Old
Kent Bank & Trust Co. v. United States, supra at 53-55, that a
life estate had no value for tax credit purposes where, despite a
testamentary provision creating a presumption of survival, the
decedents had apparently died together in a plane crash. This
Court then reached the same conclusion in Estate of Lion v.
Commissioner, 52 T.C. at 606-607, and the Court of Appeals for
the Fourth Circuit affirmed, Estate of Lion v. Commissioner, 438
F.2d at 61-62. Each of these decisions reiterated that value for
tax purposes is based upon the amount that a hypothetical willing
- 11 -
buyer with knowledge of all relevant facts would pay for the
subject interest. See Estate of Lion v. Commissioner, 438 F.2d
at 62; Estate of Lion v. Commissioner, 52 T.C. at 606; Old Kent
Bank & Trust Co. v. United States, supra at 54. Since such a
buyer would have been aware that the decedents were hurtling to
the ground in a plane crash and would have recognized the
probability of simultaneous deaths, the buyer would have paid
nothing for the life estates at issue. See Estate of Lion v.
Commissioner, 52 T.C. at 606; Old Kent Bank & Trust Co. v. United
States, supra at 54. As stated by the Court of Appeals for the
Fourth Circuit:
Where at the time of the transferor’s death it was
unmistakable to one in possession of the facts that the
transferee’s life would be radically shorter than
predicted in the actuarial tables, the value of a
transferred life estate may be reduced accordingly for
purposes of calculating the tax credit under § 2013.
[Estate of Lion v. Commissioner, 438 F.2d at 62.]
Moreover, the Court of Appeals for the Fourth Circuit also
noted that this result is consistent with the regulations, which
explicitly sanction use of “‘recognized valuation principles’” in
the section 2013 context. Id. at 59-60, 62. The court concluded
that use in section 20.2013-4, Estate Tax Regs., of the phrase
beginning “see” to direct attention to actuarial tables, rather
than an imperative phrase, served to “leave room for departure
from strict application of the tables.” Id. at 60.
- 12 -
More recently, this Court considered the issue in Estate of
Marks v. Commissioner, supra at 727-729, and held, as before,
that “the deemed surviving spouse is not entitled to the section
2013 credit in a simultaneous death situation.” We indicated
that the surviving spouse’s interest was “too ephemeral to be
accorded value”. Id. at 729. Likewise, the Court of Appeals for
the Fifth Circuit ruled in Estate of Carter v. United States,
supra at 64, that an interest “passed between persons dying in a
common disaster has no value and thus that the taxpayer is
entitled to no credit.” The court once again emphasized that
“‘recognized valuation principles’” in section 20.2013-4(a),
Estate Tax Regs., “does not refer exclusively to the actuarial
tables” and stated that “The paradigm ‘unusual circumstance’ in
which mortality tables have not been employed is the simultaneous
death of the transferor and transferee.” Id. at 66 & n.6, 67.
IV. Interpretation and Application
Given the foregoing authority, we first consider whether the
principles developed in simultaneous death situations arising
prior to the enactment of section 7520 in 1988, see Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3342, retain their validity under the current statutory and
regulatory regime. If so, we must then decide whether the case
at bar is to be treated as a simultaneous death situation.
- 13 -
The regulations issued under section 2013 have been amended
to reflect section 7520’s enactment, yet they continue to
expressly authorize use of “recognized valuation principles” in
valuing life estates. Sec. 20.2013-4(a), Estate Tax Regs. They
similarly have retained the nonimperative term “see” to cite
provisions dealing with actuarial tables as an example of such
principles. Id. Furthermore, one of the provisions so cited is
section 20.7520-3, Estate Tax Regs., which enumerates exceptions
to use of actuarial tables. Section 20.7520-3, Estate Tax Regs.,
in turn, was promulgated under the explicit statutory grant of
authority in section 7520(b), stating that the section shall not
apply for purposes of “any other provision specified in
regulations.” Section 20.7520-3(a)(9), Estate Tax Regs., then
likewise specifies that section 7520 shall not apply for purposes
of “Any other sections of the Internal Revenue Code to the extent
provided by the Internal Revenue Service in revenue rulings or
revenue procedures.” As effective in 1994, Rev. Rul. 80-80,
1980-1 C.B. 194, precluded use of valuation tables where death
was clearly imminent. We observe that such would frequently be
the case in the throes or aftermath of an airplane crash.
We also reject the estates’ contentions that, in order for
an exception to fall within the terms of section 7520(b) and
section 20.7520-3(a)(9), Estate Tax Regs., the Commissioner is
required in all instances to specifically designate in the
- 14 -
regulation, revenue ruling, or revenue procedure the particular
section for purposes of which section 7520 does not apply. We do
not believe that the relevant language must be read so narrowly,
as it is possible to indicate that valuation tables are
inapplicable for purposes of various Internal Revenue Code
sections in a given set of circumstances by enunciating general
rules, without exhaustively listing such sections by number.
After all, legislative history regarding section 7520 states that
“the provision does not apply to interests valued with respect to
qualified plans or in other situations specified in Treasury
regulations.” H. Conf. Rept. 100-1104 (Vol. II), at 113 (1988),
1988-3 C.B. 603.
Moreover, administrative rulings and case law repeatedly
rejecting taxpayers’ attempts to apply actuarial tables in the
context of common accidents and section 2013 credits existed at
the time section 7520 was enacted. In light of the facially
manifest intent in section 7520(b) that exceptions to the
statute’s application be permitted, we have no basis for
concluding that Congress meant to overrule this administrative
and judicial precedent. We are satisfied that the principles
therein remain valid, and we find the estates’ efforts to avoid
their import through reliance on Estate of McLendon v.
- 15 -
Commissioner, 135 F.3d 1017 (5th Cir. 1998), revg. and remanding
T.C. Memo. 1996-307, and section 20.7520-4, Estate Tax Regs., to
be misplaced.
The decedent in Estate of McLendon v. Commissioner, supra at
1018-1020, after having been diagnosed with cancer, made a
transfer of property in trust and received in return an annuity
based on the actuarial tables for an individual of his age. He
died approximately 6 months later, and the Commissioner
determined that the transferred property was to be included in
his estate under section 2036(a) as a transfer not for adequate
and full consideration. See id. at 1020-1021. The Court of
Appeals for the Fifth Circuit held that the decedent was entitled
to follow Rev. Rul. 80-80, 1980-1 C.B. 194, and concluded, as a
factual matter, that his death was not clearly imminent at the
time of the transfer. See id. at 1023, 1025. Use of actuarial
tables was accordingly deemed proper. See id.
The estates quote the following language from Estate of
McLendon v. Commissioner, supra at 1025, to support their
reliance on the transitional rules of section 20.7520-4(a),
Estate Tax Regs.: “Where the Commissioner has specifically
approved a valuation methodology, like the actuarial tables, in
his own revenue ruling, he will not be heard to fault a taxpayer
for taking advantage of the tax minimization opportunities
inherent therein.”
- 16 -
As previously indicated, section 20.7520-4(a), Estate Tax
Regs., states that, if the relevant valuation date is after April
30, 1989, and before June 10, 1994, executors may rely on Notice
89-24, 1989-1 C.B. 660, and Notice 89-60, 1989-1 C.B. 700, in
valuing transferred interests. However, in attempting to
analogize their use of these Notices to the reliance on Rev. Rul.
80-80, 1980-1 C.B. 194, addressed in Estate of McLendon v.
Commissioner, supra, the estates have failed to recognize a
critical distinction. Neither the regulation nor the referenced
Notices purport to deal with the substantive question of whether
actuarial tables are properly applied in the first instance. In
fact, Notice 89-24, 1989-1 C.B. 660, recites only that
“Generally, under section 7520, the value of an annuity, interest
for life or for a term of years, or remainder or reversionary
interest is determined under new tables that are to be prescribed
by the Secretary.” The regulation and Notices merely authorize
executors to utilize a particular set of figures and formulas,
different from those promulgated in the final regulations, in
performing the actuarial computation. They do not provide any
standards regarding whether use of actuarial tables is the
appropriate valuation methodology. Other administrative and
judicial rulings in place at the time the Notices were issued
dealt with this question, and the estates are not entitled to
ignore the principles established therein.
- 17 -
Furthermore, in comparing Estate of McLendon v.
Commissioner, supra, to the instant section 2013 case, we note
that the decision is not directly on point and makes no attempt
to distinguish or overrule the earlier decision by the Court of
Appeals for the Fifth Circuit in Estate of Carter v. United
States, 921 F.2d 63 (5th Cir. 1991), which specifically analyzed
availability of the section 2013 credit in the context of
simultaneous deaths. Hence, Estate of McLendon v. Commissioner,
supra, is inapposite and does not alter our conclusion that the
administrative and judicial rulings addressing the relationship
between common accidents and the section 2013 credit remain
viable.
We therefore turn to the question of whether the matter
before us is to be treated as a simultaneous death situation.
The estates oppose any assumption that the Harrisons died
simultaneously on the grounds that no facts establish they were
victims of a common disaster. We, however, are satisfied that
this case is sufficiently analogous to a simultaneous death
scenario to render applicable principles related thereto.
As indicated above, an underlying rationale for deeming
valueless life estates transferred upon simultaneous deaths is
that a willing buyer with knowledge of all relevant facts would
pay nothing for the interest. Here such a buyer would be aware
either of an airplane crash and consequent near simultaneous
- 18 -
deaths or, at minimum, of some misfortune that left one or both
spouses stranded in an area apparently so remote that not even a
possible crash site was found for many months. In both
scenarios, we believe that a buyer so informed would have
realized the high probability that any survival would be brief
and, accordingly, would have declined to pay anything for the
life estates at issue.
Moreover, the record before us reflects probate orders and
death registrations presuming identical April 1, 1994, dates of
death and finding it “more probable than not” that the Harrisons
died as a result of an aircraft crash en route to their
destination. In absence of any evidence that might suggest a
period of survival by either spouse, we find it incongruous to
accept the presumed April 1 dates of death for all other estate
tax purposes while at the same time rejecting the rationale
underlying such presumptions.
We hold that the Harrisons’ reciprocal life estates are not
appropriately valued on the basis of actuarial tables but instead
must be deemed without value. Consequently, the estates are not
entitled to credit for tax on prior transfers under section 2013.
To reflect the foregoing,
Decision will be entered
under Rule 155.