Opinion ID: 382844
Heading Depth: 2
Heading Rank: 2

Heading: Valuation of the Reversionary Interest

Text: 19 Robinson says the Government, in evaluating the reversionary interest, improperly relied exclusively on Table 38 of the U.S. Life Tables and Actuarial Tables 1939-1941. Table 38 is a normal-health mortality table which provides average life expectancy figures from which a calculation of the value of a reversionary interest dependent upon the continuation or termination of more than one life may be made. Robinson contends that the exclusive use of Table 38 life expectancy figures is improper here because Decedent had a reduced life expectancy of at least 200% normal mortality during the last two years of her life. He asserts that § 2037 in these circumstances requires consideration of the actual state of health of Decedent to compute an accurate value of her reversionary interest. 6 20 In Hall v. United States, 353 F.2d 500 (7th Cir. 1965), the Seventh Circuit held that the state of health should be considered in computing the value of a decedent's reversionary interest in a trust for purposes of § 2037. The Government says the better reasoned case law supports an exclusive use of mortality tables, citing Estate of Allen v. United States, 558 F.2d 14 (Ct.Cl.1977); and Estate of Roy v. Commissioner, 54 T.C. 1317 (1970). The courts in these cases held use of mortality tables prescribed by the Treasury Regulations the only permissible method of valuation. We agree with that view. 21 Section 2037(b)(2) provides in applicable part: 22 The value of a reversionary interest immediately before the death of the decedent shall be determined (without regard to the fact of the decedent's death) by usual methods of valuation, including the use of tables of mortality and actuarial principles, under regulations prescribed by the Secretary. The court in Hall stated: 23 It is plain that the statute does not contemplate that valuation shall be determined ... solely by the use of tables of mortality and actuarial principles prescribed by the Secretary ... What the statute provides is that such valuation shall be determined by usual methods of valuation, including mortality tables prescribed by the Secretary. 24 Hall v. United States, supra, at 503. 25 With due respect, we decline to adopt the interpretation set forth in Hall. In our view, the statute authorizes the Secretary to prescribe regulations employing appropriate methods found among the usual methods of valuation. It does not require the Secretary to employ any particular usual method or to employ all such usual methods (such as consideration of state of health). Mortality tables and actuarial principles are listed in the statute as among the usual methods from which the Secretary is empowered to choose. 26 In accord with the authority granted in § 2037(b)(2), the Secretary has chosen to promulgate regulations dealing with valuation as reflected by 26 CFR 20.2037-1, which in turn refers to 26 CFR §§ 20.2031-1 through 20.2031-10. Those regulations, having been promulgated pursuant to an express grant of authority, carry a strong presumption of validity. Robinson has made no showing that the regulations are beyond the Secretary's authority, or that they are contrary to statute, or that they are unreasonable. 7 Use of Table 38, one of the mortality tables, is a usual method of valuation within the meaning of the statute and use of such tables has long been regarded as a workable forecasting technique. 27 Moreover, consideration of decedent's health would raise a substantial problem in selecting the date on which to make that determination. In this case petitioner suggests a date two years prior to decedent's death. Because no regulation establishes that or any other date, it would be just as logical to select a date closer to or further from the date of death. In many cases the decedent's health will have varied substantially, yet the eventual determination of life expectancy would be dependent on the decedent's health on the particular date selected. Consideration of the decedent's health would thus engender uncertainty and a fertile source of litigation. 28 Robinson quotes 26 CFR 20.2031-1, in contending that the Regulations require consideration of (a)ll relevant factors and elements of value. 8 Those factors, says Robinson, should include the state of Decedent's health. Section 20.2031-1, however, deals with valuation of property generally, and resort to its principles is proper only in valuing property not specifically described in §§ 20.2031-2 through 20.2031-8. 9 A decedent's reversionary interest being specifically described in § 20.2031-7, that section is controlling in the valuation of that interest. 10 29 The Commissioner, in evaluating Decedent's reversionary interest, acted in conformity with established Treasury Regulations. Beginning at 26 CFR 20.2037-1, the regulations provide in applicable part: 30 § 20.2037-1 Transfers taking effect at death. 31 (c) Retention of reversionary interest. 32 (3) For purposes of this section, the value of the decedent's reversionary interest is computed as of the moment immediately before his death, ... without regard to the fact of the decedent's death. The value is ascertained in accordance with recognized valuation principles for determining the value for estate tax purposes of future or conditional interests in property. (See §§ 20.2031-1, 20.2031-7, and 20.2031-9). For example, if the decedent's reversionary interest was subject to an outstanding life estate in his wife, his interest is valued according to the actuarial rules set forth in § 20.2031-7. On the other hand, if the decedent's reversionary interest was contingent on the death of his wife without issue surviving and if it cannot be shown that his wife is incapable of having issue (so that his interest is not subject to valuation according to the actuarial rules in § 20.2031-7), his interest is valued according to the general rules set forth in § 20.2031-1.... 33 The language of § 20.2037-1 clearly directs that valuation of Decedent's reversionary interest should be determined according to the procedure set forth in § 20.2031-7, providing in applicable part: 34 § 20.2031-7 Valuation of annuities, life estates, terms for years, remainders and reversions for estates of decedents dying on or before December 31, 1970. 35 (a) In general.... 36 (2) ... If the interest to be valued is dependent upon more than one life or there is a term certain concurrent with one or more lives, see paragraph (e) of this section.... 37 (e) Actuarial computations by the Internal Revenue Service. If the valuation of the interest involved is dependent upon the continuation or the termination of more than one life or upon a term certain concurrent with one or more lives, a special factor must be used. The factor is to be computed upon the basis of the Makehamized mortality table appearing as Table 38 of United States Life Tables and Actuarial Tables 1939-1941, published by the United States Department of Commerce, Bureau of Census, and interest at the rate of 31/2 percent a year, compounded annually.... 38 The method of valuation used by the Commissioner in computing the value of Decedent's reversionary interest, that is, the exclusive use of Table 38 life expectancy figures, is the method specifically prescribed by the regulations. § 20.2031-7(a)(2), (e). This method resulted in a valuation of 8.47%. Thus, the trust corpus was properly included in Decedent's gross estate and taxable under § 2037(a)(2).