Opinion ID: 33212
Heading Depth: 3
Heading Rank: 2

Heading: Reasonableness of the result produced by the annuity tables

Text: 22 The Estate holds out the three results from valuation experts against the result from the tables as speaking for themselves on the question of reasonableness. The annuity-table valuation of the lottery prize exceeds the lowest expert valuation by $3,982,850, and the highest by $2,504,661. The difference in the numbers is attributable to non-marketability discounts applied by the experts to the lottery prize but not taken into account by the valuation tables. The Tax Court observed that the wide discrepancies between the three expert valuations made a compelling argument justifying use of the valuation tables, given Congress's policy of standardizing valuation. 23 The result produced by the valuation tables is not unreasonable because the factor accounting for the disparity between the expert and the table valuation, i.e., a marketability discount, is not properly applied to the lottery prize. The non-marketability of a private annuity is an assumption underlying the annuity tables. 6 For example, the value of survivor annuities payable under qualified plans (transfer of which is prohibited by ERISA); charitable remainder annuity trusts; and grantor retained annuity trusts (GRATS); which are not marketable, are determined by use of the tables. See, Treas. Reg. § 1.664-2(c); 20.2039-2(c)(1)(viii) and (c)(2). As discussed above, the cases in which courts have seen fit to depart from the valuation tables have involved facts that disproved assumptions underlying the tables. The holdings in Shackleford and Gribauskas depart from that longstanding trend based on the premise that the right to alienate is fundamental to the valuation of any property. 7 Gribauskas at ; Shackleford, 262 F.3d at 1032 (The right to transfer is `one of the most essential sticks in the bundle of rights that are commonly characterized as property.')(quoting Youpee v. Babbitt, 67 F.3d 194, 197 (9th Cir.1995), aff'd, Babbitt v. Youpee, 519 U.S. 234, 117 S.Ct. 727, 136 L.Ed.2d 696 (1997)). 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. Youpee involved restrictions on the right to devise land, a capital asset. The remaining cases relied upon by the Ninth Circuit also involved capital assets, such as corporate stock, for which value is not readily ascertainable absent a transfer from buyer to seller. See Mailloux v. Comm'r, 320 F.2d 60, 62 (5th Cir.1963)(alienability restrictions reduce value of highly speculative stock); Bayley v. Comm'r, 624 F.2d 884, 885 (9th Cir.1980) (holding that stock transfer restrictions affect valuation); Trust Services of Am., Inc. v. United States, 885 F.2d 561, 569 (9th Cir.1989) (discount may be necessary to accurately value stock subject to resale restrictions); Estate of Jung v. Comm'r, 101 T.C. 412, 434, 1993 WL 460544 (1993) (marketability discount applied to minority shares in closely held corporations to reflect hypothetical buyer's concern that there will not be a ready market); Theophilos v. Comm'r, 85 F.3d 440 (9th Cir.1996) (lack of control discount for minority shares). 24 The Second Circuit recognized that previous cases departing from the tables involved not simply a disparity in numbers but factual assumptions in the tables that were inconsistent with the facts of an individual case. Gribauskas at . The court reasoned that the exception recognized by previous cases is broader than the Commissioner suggests, as evidenced by the standard of an unreasonable and unrealistic result. Id. While an extraordinary case whose facts are not duplicative of previous cases might justify departure, the exception is not so broad as to include a case involving a factor not necessary to determine the asset's value. We note that the Second Circuit relied in Gribauskas on the parties' stipulations that the non-marketability of the lottery prize reduced its value. Id. at  (Notably, the parties stipulated that a market for the Lotto winnings did exist at the time the return was filed [and] that the prize's market value was diminished considerably due to transfer restrictions....). In the case at bar, the parties stipulated that no market existed for the lottery prize. 25 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. 8 As the Tax Court stated, non-marketability does not alter or jeopardize the essential entitlement to a stream of fixed payments. The value of the lottery prize is readily ascertainable by simple aggregation of the payments to be received. The value of the prize must be discounted because it is payable over time, rather than in a lump sum; the tables account for that feature by discounting the payments to present value. We disagree with the Second and Ninth Circuits that a reasonable valuation of the lottery prize requires a discount for non-marketability. The Tax Court was correct in holding that departure from the annuity tables is not warranted for valuation of the lottery prize.