VALUATION: WHEN CAN SECTION 7520 BE AVOIDED?

The Fifth Circuit in Taylor v. United States, ___F.3d___, 2008 WL 57081 (5th Cir. 2008) faced the issue of how to value payments made pursuant to a structured settlement arising from tort claims, which payments could not be anticipated, sold, assigned or encumbered. The issue is whether the annuities should have been valued under the customary willing buyer-willing seller test (presumably at a discount because of the restrictions on transferability), or using the Section 7520 tables. The estate had argued that the provisions of Reg. Section 20.7520-3(b)(1)(i) of a “restricted beneficial intent” meant that the Section 7520 approach should not be used. The cited regulations preclude the use of section 7520 tables for “an annuity…that is subject to any contingency power, or restriction…” The court explained that the use of the tables did not produce a result so unrealistic that the table should be ignored. 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.” Gribauskas, 116 T.C. at 163-64.

The Fifth Circuit relied on its earlier opinion in Cook v. United States, 349 F.3d 850 (5th Cir. 2003) affirming T. C. Memo 2001-170 which valued lottery payments as suitable for valuation by using the Section 7520 approach rather than general valuation principles which remains the Fifth Circuit’s view.

The Ninth Circuit (Estate of Shackleford v. United States, 262 F.3d 1028 (9th Cir. 2001)), and the Second Circuit (Estate of Gribauskas, 342 F.3d 85 (2nd Circuit, 2003) are to the contrary. The result in Taylor does not seem unreasonable because the factor accounting for the disparity between the expert valuation testimony and the table valuation is not properly applied to the lottery winnings. After all, non-marketability of a private annuity is an assumption underlying the section 7520 table.

From a planning point of view, until the Supreme Court resolves the conflict in the circuits, any private annuity arrangement should have strong non-assignability clauses.

NONACQUIESCENCE AND FAILURE TO APPEAL

Once again the Internal Revenue Service in AOD 2008-1 announced its nonacquiescence in Herbert V. Kohler, Jr., v. Commissioner, T.C. Memo 2006-152(2006), but did not appeal the adverse result in the Tax Court.

In Kohler, a shareholder died and two months later the corporation reorganized tax-free under § 368 and the new stock received by the shareholder’s estate was subject to transfer restrictions, and a purchase option designed to insure that family members would continue to own all of the stock.

Pursuant to § 2032, the Tax Court held that the new stock received within six months after death, is the stock to be valued. In other words, the court accepted the estate’s argument that (i) the stock should be valued at six months post-death and (ii) that the stock to be valued has the restrictions which depress the value. As the court noted, the regulations (Reg Sec. 20.2032-1(c)(1)) provide that a tax-free organization is not a disposition. 

If the Service disagrees with a decision, it has a simple remedy: Appeal. Sound tax policy is not found here. 


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