Florida Tax Litigation Lawyer & Attorney : Fox Rothschild : Serving West Palm Beach, Jacksonville, Miami

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.

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       The most recent appellate case involving family limited partnerships, Estate of Bigelow v. Commissioner, 503 F.3d 955, 2007 WL 2684526 (9th Cir. 2007) deserves careful study for the discussion of the "bona-fide sale for adequate and full consideration," exception to section 2036.

       The Ninth Circuit held that if the consideration exception applies, section 2036 does not apply.  In determining the applicability of the exception, the inherent reduction (such as arises when an investor transfers a stock portfolio to a hedge fund in exchange for an interest therein) of the value of the property transferred cannot per se disqualify the property from failing the 2036(a) exception.  But, the court continues on to state:

"The validity of the adequate and full consideration prong cannot be gauged independently of the non-tax-related business purposes involved in making the bona fide transfer inquiry."

         Estate planners should not assume that the inquiry of subjective motive is necessarily required in measuring the adequacy of the consideration.  In Bongard, 124 T.C. 95 (2005), Judge Halpern, in a concurring opinion, expressed his disagreement with the majority's interpretation of the bona-fide sale exception, as the Judge stated:"

"Therefore, to establish that the transfers were for full consideration, petitioner must, for each transfer, establish that the value of the property transferred by decedent did not exceed the cash value of the property received by him. Id. By the explicit terms of section 25, 2512-8, Gift Tax Regs., the resulting inquiry is limited to an economic calculus, and there is no room for any inquiry as to the transferor's (decedent's) state of mind.  Yet the majority makes his state of mind critical..."

         A more recent Tax Court decision, Estate of Rector, T.C. Memo 2007 367 (2007) involved the creation of an FLP, by a 92-year old woman who was living in a nursing home.  She was the only general partner and her revocable trust held the remaining 98% interest as a limited partner.  Before death, the decedent transferred by a gift a 30% interest of FLP.  Judge Laro had no difficulty in concluding that section 2036 applied and no discount was available.  See also, Estate of Hilde E. Erickson, 2007 T.C. Memo 107 (2007).

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