Roy v. Commissioner , 54 T.C. 1317 ( 1970 )

Estate of Dwight B. Roy, Jr., the Connecticut Bank and Trust Company and Mary C. Roy, Executors, Petitioners v. Commissioner of Internal Revenue, Respondent

Roy v. Commissioner

Docket No. 542-69

United States Tax Court

54 T.C. 1317; 1970 U.S. Tax Ct. LEXIS 112;

June 18, 1970, Filed

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">*112

Decision will be entered under Rule 50.

The decedent in transferring certain property in trust for his father retained a reversionary interest. The state of the decedent's health immediately prior to his death indicated an exceedingly short life expectancy, which if considered would bring his reversionary interest below 5 percent for purposes of sec. 2037(a)(2), I.R.C. 1954. Held, the value of the reversionary interest for purposes of sec. 2037(a)(2) is to be determined by the applicable mortality tables; the decedent's state of health must be disregarded.

Sidney D. Pinney, Jr., for the petitioner.

Rudolph J. Korbel, for the respondent.

Sterrett, Judge.

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STERRETT

">*1317 Respondent determined a deficiency in the Federal estate tax of the Estate of Dwight B. Roy, Jr., in the amount of $ 8,430.56. Due to the concessions of the parties the sole issue remaining for our decision is whether Dwight B. Roy, Jr., upon transferring certain property in trust retained a reversionary interest, the value of which, immediately prior to his death exceeded 5 percent of the value of the property transferred; thereby, necessitating inclusion of said property in his gross estate under section 2037 of the Internal Revenue Code of 1954. ">*113 ¹ Specifically, the question presented is whether ">*1318 in valuing the reversionary interest extrinsic facts may be considered or whether we are bound to use table 38 of United States Life Tables and Actuarial Tables 1939-1941 as prescribed by section 20.2031-7, Estate Tax Regs.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.

Dwight B. Roy, Jr. (hereinafter sometimes referred to as the decedent), was born on May 8, 1918, in New York, N.Y., and died, testate, on April 28, 1965, a resident of Wethersfield, Conn.

The Connecticut Bank & Trust Co., coexecutor, had its principal office in Hartford, Conn., at the time of the filing of the petition herein. Mary C. Roy, coexecutrix, resided at Wethersfield, Conn., at the time of the filing of the petition herein. Letters of administration were granted on May 20, 1965, by the Probate Court, Hartford, Conn. The coexecutors are the petitioners herein. On October 27, 1959, the decedent and his brother, Richard M. Roy (hereinafter referred ">*114 to as Richard), as grantors, entered into an irrevocable agreement of trust. The trustees were the decedent, Richard, and the decedent's father, D. Benjamin Roy (hereinafter referred to as Benjamin).

Under the terms of the trust, net income was to be payable to Benjamin during his lifetime, with any undistributed income payable to his estate upon his death. After Benjamin's death the trust estate was to be distributed equally, and free of the trust, to the decedent and to Richard; at this time the trust was to terminate. If either brother predeceased Benjamin, his share was to be administered for the benefit of his family.

At the decedent's death the trust estate comprised the following assets, having at the alternate valuation date ² the values indicated:

Land and building at 75 Christian Lane, New Britain, Conn	$ 69,000
$ 200,000 U.S. Treasury bonds	186,250
500 shares, Superior Metal Products, Inc	1 7,500
Total	262,750

In 1952, in connection with a routine physical examination for a life insurance policy, it was discovered that the decedent had chronic glomerulonephritis, ">*115 a form of Bright's disease which is an inflammatory disease of the kidney. As is frequently the case with chronic nephritis, decedent remained clinically well for approximately 11 years. The ">*1319 only indication of the disease was the presence of albumin in decedent's urine.

In 1963 the decedent's physician observed a gradual rise in blood pressure, which is one of the sequelae of chronic nephritis. In November of 1963 decedent's physician observed that decedent's blood pressure was markedly increased. The decedent appeared chronically ill. He had facial edema, swelling of his eyes and face, and swelling of his ankles and feet. He complained of fatigue and drowsiness. A blood test indicated renal failure.

Decedent's condition steadily worsened. He required 2-hour rest periods during the afternoons. His kidneys were unable to concentrate urine and in order to eliminate nitrogenous waste he drank large quantities of fluid. His physician attempted to control his blood pressure with medication.

On March 16, 1965, decedent's condition had worsened; his blood pressure was high. He was vomiting frequently, unrelated to meals, due to uremia and hypertension. At this time hospitalization ">*116 was advised and on March 19, 1965, decedent was admitted to Hartford Hospital. On March 16, 1965, the decedent's life expectancy was no more than 3 months.

On March 20, 1965, the decedent underwent peritoneal dialysis, which entailed the use of an artificial kidney machine designed to remove waste products from the patient's blood. However, the treatment was not successful due to technical difficulties. On March 23, 1965, hemodialysis was attempted and while there was marked improvement in the decedent's clinical condition, the effect was short-lived. After this attempt the kidney specialists at Hartford Hospital determined that further dialysis would be to no avail.

On or about April 9, 1965, the decedent developed acute pericarditis, a cardiac complication of uremia which is often terminal. In decedent's case this was transient, lasting for several days.

Prior to April 15, 1965, the decedent became confused, restless, difficult to manage and required large amounts of sedation. He developed urinary retention and had to be catheterized. His uremia increased and he developed congestive heart failure.

At this time he developed parotitis. This, though not specifically connected with ">*117 uremia, is an occasional preterminal event with seriously ill persons. In addition he ran a high temperature.

As of April 15, 1965, the decedent's life expectancy was limited to 2 days. April 15, 1965, was his 27th day in the hospital and on his 41st day, April 28, 1965, he died of uremia.

The decedent's father, Benjamin, was born on July 1, 1890, and died on April 6, 1969. On January 18, 1965, Benjamin was in good physical condition for a man of 75.

">*1320 During the 1950's Benjamin had ulcer symptoms, but these abated after his retirement. Beginning in 1956 he had two brief episodes of cerebral vasospasm which caused him to lose the function of his right hand and his ability to speak. This was transient and within a day or two he made a complete recovery.

In 1960 Benjamin had a urinary obstruction. To correct this condition he had a transurethral resection, a relatively minor operation, from which he made a complete recovery.

A man of 75, in good health, would normally have a life expectancy of about 8 years. Due to his somewhat elevated blood pressure and the two episodes of cerebral spasm, Benjamin's life expectancy as of April 15, 1965, was approximately 4 years.

On July 28, 1966, ">*118 the petitioners filed a Federal estate tax return on behalf of the decedent's estate. In the said return petitioners stated that in view of the decedent's limited, actual life expectancy immediately prior to his death his retained reversionary interest in the trust estate was less than 5 percent of the value of the "entire property." For this reason petitioners included no part of the trust estate in the decedent's gross estate.

Respondent, by his statutory notice of deficiency, expressed his determination that one-half of the value of the trust corpus as of the alternate valuation date was includable in decedent's gross estate under section 2037.

OPINION

Section 2037(a) provides for inclusion in the decedent's gross estate of property which the decedent has transferred if two conditions are met:

(1) possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and

(2) the decedent has retained a reversionary interest in the property * * * and the value of such reversionary interest immediately before the death of the decedent exceeds 5 percent of the value of such property.

The question presented herein concerns only the second ">*119 of these conditions, more specifically, whether the reversion retained by the decedent exceeded, immediately prior to his death, 5 percent of the value of the property transferred. The parties agree with respect to the applicability of the first condition set forth in paragraph (1) above.

The facts involved are not complex and they are largely uncontested. On October 27, 1959, the decedent, who was then approximately 41 years old, and his brother transferred certain property in trust. Decedent's father, Benjamin, who was then approximately 69 years ">*1321 of age, was to have a life interest in the trust's net income. ³ Upon Benjamin's death the trust corpus was to revert to the grantors, if living. If either grantor predeceased Benjamin his share of the trust corpus was to be administered for the benefit of his family.

Although ">*120 the decedent was in relatively good health at the inception of the trust, in 1952 it was discovered that he was afflicted with glomerulonephritis. He, nonetheless, remained clinically well for approximately 11 years. In November of 1963 his condition began to steadily worsen until he succumbed to uremia on April 28, 1965. Benjamin did not die until approximately 4 years later, on April 6, 1969.

The controversy at issue arises because just prior to the decedent's death the state of his health indicated a severely limited, actual life expectancy, while the respondent's mortality tables indicate an expectancy for a man of 47, in normal health, of considerably longer duration. If we consider the decedent's actual health in valuing his reversionary interest, that interest would have been less than 5 percent. If we are bound to consider only the average life expectancy of those in normal health as reflected in the mortality tables, his interest would have been approximately 70 percent ^4">*121 as the respondent contends. The issue is thus narrowed to whether the decedent's personal life expectancy may be considered for purposes of valuing his reversionary interest under section 2037(a)(2).

Section 2037(b) prescribes the methods of evaluating reversionary interest as follows:

The value of a reversionary interest immediately before the death of the decedent shall be determined (without regard to the fact of the decedent's death) by usual methods of valuation, including the use of tables of mortality and actuarial principles, under regulations prescribed by the Secretary or his delegate.

Since it is the method of evaluation that is at issue here, construction of the language quoted above will be determinative.

The predecessor of section 2037(a)(2) and (b) was enacted as section 811(c)(2) of the Internal Revenue Code of 1939 by section 8 of the Technical Changes Act of 1949. ^5">*122 Prior to the enactment of this section, section 811(c)(1)(C) of the 1939 Code simply provided for the inclusion in the decedent's gross estate of interests that the decedent had transferred which were "intended to take effect in possession or enjoyment at or after his death."

">*1322 Consequently, in Estate of Spiegel v. Commissioner, 335 U.S. 701">335 U.S. 701 (1949), the Supreme Court required inclusion of a trust of approximately $ 1,140,000 due to the retention of a $ 70 reverter. See 335 U.S. 701">Estate of Spiegel v. Commissioner, supra at 727 (Burton, J., dissenting). It was the congressional reaction to this decision which provided the impetus for the enactment of section 8 of the Technical Changes Act of 1949. S. Rept. No. 831, 81st Cong., 1st Sess., p. 8.

The circumstances surrounding this enactment indicate Congress' intention to reverse the holding in 335 U.S. 701">Estate of Spiegel v. Commissioner, supra, by the incorporation of a de minimis standard determinable with some mathematical precision. Certainty is of benefit to taxpayer and Internal Revenue Service alike.

As the statute obviously recognizes, no single method of valuation of a reversion can be prescribed in view of the large variety of reversionary interests. ⁶ There must necessarily be some flexibility in the means used to make the appraisal. Thus, it is that mortality tables would be of little use in valuing an interest the receipt of which is ">*123 contingent upon someone dying without issue. Yet there are, it is equally obvious, certain reversionary interests where the use of a mortality table is the fairest and most equitable method to be used.

In the case at bar petitioner would have us ignore the life expectancy as reflected in the mortality tables and use, in lieu thereof, the actual life expectancy of the decedent here involved. Admittedly such a position has appeal and ignites a sympathetic reaction under the facts here present. ⁷ Further, the position is ably argued in the briefs.

Yet we feel its acceptance would emasculate section 2037 thereby ">*124 vitiating the congressional intent to bring certainty to the law through the enactment of a de minimis provision. It would effectively write the words "including the use of tables of mortality" out of the statute. Surely Congress had certain reversionary interests in mind when it prescribed mortality tables as a means of evaluation. It is difficult to conceive of a "section 2037 reversion" where the use of such tables would be more appropriate than the one before us. Thus, to deny the applicability of the "tables of mortality" language here would be to ignore what appears to be the specific mandate of Congress.

Should we accept the petitioner's arguments herein, section 2037 would not apply to comparable reversionary interests in any instance where the decedent was terminally ill prior the death. In cases of that sort a drastically foreshortened actual life expectancy would bring ">*1323 any retained reversion below the 5-percent level. Section 2037 would then be applicable only in cases of sudden death; e.g., when a healthy individual is killed in an accident or when an ostensibly healthy individual dies as the result of a sudden coronary. We do not feel it reasonable to assume that ">*125 Congress intended section 2037 to be limited to such narrow circumstances. Nor can we believe that Congress intended the mode of death, lingering or sudden, to be determinative of estate tax consequence. ⁸

Section 2037(b) states that the value of a retained reversionary interest "shall be determined (without regard to the fact of the decedent's death) * * *." If we were in the future to consider the manner of cause of a decedent's death we would, it seems to us, be in violation of this requirement.

By adopting the above construction of section 2037, as contrasted with petitioner's, we have stayed within the framework of the rule of statutory construction set down by the Supreme Court in Sunshine Coal Co. v. Adkins, 310 U.S. 381">310 U.S. 381, 310 U.S. 381">392 (1940), wherein it was said that an "alternative [which would seriously impair the effectiveness of a statue] will not be taken where a construction is possible which will preserve the vitality of the Act and the utility of the language in question."

It follows from the foregoing that we believe the Commissioner was merely following the edict of Congress when, in section 20.2037-1(c)(3) of the ">*126 Estate Tax Regulations, he invoked the applicable provisions of section 20.2031-7, Estate Tax Regs., to limit the valuation method to be used with respect to reversions such as the one at issue to that contained in the mortality tables.

Section 20.2037-1(c)(3), Estate Tax Regs., provides in applicable part as follows:

(3) For purposes of this section, the value of the decedent's reversionary interest is computed as of the moment immediately before his death, * * * and without regard to the fact of the decedent's death. The value is ascertained in accordance with recognized valuation principles for determining the value for estate tax purposes of future or conditional interests in property. * * * For example, if the decedent's reversionary interest was subject to an outstanding life estate in his wife, his interest is valued according to the actuarial rules set forth in § 20.2031-7.

Section 20.2031-7(a)(2), Estate Tax Regs., in turn, reads in part:

(2) The present value of an annuity, life estate, remainder or reversion determined under this section which is dependent on the continuation or termination of the life of one person is computed by the use of Table I in paragraph (f) of this ">*127 section. * * * If the interest to be valued is dependent upon more than one life or there is a term certain concurrent with one or more lives, see paragraph (e) of this section. * * *

">*1324 Paragraph (e) referred to in subparagraph (2) above relates to the actuarial computations to be used.

We will not overrule a regulation "except for weighty reasons [citation omitted]." Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 333 U.S. 496">501 (1948). And legislative regulations may, indeed, be entitled to even greater weight. Ruud Manufacturing Co., 10 T.C. 14">10 T.C. 14, 10 T.C. 14">17 (1948). In the instant case the respondent's regulations are clearly commensurate with the legislative purpose of bringing a degree of certainty to at least this portion of our tax laws. It certainly cannot be said that the regulations reflect an unreasonable interpretation of the statute. Bingler v. Johnson, 394 U.S. 741">394 U.S. 741 (1969).

At trial one of the petitioner's witnesses stated that he was able to estimate decedent's life expectancy some 6 weeks and then again some 13 days before his actual death without reference to the fact of death. We attach little weight to such testimony given with respect to an individual clearly in extremis, and ">*128 in view of the statutory language we find petitioner's cause deficient on this ground in addition to its misinterpretation of the legislative intent.

In support of its arguments petitioner, on brief, cites many cases in which this Court has held that mortality tables are merely evidentiary and will not adhered to when more realistic or reliable measures are available. ⁹ However, these cases are distinguishable from the one at bar. They concern the valuation of a trust corpus for marital deduction purposes, a charitable remainder, a life estate, and certain annuities. It is true that in these cases we turned to the state of health of a particular individual; however, in no one of them was a statute rendered ineffectual by our so doing. In addition we were there concerned with the valuation of property or interests in property and not with the application of an exclusionary, de minimis rule of thumb.

In ">*129 our research we have found but one decided case which treats the issue at bar. ¹⁰Hall v. United States, 353 F.2d 500 (C.A. 7, 1965), is indistinguishable from the instant case. However, we respectfully decline to follow Hall for the reasons stated above. See Stephens & Maxfield, Federal Estate and Gift Taxes 80 (2d ed. 1967); 54 Calif. L. Rev. 2180 (1966); 66 Colo. L. Rev. 797 (1966). The Hall case was decided by the Court of Appeals for the Seventh Circuit; an appeal by the within petitioner would normally be venued in the Second Circuit under section 7482(b)(1)(A). Therefore, due to the fact that the Court ">*1325 of Appeals for the Second Circuit has not yet ruled upon the issue we are not constrained to follow Hall. Arthur L. Lawrence, 27 T.C. 713">27 T.C. 713, 27 T.C. 713">717 (1957), reversed without discussion of this point 258 F.2d 562 (C.A. 9, 1958). ^11">*130

To reflect the foregoing and the concessions of the parties,

Decision will be entered under Rule 50.

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Footnotes

• 1. All section references are to the Internal Revenue Code of 1954 unless otherwise designated.↩

• 2. Petitioners elected the alternate valuation date pursuant to sec. 2032, I.R.C. 1954↩.

• 1. Based on the stipulated value of $ 15 per share.↩

• 3. We note that at the time of the transfer in trust the decedent was in clinically good health. If one were to view the decedent's life expectancy as of 1959 the facts would seem to indicate that the value of the transferred interest would eventually be included in the decedent's gross estate under either sec. 2037↩ or, if he should survive his father, under 2033.

• 4. Table 38 of United States Life Tables 1939-1941, published by the U.S. Department of Commerce, Bureau of Census. Sec. 20.2031-7(e), Estate Tax Regs.

• 5. Although the Technical Changes Act provision was only applicable to pre-Oct. 8, 1949, transfers, its operation was extended in 1954 with the enactment of sec. 2037↩.

• 6. The predecessor of this language was also contained in the Technical Changes Act of 1949. The applicable committee reports state that usual methods of valuation are to be used and, "The rule of Robinette v. Helvering, 318 U.S. 184">318 U.S. 184↩, under which a reversionary interest not having an ascertainable value under recognized valuation principles is considered to have a value of zero, is to apply." See H. Rept. No. 1412, 81st Cong., 1st Sess., p. 7. However, see S. Rept. No. 1622, 83d Cong., 2d Sess., p. 469.

• 7. However, we must be mindful of the old adage that "hard cases make bad law."↩

• 8. In this connection, see 54 Calif. L. Rev. 2180, 2186↩ (1966).

• 9. See, e.g., Estate of John P. Hoelzel, 28 T.C. 384">28 T.C. 384 (1957); Estate of Nicholas Murray Butler, 18 T.C. 914">18 T.C. 914 (1952); Huntington National Bank, 13 T.C. 760">13 T.C. 760 (1949); Estate of Nellie H. Jennings, 10 T.C. 323">10 T.C. 323 (1948); Estate of John Halliday Denbigh, 7 T.C. 387">7 T.C. 387 (1946). See also Rev. Rul. 66-307, 1966-2 C.B. 429↩.

• 10. Mears v.United States, an unreported case ( D. Mass. 1961, 8 A.F.T.R.2d (RIA) 6013↩, 61-2U.S.T.C. par. 12,021), relies on mortality tables without mention of actual life expectancy. From this short opinion it is not possible to determine whether the issue was raised by the parties.

• 11. Although Lawrence was concerned with reconsideration of issues after reversal by a Court of Appeals we think its rationale applies here. Our recent opinion in Jack E. Golsen, 54 T.C. 742">54 T.C. 742 (1970), does not affect the validity of Lawrence↩ in this regard since the Second Circuit has not had the issue herein before it.