Opinion ID: 3014809
Heading Depth: 3
Heading Rank: 2

Heading: Human factors

Text: Tax Court also rejected McCarthy’s lifing analysis because it found that McCarthy did not consider various “human elements” that would influence lapse rates, viz., various subjective factors that might make customers cancel their at-will contracts. It held that “These human elements associated with petitioner’s group contracts created a significant element of unpredictability with regard to the useful life of petitioner’s group contracts.” 122 T.C. at 257. The Tax Court’s conclusion here reflects a fundamental misunderstanding of McCarthy’s method, if not of the nature of the insurance industry and actuarial methods. McCarthy took into account the human factors in the way that all actuaries do: actuarially. He divided the contracts into groups based on distinctions that he found relevant, computed average lapse rates, and used them to project future lapse rates. Capital quite wittily cites Ehrhart v. Comm’r, 57 T.C. 872, 873 (1972) (“Actuaries are highly skilled mathematicians who deal with various contingencies affecting human life.”), for the proposition that an actuary of McCarthy’s experience is well equipped to deal mathematically with the human factors affecting the lapse rates of insurance contracts. Furthermore, the Tax Court did not identify any “human factors” that McCarthy’s valuation failed to take into account. The Tax Court’s reliance on Ithaca II, supra, 17 F.3d at 689-90, and Globe Life & Accident, supra, 54 Fed. Cl. 132, is misplaced. Those cases concerned workforces, which are much harder to value than insurance contracts; the valuations involved there were far less careful and thorough than McCarthy’s valuation here; and those cases concerned amortization (where precise lapse rates are essential) rather than deductions for the direct loss of contracts. Because it ignored undisputed evidence and misunderstood 34 the nature of McCarthy’s calculations, the Tax Court’s rejection of Capital’s lifing analysis on the theory that McCarthy failed to take into account any subjective “human factors” was clearly erroneous and must be set aside.