Opinion ID: 1200224
Heading Depth: 3
Heading Rank: 2

Heading: The Law for Estates with pre-December 14, 1995, Valuations

Text: This Court in 2003 addressed the proper method for valuing an estate's interest in non-transferable lottery payments; the right to the payments was determined to be a private annuity that could be valued under the tables. Cook, 349 F.3d at 855. The death of the Cook decedent occurred prior to the 1995 effective date of the regulation that we will later analyze. The Cook estate argued that the annuity tables did not account for the lowered present value of the right to these payments caused by marketability restrictions; thus, departure from the tables was necessary to avoid an unreasonable result. Id. at 855-57. The annuity-table valuation of the right to the payments exceeded by almost four million dollars the lowest valuation by an expert, and exceeded the highest by over two and a half million dollars. The court found that the disparity between the value reached under the tables and the valuation by experts was attributable to a reason that was irrelevant to the valuation, namely, the non-marketability of the right to receive the lottery payments. Id. at 856. Therefore, Cook held that departure from the tables was not necessary because the non-marketability of a private annuity is an assumption underlying the annuity tables. Id. Marketability is important to the valuation of an asset when capital appreciation is an element of value or when the value would otherwise be difficult to ascertain. Other kinds of private annuities are valued under the tables despite being non-marketable. . . . [N]on-marketability does not alter or jeopardize the essential entitlement to a stream of fixed payments. Id. at 857 (citations and quotation marks omitted). Cook analyzed two other circuits' precedents that recognized a non-marketability exception to the annuity tables, then rejected their rationale and holdings. Id. at 855-57 (citing Estate of Gribauskas v. Comm'r, 342 F.3d 85 (2d Cir.2003); Shackleford v. United States, 262 F.3d 1028 (9th Cir.2001)). Cook is important here for two reasons. [4] First, the opinion is this Circuit's definitive interpretation of the law governing departure from the annuity tables as it existed prior to December 13, 1995, the effective date of Section 20.7520-3(b). As Cook noted, courts had departed from the valuation tables under the unrealistic and unreasonable standard only when individual cases involved facts substantially at variance with factual assumptions underlying the tables. 349 F.3d at 854-55. Even courts that have recognized a non-marketability exception to the tables agree with Cook's interpretation of prior case law. See e.g., Gribauskas, 342 F.3d at 88 (The Commissioner is correct in characterizing the case law up to this point  excluding, of course, Shackleford  as authorizing departures only when the actual facts are inconsistent with the assumptions underlying the tables.). Prior to Shackleford and Gribauskas, the unrealistic and unreasonable exception was a narrow one. Its application was confined to a limited set of circumstances, such as cases where the actual rate of return was lower than the assumed rate of return in the tables, the death of the measuring life was imminent due to a terminal illness, or the income stream would be exhausted before expiration of the income term. Cook, 349 F.3d at 855; Gribauskas, 342 F.3d at 88. Second, Cook presented this Court with an opportunity to recognize a new, non-marketability exception to the annuity tables. Such an extension of the law was rejected. Cook found the Second and Ninth Circuits' rationale unpersuasive in the context of valuing a private annuity: We agree that the right to alienate is necessary to value a capital asset; however, we think it unreasonable to apply a non-marketability discount when the asset to be valued is the right, independent of market forces, to receive a certain amount of money annually for a certain term. Cook, 349 F.3d at 856. The Court refused to depart from the longstanding trend of requiring valuation under the tables unless a case involved facts that disproved assumptions underlying those tables. Id.