Tax Court Bars Late Alternate Valuation Election

The Tax Court held that estates of spouses who were presumed to die in a private airplane crash could not use actuarial tables to value the testamentary life estates because the interests created by reciprocal will had no value. Estate of Harrison v. CIR, 115 T.C. 13 (8/22/2000). The will of each spouse presumed survival by the other in circumstances where the order of death was unknown and transferred a life estate to that 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 IRC § 2013.  [§ 2013 provides an estate tax credit with respect to the “transfer of property . . .  to the decedent by or from a person who died within 10 years before, or within 2 years after, the decedent’s death.” The credit is the product of a fraction, determined by calculating the value of property transferred over the taxable estate, multiplied by the estate tax paid.]

The estates argued that the language of § 7520 was clear in providing that “the value of any annuity . . . shall be determined under tables prescribed by the Secretary” and cited to McClendon, which in reversing an earlier Tax Court decision, held that “[w]here 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.” McLendon v. CIR, 135 F.3d 1017 (5th Cir. 1998), revg. and remanding T.C. Memo. 1996-307.

The Tax Court, finding McLendon inapposite, ruled that the life estates must be accorded no value. The court reasoned that §7520(b) by its own terms “shall not apply” where otherwise provided in the regulations, and that Estate Tax Reg. §20.7520-3 provides that § 7520 shall not apply “to the extent provided by the IRS in revenue rulings or revenue procedures.” Rev. Rul. 96-3 in turn provides that departure from actuarial tables is warranted in instances of (1) terminal illness, where there is at least a 50% probability of death within one year; and (2) deaths resulting from a common accident.

Noting Estate of Carter v. U.S., 921 F.2d 63 (5th Cir. 1991), which held that an interest which “passed between persons dying in a common disaster has no value,” the Tax Court concluded that although Notice 89-24 provides that new tables are to be used to value an annuity, the notice does not determine the “substantive” question of whether actuarial tables are properly applied in the first instance. In a simultaneous death situation the court found that the life estates had no value. Therefore, actuarial tables could not be used in valuing the reciprocal life estates.

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The Tax Court in Estate of Eddy v. CIR, 115 T.C. 10 (8/16/00), held that an alternate valuation election must be made within 1 year after the time prescribed by law (including extensions) for filing the estate tax return.

The due date for the estate tax return in question was January 13, 1994, nine months after the decedent’s date of death. A timely extension was filed, requiring the estate tax return to be filed by July 13, 1994. The estate tax return was not filed until January 19, 1996, 33 months after the decedent’s death and more than 18 months after the extended due date for filing the return. The return reported the alternate value of the estate assets as $5.99 million and the date-of-death value as $6.60 million.

Under IRC § 2032(d), which was amended in 1984, an alternate election may be made on a late-filed return if the return is filed within one year of the due date. The estate argued that Rev. Proc. 92-85 accords the Commissioner discretion to allow an untimely election to use the alternate valuation date. Rev. Proc. 92-85 permits “extensions of time when a statute provides that an election may be made by the due date of the taxpayer’s return or the due date of the taxpayer’s return including extensions.”

In rejecting the estate’s argument, the court held that no election could be made after the 1-year period of “legislative grace” provided by § 2032(d), since the due date of the taxpayer’s return, including extensions, ended after the 1-year period. Since Rev. Proc. 92-85 applied only to the 1-year grace period, the executor’s failure to file a return within that period precluded the election.

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