Opinion ID: 1200224
Heading Depth: 3
Heading Rank: 1

Heading: General Estate Tax Principles

Text: The United States imposes a tax on the taxable portions of the estates of all decedents who are citizens or residents. 26 U.S.C. § 2001. A decedent's estate is composed of all property, real or personal, tangible or intangible. 26 U.S.C. § 2031(a). Private annuities, like those payable to Bankston, fall within this definition of a taxable estate. See Treas. Reg. § 20.2039-1(b)(1)(I). Treasury regulations provide that the value of every item of property includible in a decedent's gross estate . . . is its fair market value at the time of the decedent's death. Treas. Reg. § 20.2031-1(b). Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Id. The fair market value of an annuity is generally determined by resort to annuity tables prescribed by the IRS. See 26 U.S.C. § 7520(a); Treas. Reg. § 20.7520-1. These tables provide a factor composed of an interest rate component and a mortality component that is used to determine the present value of an annuity. Treas. Reg. § 20.7520-1. This Court has recognized that [i]n enacting § 7520(a)(1) and requiring valuation by the tables, Congress displayed a preference for convenience and certainty over accuracy in the individual case. Cook v. Comm'r, 349 F.3d 850, 854 (5th Cir.2003). While the tables inevitably lead to departures from true value, whatever that might be, the error costs are perceived as small in the aggregate. Id. The tables provide some measure of certainty and administrative convenience that would be disrupted if every attempt to value an annuity deteriorated into a battle of experts regarding market value. However, there are limited situations in which the values determined by application of the annuity tables need not be used. When the tables result in a value that is unrealistic and unreasonable, other valuation methods should be employed. See Cook, 349 F.3d at 855 (citing O'Reilly v. Comm'r, 973 F.2d 1403, 1407 (8th Cir. 1992)). This case-law exception to the tables has existed for some time. See Weller v. Comm'r, 38 T.C. 790, 802, 1962 WL 1155 (1962). Effective with estates of decedents who died after December 13, 1995, the Treasury Department promulgated regulations that provide an explicit exception to the tables for restricted beneficial interests. Treas. Reg. § 20.7520-3(b)(ii) & (c). The regulations define a restricted beneficial interest as an annuity, income remainder, or reversionary interest that is subject to any contingency, power, or other restriction, whether the restriction is provided for by the terms of the trust, will, or other governing instrument or is caused by other circumstances. Treas. Reg. § 20.7520-3(b)(ii). Generally, a restricted beneficial interest should be assigned its fair market value without regard to the annuity tables. Treas. Reg. § 20.7520-3(b)(ii) & (iii). [3] In Cook, this Court analyzed the case law exception to the tables, not this regulation. We have yet to interpret or apply the regulatory restricted beneficial interest exception. To understand this regulation and its application, we look first at the law applicable to estates that were not subject to the regulation, then seek to determine the change, if any, that the regulation wrought.