Estate of Judith U. Harrison v. Commissioner

115 T.C. No. 13

UNITED STATES TAX COURT

ESTATE OF JUDITH U. HARRISON, DECEASED, RICHARD J. TEJEDA,
EXECUTOR, AND ESTATE OF KENNETH R. HARRISON, DECEASED, RICHARD J.
TEJEDA, EXECUTOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16018-98. Filed August 22, 2000.

H and W boarded their private aircraft in July of
1993 but never arrived at their destination.
Subsequently, probate orders were entered presuming
identical April 1, 1994, dates of death and finding it
more probable than not that the airplane crashed en
route. The will of each spouse presumed survival by
the other in circumstances where order of death was
unknown and transferred a life estate to such surviving
spouse. For estate tax purposes, the transferred life
estates were valued on the basis of actuarial tables,
and each estate took a credit for tax on prior
transfers pursuant to sec. 2013, I.R.C. R disallowed
these credits on the grounds that, under recognized
valuation principles, the life estates were not to be
valued by resort to actuarial tables but, rather, must
be accorded no value.

Held: The reciprocal life estates at issue are not
appropriately valued utilizing actuarial tables, must be
 - 2 -

deemed without value for estate tax purposes, and,
therefore, will not support allowance of credits for tax on
prior transfers under sec. 2013, I.R.C.

Michael Antin, for petitioners.

Donna F. Herbert, for respondent.

OPINION

NIMS, Judge: Respondent determined a deficiency in Federal

estate tax with respect to the Estate of Judith U. Harrison, in

the amount of $16,457, and a deficiency in Federal estate tax

with respect to the Estate of Kenneth R. Harrison, in the amount

of $16,457. After concessions, the sole issue for decision is

whether the estates of Judith U. Harrison and Kenneth R. Harrison

are entitled to credits for tax on prior transfers pursuant to

section 2013.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

This case was submitted fully stipulated under Rule 122.

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference. Executor Richard J.

Tejeda resided in California at the time the petition in this

case was filed.
 - 3 -

Background

On or about July 25, 1993, Judith and Kenneth Harrison

boarded their private aircraft in Roosevelt, Utah. The aircraft

thereafter failed to arrive at its destination of Camarillo,

California, and the Harrisons were never again seen or heard

from.

On April 1, 1994, Orders for Probate were issued by the

California Superior Court with respect to the estates of Mr. and

Mrs. Harrison. An attachment to each order recited the court’s

findings and concluded as follows:

It unfortunately appearing that it is more
probable than not that the aircraft crashed en route
and that JUDITH UTZ HARRISON [or KENNETH REED HARRISON]
died as a result thereof, the orders hereinafter set
forth should be made and entered.

IT IS THEREFORE ORDERED that JUDITH UTZ HARRISON
[or KENNETH REED HARRISON] is a missing person who is
presumed dead under P.C. § 12401, that the date of
JUDITH UTZ HARRISON’S [or KENNETH REED HARRISON’S]
death is presumed to be the date hereof and that
RICHARD J. TEJEDA is appointed to act as the Executor
of the Will of JUDITH UTZ HARRISON [or KENNETH REED
HARRISON], as set forth hereinabove.

Subsequently, on May 27, 1994, the California Department of

Health Services entered a Court Order Delayed Registration of

Death for each of the Harrisons. These documents indicated that

the date of death was April 1, 1994, and the cause of death was

“Unknown. Believed to be trauma suffered in crash of small

aircraft.”
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The wills admitted to probate pursuant to the April 1994

orders each created a trust in which the surviving spouse was

given a life estate. In addition, for purposes of effectuating

these trusts, the will of each decedent provided that if the

spouses died simultaneously, or under circumstances rendering it

difficult or impossible to determine order of death, the other

spouse would be conclusively presumed to have survived the

decedent. Based on the foregoing provisions, estate tax returns

were prepared which treated each spouse as having passed a life

interest to the other and which claimed a section 2013 credit for

tax on prior transfers with respect to the reciprocal interest so

received. In calculating the amount of the credit, the life

interests were valued utilizing the actuarial formulas and tables

set forth by the Internal Revenue Service in Notice 89-24, 1989-1

C.B. 660, and Notice 89-60, 1989-1 C.B. 700. Respondent’s

disallowance of these credits is the subject of the instant

controversy.

Discussion

Broadly stated, the principal issue in this case is whether

the estates are entitled to credits for tax on prior transfers

pursuant to section 2013. As more narrowly framed by the

contentions of the parties and the facts before us, resolution of

this inquiry turns on whether the estates are entitled to value
 - 5 -

the reciprocal life estates for purposes of the section 2013

credit on the basis of actuarial tables promulgated under section

7520.

I. Contentions of the Parties

The estates contend that section 7520 makes use of actuarial

tables mandatory, subject only to narrow exceptions not

applicable here. Specifically, the estates maintain that

judicial decisions and revenue rulings sanctioning departure from

actuarial tables in cases of known simultaneous or clearly

imminent deaths are not controlling here because there exist no

facts to establish the circumstances surrounding the Harrisons’

demise. The spouses were only presumed dead after an absence of

more than 9 months. The estates therefore aver that the life

estates at issue were properly valued on the basis of

transitional rules set forth in section 20.7520-4(a), Estate Tax

Regs., which state that executors may rely on the formulas and

tables in Notice 89-24, 1989-1 C.B. 660, and Notice 89-60, 1989-1

C.B. 700, to value transferred interests if the valuation date is

after April 30, 1989, and before June 10, 1994.

Conversely, respondent asserts that the Harrisons’ life

estates may not be valued through application of actuarial

formulas and tables. Rather, it is respondent’s position that

this case presents a simultaneous death situation governed by

case law and revenue rulings declaring valueless interests
 - 6 -

transferred between victims of a common disaster or to an

individual whose death is clearly imminent. Hence, because the

amount of the credit allowed under section 2013 is proportionate

to the value of the transferred interest, respondent avers that

the estates are entitled to no such credit.

On these facts, we conclude that the spouses’ reciprocal

life estates must be deemed to have a value of zero and,

therefore, will not support allowance of a section 2013 credit.

II. Statutory and Regulatory Provisions

Section 2013 provides a credit against estate tax liability

where the decedent has received property in a transfer from a

person who dies within a prescribed period before or after the

decedent, which transfer is itself subject to estate tax in the

transferor’s estate. The credit is intended “to prevent the

diminution of an estate by the imposition of successive taxes on

the same property within a brief period”. S. Rept. 1622, 83d

Cong., 2d Sess. at 122 (1954). As pertinent herein, the statute

reads:

SEC. 2013. CREDIT FOR TAX ON PRIOR TRANSFERS.

(a) General Rule.--The tax imposed by section 2001
shall be credited with all or a part of the amount of
the Federal estate tax paid with respect to the
transfer of property * * * to the decedent by or from a
person (herein designated as a “transferor”) who died
within 10 years before, or within 2 years after, the
decedent’s death. * * *

(b) Computation of Credit.-- * * * the credit
provided by this section shall be an amount which bears
 - 7 -

the same ratio to the estate tax paid * * * with
respect to the estate of the transferor as the value of
the property transferred bears to the taxable estate of
the transferor (determined for purposes of the estate
tax) * * *

Regulations promulgated under section 2013 specify that if

the interest received by the decedent takes the form of a life

estate, “the value of the interest is determined as of the date

of the transferor’s death on the basis of recognized valuation

principles (see §§ 20.2031-7 (or, for certain prior periods, §

20.2031-7A) and 20.7520-1 through 20.7520-4).” Sec. 20.2013-

4(a), Estate Tax Regs.

Section 7520, in turn, states in relevant part:

SEC. 7520. VALUATION TABLES.

(a) General Rule.--For purposes of this title, the
value of any annuity, any interest for life or a term
of years, or any remainder or reversionary interest
shall be determined--

(1) under tables prescribed by the Secretary
* * *

* * * * * * *

(b) Section Not to Apply for Certain Purposes.--
This section shall not apply for purposes of part I of
subchapter D of chapter 1 [relating to deferred
compensation] or any other provision specified in
regulations.

In accordance with the authority granted in section 7520(b)

above, the Commissioner issued section 20.7520-3, Estate Tax

Regs. Paragraph (a) of the regulation begins “Section 7520 of

the Internal Revenue Code does not apply for purposes of” and
 - 8 -

then enumerates a series of limitations on the statute’s

application. The list concludes with “Any other sections of the

Internal Revenue Code to the extent provided by the Internal

Revenue Service in revenue rulings or revenue procedures.” Sec.

20.7520-3(a)(9), Estate Tax Regs. Paragraph (a) is effective as

of May 1, 1989. See sec. 20.7520-3(c), Estate Tax Regs.

At the time paragraph (a) was issued, Rev. Rul. 80-80, 1980-

1 C.B. 194, set forth the standard applied by the Commissioner

for determining whether departure from actuarial tables was

warranted. The test therein provided:

In view of recent case law, the resulting
principle is as follows: the current actuarial tables
in the regulations shall be applied if valuation of an
individual’s life interest is required for purposes of
the federal estate or gift taxes unless the individual
is known to have been afflicted, at the time of
transfer, with an incurable physical condition that is
in such an advanced stage that death is clearly
imminent. Death is not clearly imminent if there is a
reasonable possibility of survival for more than a very
brief period. * * * [Id.]

Rev. Rul. 80-80, 1980-1 C.B. 194, was subsequently obsoleted

by Rev. Rul. 96-3, 1996-1 C.B. 348, in conjunction with the

promulgation of section 20.7520-3(b), Estate Tax Regs. This

paragraph (b) is effective with respect to estates of decedents

dying after December 13, 1995. See sec. 20.7520-3(c), Estate Tax

Regs. Among other things, paragraph (b) explicitly precludes use

of actuarial tables prescribed under section 7520 in instances

of: (1) Terminal illness, where there is at least a 50-percent
 - 9 -

probability that an individual with a known incurable illness

will die within 1 year, and (2) deaths resulting from a common

accident. See sec. 20.7520-3(b)(3)(i), (iii), Estate Tax Regs.

Although this regulatory text is not applicable here, the

preamble to T.D. 8630, 1996-1 C.B. 339, which adopted paragraph

(b) as an amendment to the final regulations under section 7520,

addressed the relationship of the new provisions to prior law as

follows:

One commentator suggested that the tables
prescribed by the regulations must be used for valuing
all interests transferred between April 30, 1989 (the
effective date of section 7520) and December 13, 1995
(the effective date of the regulations). However,
these regulations generally adopt principles
established in case law and published IRS positions.
* * * There is no indication that Congress intended to
supersede this well-established case law and
administrative ruling position when it enacted section
7520. Consequently, in the case of transfers prior to
the effective date of these regulations, the question
of whether a particular interest must be valued based
on the tables will be resolved based on applicable case
law and revenue rulings.

In addition, the regulations contain a transitional rule

which reads: “If the valuation date is after April 30, 1989, and

before June 10, 1994, an executor can rely on Notice 89-24, 1989-

1 C.B. 660, or Notice 89-60, 1989-1 C.B. 700 * * *, in valuing

the transferred interest.” Sec. 20.7520-4(a), Estate Tax Regs.

The referenced Notices set forth formulas and tables of actuarial

factors intended “to provide guidance to taxpayers in determining

the present value of * * * an interest for life * * * under
 - 10 -

section 7520 of the Internal Revenue Code”, Notice 89-24, 1989-1

C.B. 660, during the period between the enactment of section 7520

and the promulgation of final regulations and tables.

III. Case Law

The existing case law as of April 1, 1994, although

involving valuation dates prior to section 7520’s enactment,

specifically dealt with the issue of valuing interests

transferred in simultaneous death situations for purposes of the

section 2013 credit. See Estate of Carter v. United States, 921

F.2d 63 (5th Cir. 1991); Estate of Lion v. Commissioner, 438 F.2d

56 (4th Cir. 1971), affg. 52 T.C. 601 (1969); Estate of Marks v.

Commissioner, 94 T.C. 720 (1990); Old Kent Bank & Trust Co. v.

United States, 292 F. Supp. 48 (W.D. Mich. 1968), revd. on other

grounds 430 F.2d 392 (6th Cir. 1970).

As early as 1968, a U.S. District Court had ruled in Old

Kent Bank & Trust Co. v. United States, supra at 53-55, that a

life estate had no value for tax credit purposes where, despite a

testamentary provision creating a presumption of survival, the

decedents had apparently died together in a plane crash. This

Court then reached the same conclusion in Estate of Lion v.

Commissioner, 52 T.C. at 606-607, and the Court of Appeals for

the Fourth Circuit affirmed, Estate of Lion v. Commissioner, 438

F.2d at 61-62. Each of these decisions reiterated that value for

tax purposes is based upon the amount that a hypothetical willing
 - 11 -

buyer with knowledge of all relevant facts would pay for the

subject interest. See Estate of Lion v. Commissioner, 438 F.2d

at 62; Estate of Lion v. Commissioner, 52 T.C. at 606; Old Kent

Bank & Trust Co. v. United States, supra at 54. Since such a

buyer would have been aware that the decedents were hurtling to

the ground in a plane crash and would have recognized the

probability of simultaneous deaths, the buyer would have paid

nothing for the life estates at issue. See Estate of Lion v.

Commissioner, 52 T.C. at 606; Old Kent Bank & Trust Co. v. United

States, supra at 54. As stated by the Court of Appeals for the

Fourth Circuit:

Where at the time of the transferor’s death it was
unmistakable to one in possession of the facts that the
transferee’s life would be radically shorter than
predicted in the actuarial tables, the value of a
transferred life estate may be reduced accordingly for
purposes of calculating the tax credit under § 2013.
[Estate of Lion v. Commissioner, 438 F.2d at 62.]

Moreover, the Court of Appeals for the Fourth Circuit also

noted that this result is consistent with the regulations, which

explicitly sanction use of “‘recognized valuation principles’” in

the section 2013 context. Id. at 59-60, 62. The court concluded

that use in section 20.2013-4, Estate Tax Regs., of the phrase

beginning “see” to direct attention to actuarial tables, rather

than an imperative phrase, served to “leave room for departure

from strict application of the tables.” Id. at 60.
 - 12 -

More recently, this Court considered the issue in Estate of

Marks v. Commissioner, supra at 727-729, and held, as before,

that “the deemed surviving spouse is not entitled to the section

2013 credit in a simultaneous death situation.” We indicated

that the surviving spouse’s interest was “too ephemeral to be

accorded value”. Id. at 729. Likewise, the Court of Appeals for

the Fifth Circuit ruled in Estate of Carter v. United States,

supra at 64, that an interest “passed between persons dying in a

common disaster has no value and thus that the taxpayer is

entitled to no credit.” The court once again emphasized that

“‘recognized valuation principles’” in section 20.2013-4(a),

Estate Tax Regs., “does not refer exclusively to the actuarial

tables” and stated that “The paradigm ‘unusual circumstance’ in

which mortality tables have not been employed is the simultaneous

death of the transferor and transferee.” Id. at 66 & n.6, 67.

IV. Interpretation and Application

Given the foregoing authority, we first consider whether the

principles developed in simultaneous death situations arising

prior to the enactment of section 7520 in 1988, see Technical and

Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.

3342, retain their validity under the current statutory and

regulatory regime. If so, we must then decide whether the case

at bar is to be treated as a simultaneous death situation.
 - 13 -

The regulations issued under section 2013 have been amended

to reflect section 7520’s enactment, yet they continue to

expressly authorize use of “recognized valuation principles” in

valuing life estates. Sec. 20.2013-4(a), Estate Tax Regs. They

similarly have retained the nonimperative term “see” to cite

provisions dealing with actuarial tables as an example of such

principles. Id. Furthermore, one of the provisions so cited is

section 20.7520-3, Estate Tax Regs., which enumerates exceptions

to use of actuarial tables. Section 20.7520-3, Estate Tax Regs.,

in turn, was promulgated under the explicit statutory grant of

authority in section 7520(b), stating that the section shall not

apply for purposes of “any other provision specified in

regulations.” Section 20.7520-3(a)(9), Estate Tax Regs., then

likewise specifies that section 7520 shall not apply for purposes

of “Any other sections of the Internal Revenue Code to the extent

provided by the Internal Revenue Service in revenue rulings or

revenue procedures.” As effective in 1994, Rev. Rul. 80-80,

1980-1 C.B. 194, precluded use of valuation tables where death

was clearly imminent. We observe that such would frequently be

the case in the throes or aftermath of an airplane crash.

We also reject the estates’ contentions that, in order for

an exception to fall within the terms of section 7520(b) and

section 20.7520-3(a)(9), Estate Tax Regs., the Commissioner is

required in all instances to specifically designate in the
 - 14 -

regulation, revenue ruling, or revenue procedure the particular

section for purposes of which section 7520 does not apply. We do

not believe that the relevant language must be read so narrowly,

as it is possible to indicate that valuation tables are

inapplicable for purposes of various Internal Revenue Code

sections in a given set of circumstances by enunciating general

rules, without exhaustively listing such sections by number.

After all, legislative history regarding section 7520 states that

“the provision does not apply to interests valued with respect to

qualified plans or in other situations specified in Treasury

regulations.” H. Conf. Rept. 100-1104 (Vol. II), at 113 (1988),

1988-3 C.B. 603.

Moreover, administrative rulings and case law repeatedly

rejecting taxpayers’ attempts to apply actuarial tables in the

context of common accidents and section 2013 credits existed at

the time section 7520 was enacted. In light of the facially

manifest intent in section 7520(b) that exceptions to the

statute’s application be permitted, we have no basis for

concluding that Congress meant to overrule this administrative

and judicial precedent. We are satisfied that the principles

therein remain valid, and we find the estates’ efforts to avoid

their import through reliance on Estate of McLendon v.
 - 15 -

Commissioner, 135 F.3d 1017 (5th Cir. 1998), revg. and remanding

T.C. Memo. 1996-307, and section 20.7520-4, Estate Tax Regs., to

be misplaced.

The decedent in Estate of McLendon v. Commissioner, supra at

1018-1020, after having been diagnosed with cancer, made a

transfer of property in trust and received in return an annuity

based on the actuarial tables for an individual of his age. He

died approximately 6 months later, and the Commissioner

determined that the transferred property was to be included in

his estate under section 2036(a) as a transfer not for adequate

and full consideration. See id. at 1020-1021. The Court of

Appeals for the Fifth Circuit held that the decedent was entitled

to follow Rev. Rul. 80-80, 1980-1 C.B. 194, and concluded, as a

factual matter, that his death was not clearly imminent at the

time of the transfer. See id. at 1023, 1025. Use of actuarial

tables was accordingly deemed proper. See id.

The estates quote the following language from Estate of

McLendon v. Commissioner, supra at 1025, to support their

reliance on the transitional rules of section 20.7520-4(a),

Estate Tax Regs.: “Where the Commissioner has specifically

approved a valuation methodology, like the actuarial tables, in

his own revenue ruling, he will not be heard to fault a taxpayer

for taking advantage of the tax minimization opportunities

inherent therein.”
 - 16 -

As previously indicated, section 20.7520-4(a), Estate Tax

Regs., states that, if the relevant valuation date is after April

30, 1989, and before June 10, 1994, executors may rely on Notice

89-24, 1989-1 C.B. 660, and Notice 89-60, 1989-1 C.B. 700, in

valuing transferred interests. However, in attempting to

analogize their use of these Notices to the reliance on Rev. Rul.

80-80, 1980-1 C.B. 194, addressed in Estate of McLendon v.

Commissioner, supra, the estates have failed to recognize a

critical distinction. Neither the regulation nor the referenced

Notices purport to deal with the substantive question of whether

actuarial tables are properly applied in the first instance. In

fact, Notice 89-24, 1989-1 C.B. 660, recites only that

“Generally, under section 7520, the value of an annuity, interest

for life or for a term of years, or remainder or reversionary

interest is determined under new tables that are to be prescribed

by the Secretary.” The regulation and Notices merely authorize

executors to utilize a particular set of figures and formulas,

different from those promulgated in the final regulations, in

performing the actuarial computation. They do not provide any

standards regarding whether use of actuarial tables is the

appropriate valuation methodology. Other administrative and

judicial rulings in place at the time the Notices were issued

dealt with this question, and the estates are not entitled to

ignore the principles established therein.
 - 17 -

Furthermore, in comparing Estate of McLendon v.

Commissioner, supra, to the instant section 2013 case, we note

that the decision is not directly on point and makes no attempt

to distinguish or overrule the earlier decision by the Court of

Appeals for the Fifth Circuit in Estate of Carter v. United

States, 921 F.2d 63 (5th Cir. 1991), which specifically analyzed

availability of the section 2013 credit in the context of

simultaneous deaths. Hence, Estate of McLendon v. Commissioner,

supra, is inapposite and does not alter our conclusion that the

administrative and judicial rulings addressing the relationship

between common accidents and the section 2013 credit remain

viable.

We therefore turn to the question of whether the matter

before us is to be treated as a simultaneous death situation.

The estates oppose any assumption that the Harrisons died

simultaneously on the grounds that no facts establish they were

victims of a common disaster. We, however, are satisfied that

this case is sufficiently analogous to a simultaneous death

scenario to render applicable principles related thereto.

As indicated above, an underlying rationale for deeming

valueless life estates transferred upon simultaneous deaths is

that a willing buyer with knowledge of all relevant facts would

pay nothing for the interest. Here such a buyer would be aware

either of an airplane crash and consequent near simultaneous
 - 18 -

deaths or, at minimum, of some misfortune that left one or both

spouses stranded in an area apparently so remote that not even a

possible crash site was found for many months. In both

scenarios, we believe that a buyer so informed would have

realized the high probability that any survival would be brief

and, accordingly, would have declined to pay anything for the

life estates at issue.

Moreover, the record before us reflects probate orders and

death registrations presuming identical April 1, 1994, dates of

death and finding it “more probable than not” that the Harrisons

died as a result of an aircraft crash en route to their

destination. In absence of any evidence that might suggest a

period of survival by either spouse, we find it incongruous to

accept the presumed April 1 dates of death for all other estate

tax purposes while at the same time rejecting the rationale

underlying such presumptions.

We hold that the Harrisons’ reciprocal life estates are not

appropriately valued on the basis of actuarial tables but instead

must be deemed without value. Consequently, the estates are not

entitled to credit for tax on prior transfers under section 2013.

To reflect the foregoing,

Decision will be entered

under Rule 155.