Opinion ID: 3014809
Heading Depth: 3
Heading Rank: 3

Heading: The Commissioner’s lifing arguments

Text: In his appellate briefs, the Commissioner builds on the Tax Court’s findings by arguing that McCarthy’s lapse rate assumptions were flawed in other respects. Specifically, McCarthy only used average rates for contracts of a given size and age, and did not calculate different rates for different kinds of coverage or contract, different premium payment histories, changing sizes, or financial condition of the client group. Capital responds that McCarthy complied with actuarial principles in coming to his conclusions, and that the Commissioner has not shown that McCarthy’s valuations would be different if he took into account the more specific factors that the Commissioner urges. We agree with Capital. McCarthy’s efforts were thorough, and it appears to be undisputed that he followed actuarial standards. The Commissioner has identified some factors that he did not consider, but this alone does not seem to be a reason to reject McCarthy’s lapse rate calculations. As the Tax Court has previously stated, “lapse rates may be determined from a statistical analysis of actual past experience of policies in force at specified intervals of time or from an informed judgment of a person who has had experience in the field.” Union Bankers, 64 T.C. at 816. Simply put, it would be impossible for McCarthy to take into account every factor that might distinguish one contract from another. McCarthy did not classify contracts based on what percentage of individuals in each group was left-handed, but the Commissioner would not be heard to argue that this was a flaw in his methodology. The Commissioner cannot invalidate McCarthy’s methodology simply by pointing to factors that McCarthy neglected; instead, he must also make a reasonable case that such a factor would have changed his conclusions. The Commissioner has not even attempted to do so here, and we see no reason to reject McCarthy’s lifing analysis.