Estate of Andrew P. Carter, Through Its Dative Testamentaryexecutor, Eugene G. Taggert, Etc., Plaintiff-appellee, v. United States of America, Defendant-appellant, 921 F.2d 63 (5th Cir. 1991)

In this case, we must determine how to value, for purposes of the estate tax credit available under 26 U.S.C. § 2013, a usufruct¹  transferred between persons killed in a common disaster. The taxpayer asserts that the usufruct should be valued in accordance with actuarial tables reflecting the expected lifespan of the transferee. Emphasizing the imminence of the transferee's death at the time he received the usufruct, the government contends that the property interest was worthless. We conclude that a usufruct passed between persons dying in a common disaster has no value and thus that the taxpayer is entitled to no credit. Accordingly, the district court's judgment is reversed.

An automobile accident claimed the lives of Andrew Carter and his wife Josephine. Because no evidence indicated who had died first or whether their deaths were simultaneous, a presumption arose under Louisiana law that Mrs. Carter died first.²  Mrs. Carter's will granted her estate in usufruct to Mr. Carter and in naked ownership³  to the couple's surviving children. Because of the temporal proximity of their deaths, the period of Mr. Carter's usufruct was of exceedingly short duration--if it in fact ever existed.

After the executor of Mr. Carter's estate paid the federal estate tax, he filed a claim for a refund, alleging entitlement to a "tax on prior transfer" (hereinafter TPT) credit under section 2013 of the Internal Revenue Code of 1986, 26 U.S.C. § 2013 (1989). Section 2013(a) reduces a decedent's estate tax by "all or 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 ... who died within 10 years before, or within 2 years after, the decedent's death." The TPT credit "bears 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...." Id. Sec. 2013(b).

The credit amount is thus calculated according to the following formula:

 TPT credit = value of property transferred ------------------- ----------------------------- transferor tax paid taxable estate of transferor

Applying the formula to our facts, the TPT credit bears the same ratio to the tax paid by Mrs. Carter's estate as the value of the usufruct bears to the value of Mrs. Carter's taxable estate.

The value of the property transferred (here, the usufruct) is thus critical in calculating the TPT credit. The taxpayer urged the district court to consult the actuarial tables contained in the applicable Internal Revenue Service regulations and accordingly to conclude that the value of the usufruct transferred from Mrs. Carter to Mr. Carter was approximately $1 million. Inserting this amount into the above formula would yield a credit of $292,450.56.

In contrast, the government asserted that when a transferor and transferee die in a common disaster, a usufruct passing between them is valueless. According to the formula, the TPT credit thus would be zero.

Concluding that "no one knew or could have known whether Mr. Carter would survive or not, or how long" at the time he received the usufruct, the court consulted the actuarial tables to value the transferred property.⁴  As a consequence, the court granted the taxpayer's motion for summary judgment and awarded the requested refund.

In reviewing the disposition of a summary judgment motion, we apply the same Fed. R. Civ. P. 56(c) test as did the district court, without deference to its ultimate conclusion. Phillips Oil Co. v. OKC Corp., 812 F.2d 265, 272 (5th Cir. 1987), cert. denied, 484 U.S. 851, 108 S. Ct. 152, 98 L. Ed. 2d 107 (1988). Rule 56(c) permits summary judgment where there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. The parties stipulated to all relevant facts, and the court, interpreting the pertinent provisions of the code and their accompanying regulations, concluded that the taxpayer was entitled to judgment as a matter of law. We review de novo the district court's judgment.

Section 2013(d) states that " [t]he value of property transferred to the decedent shall be the value used for the purpose of determining the Federal estate tax liability of the estate of the transferor...." * The accompanying regulations reiterate this language. See 26 C.F.R. Sec. 20.2013-4(a) (1988). However, the regulations set up a specific valuation rule for indeterminate interests such as usufructs:

If the decedent received a life estate or remainder or other limited interests in property included in the transferor's gross 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 especially Secs. 20.2031-7 and 20.2031-10).

Id.

Sections 20.2031-7 and 20.2031-10, to which section 20.2013-4(a) refers, contain actuarial tables by which the value of indeterminate interests may be determined. However, section 20.2013-4(a)'s inclusion of the phrase "see especially Secs. 20.2031-7 and 20.2031-10" plainly indicates that "recognized valuation principles" include but are not limited to the use of actuarial tables.⁵  Accordingly, neither the statutory nor regulatory language mandates using the actuarial tables in every case.⁶ 

Unfortunately, this regulation does not identify any "recognized valuation principles" other than the actuarial tables, nor does it indicate when such alternative methods should be used. However, precedents of this court and others indicate that consideration of facts known at the time of the transferor's death (i.e., at the time of the transfer) is a "recognized valuation principle"⁷  and that this case presents a situation in which that method should have been employed by the district court.

For example, in Lion, a case identical in all relevant respects to this one, the Fourth Circuit held that the district court properly considered the simultaneous deaths of the transferor and transferee and concluded that this fact rendered the transferee's life estate worthless for purposes of the TPT credit. 438 F.2d at 62. The court observed that " [w]hile the regulations indicate that ordinarily the value of a life estate is to be determined by the use of actuarial tables, the use of tables is subject to the underlying premise that what is sought to be achieved is value 'as of the date of the transferor's death on the basis of recognized valuation principles.' " Id. at 60 (emphasis in original).

Similarly, in United States v. Provident Trust Co., 291 U.S. 272, 54 S. Ct. 389, 78 L. Ed. 793 (1934), the Court held that in determining the value of a charitable remainder contingent upon the life tenant's not having any issue, the fact that the life tenant had undergone a hysterectomy could be considered. Furthermore, in Miami Beach we held that in determining the value of charitable remainders, "evidence regarding the actual life expectancy of a life tenant" may be considered. 443 F.2d at 119.⁸  Thus, the phrase "recognized valuation principles" includes examination of facts known about the transferee at the time of the transferor's death.

Nonetheless, simply because an alternative valuation principle exists does not necessarily mean that it should be employed in this case. However, relevant caselaw indicates that this approach to valuation may be employed in exceptional situations. For example, in Lion the court observed that "unusual circumstances" have prompted courts to eschew mortality tables in favor of examining known facts when determining the value of indeterminate interests. 438 F.2d at 60.

The Lion court further noted that numerous Tax Court decisions have employed alternative valuation methods "where there is reasonable certainty that use of the tables would violate reason and fact." Id. at 61 (citations omitted). We held similarly in Miami Beach that employing valuation procedures other than actuarial tables should occur in "exceptional cases." 443 F.2d at 120 (citation omitted).

The paradigm "unusual circumstance" in which mortality tables have not been employed is the simultaneous death of the transferor and transferee. In Lion, the court observed that the transferee and transferor died at the same time and held that "the only reasonable conclusion is that [the] life estate was valueless at the instant of its creation and destruction." 438 F.2d at 62. See also Estate of Marks v. Commissioner, 94 T.C. 720 (1990). That same exceptional situation exists in this case, and we agree with the Fourth Circuit's conclusion.

The taxpayer seeks to avoid application of this alternative recognized valuation principle by arguing that it was not "known" at the time of Mrs. Carter's death that Mr. Carter would die. It analogizes this case to Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S. Ct. 291, 73 L. Ed. 647 (1929), in which the Court held that in determining the value of a life estate, the fact that the life tenant died six months after receiving the property should not be considered.

This case is unlike Ithaca Trust. In this case, it was known at the time of the transfer that Mr. Carter was already dead or would soon die. At the moment of Mrs. Carter's death, Mr. Carter's death was not an "uncertain probability," as was the death in Ithaca Trust, where the life tenant died six months after the transfer. In fact, it is only by operation of the fiction established by state law (article 938) that we deem Mr. Carter to have survived Mrs. Carter for a few seconds or minutes. The truth--which will never be known--could just as likely be that he predeceased her or that they died simultaneously.

The taxpayer further contends that policy considerations mandate application of the actuarial tables. It argues that the tables contemplate situations in which the holder of the usufruct dies much sooner than expected and that thus the tables should be applied in all circumstances. Although there is some merit to this argument, it ignores the fact that our task is to interpret the language of the regulation.

Section 20.2013-4(a) demands that we value the usufruct in accordance with "recognized valuation principles"; this language indicates that there are situations in which the value of the interest is calculated not by resort to the tables, but instead according to some other method. Taking the taxpayer's policy argument to its logical conclusion would require our applying the tables in every case, something plainly not contemplated by the regulation.

Here, we opt instead to apply the maxim that certainty should be deemed a "recognized valuation principle." Just as it would be foolish to "predict" yesterday's weather, there is no reason to use uncertain valuation principles--regardless of how sophisticated--to "value" something for which a value in fact already has been indelibly fixed by the course of events.

The taxpayer also argues that applying the tables in all cases would promote the regulatory goals of ease and uniformity. Although this is certainly true, we fail to see how our conclusion undermines those goals. We limit our holding to those situations in which the transferee and transferor of an indeterminate interest such as a usufruct die in a common disaster. Because in this situation it is known with certainty that the transferee will die (or in fact may already have died), there is no need for inquiries into just how much the particular decedent's lifespan varies from the statistical norm, and thus valuation of this variety of property interest will not be unduly complicated.

Because the district court failed to employ the recognized valuation principle appropriate to this case, we REVERSE its judgment and RENDER judgment in the government's favor.