946 CREIGHTON LAW REVIEW

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1 945 NEGRON V. UNITED STATES: THE SIXTH CIRCUIT IMPROPERLY APPLIED THE EIGHTH CIRCUIT'S UNREASONABLE AND UNREALISTIC RESULTS EXCEPTION RESULTING IN ITS CONCLUSION THAT THE IRS ANNUITY TABLES MUST BE USED TO VALUE AN ANNUITY WITH A MARKETABILITY RESTRICTION I. INTRODUCTION In Negron v. United States, 1 the United States Court of Appeals for the Sixth Circuit added its opinion to the federal circuit court split on the proper method to determine the value of a stream of future lottery payments for estate tax purposes. 2 Every federal circuit court that has considered the issue has used the same test to determine whether deviating from the standardized Internal Revenue Service's ("IRS") annuity tables is warranted. 3 The federal circuit courts use IRS annuity tables to value an annuity unless the proponent of departure can prove two things. 4 First, the proponent must prove that the IRS annuity tables produced an unreasonable and unrealistic result. 5 Second, the proponent must prove that a more realistic and reasonable valuation method was available. 6 The federal circuit courts are split, however, regarding how to value future lottery payments when a marketability restriction applies to those future payments. 7 The United States Court of Appeals for the Second and Ninth Circuits have held that the IRS annuity tables produced an unrealistic result. 8 The Second and Ninth Circuits reasoned that those tables do not take into account marketability restrictions because a marketability restriction placed upon the right to receive future lottery payments reduced the lottery payments' fair market value. 9 On the other side of F.3d 1013 (6th Cir. 2009). 2. See Negron v. United States (Negron 1), 553 F.3d 1013, 1014, 1021 (6th Cir. 2009) (concluding that the value produced by IRS annuity tables, which led to tax increase of $508, for the non-marketable annuity and was $891, greater than the Estate's valuation was not unreasonable and unrealistic, and therefore, deviation from the tables was unwarranted). 3. JACOB MERTENS, PROBLEMS OF VALUATION, MERTENS LAw OF FEDEERAL INCOME TAXATION 59:108 (West Supp. 2009). 4. Id. 5. Id. 6. Id. 7. Negron v. United States (Negron 1), 553 F.3d 1013, (6th Cir. 2009). 8. MERTENS, supra note Id.

2 946 CREIGHTON LAW REVIEW [Vol. 43 the federal circuit court split, the United States Court of Appeals for the Fifth Circuit has concluded that the IRS annuity tables do not produce unreasonable and unrealistic results when valuing future lottery payments with marketability restrictions. 10 The Fifth Circuit reasoned that the IRS annuity tables assume the non-marketability of an annuity and so a marketability factor is not needed to value a fixed income stream." In Negron v. United States, 12 the Sixth Circuit agreed with the Fifth Circuit and found that the IRS annuity tables were used properly for estate tax purposes to value the future lottery payments. 13 In Negron, Carol Negron ("Negron"), on behalf of the estates of Mildred Lopatkovich and Mary Susteric (collectively the "Estates"), brought suit against the IRS after the IRS assessed an additional tax on each estate and then denied the Estates' refund claims. 14 The IRS argued that it properly used its tables to value the Estates' annuities, while Negron argued that the IRS annuity tables did not take into account the marketability restrictions on the payments, which resulted in excessive valuation.' 5 The United States District Court for the Northern District of Ohio agreed with Negron, and found that the IRS annuity tables produced an unreasonable and unrealistic result. 16 On appeal, the Sixth Circuit reviewed the reasoning on both sides of the federal circuit court split as to whether the IRS annuity tables produced an unreasonable and unrealistic result when valuing the Estates' future lottery payments. 17 Agreeing with the Fifth Circuit, the Sixth Circuit analyzed the unreasonable and unrealistic results exception to when the IRS annuity tables can be used and determined that the IRS properly used its tables to value the Estates' future lottery payments.' 8 The Sixth Circuit reasoned that the IRS annuity tables assume non-marketability, and thus a marketability factor is not needed to value a guaranteed stream of income. 19 The Sixth Circuit 10. See Cook v. Comm'r, 349 F.3d 850, , 857 (5th Cir. 2003) (concluding that "the value produced under the valuation tables is not so unreasonable or unrealistic as to warrant resort to a different valuation method." Texas law prohibited the transfer of the payments and Cook died before receiving nineteen of his twenty lottery payments). 11. MERTENS, supra note F.3d 1013 (6th Cir. 2009). 13. Negron v. United States (Negron 1), 553 F.3d 1013, (6th Cir. 2009). 14. Negron v. United States (Negron I/), 502 F. Supp. 2d 682, 684 (N.D. Ohio 2007). 15. Brief for Appellant at 6, Negron v. United States, 553 F.3d 1013 (6th Cir. 2009) (No ). 16. Negron 11, 502 F. Supp 2d at Negron 1, 553 F.3d at Id. at The court referred to Treas. Reg (b) as the restricted beneficial interest exception. Id. at Id.

3 2010] NEGRON V. UNITED STATES also determined that the district court did not err when it failed to address the codified restricted beneficial interest exception to the use of the IRS annuity tables to value the Estates' future lottery payments because Negron did not argue that the exception applied. 20 This Note will first review the facts and holding of Negron and the rationale the Sixth Circuit utilized to reach its conclusion that the IRS annuity tables did not produce an unreasonable and unrealistic result in valuing the Estates' future lottery payments. 2 1 This Note will then provide a summary of the relevant sections of the United States Code and Treasury Regulations. 22 Next, this Note will discuss the United States Court of Appeals for the Eighth Circuit, Fifth Circuit, Second Circuit, and Ninth Circuit decisions that addressed the exception to the use of the IRS annuity tables and the federal circuit court split as to whether departure from those tables is warranted when the asset to be valued is a decedent's future lottery payments with a marketability restriction. 23 Next, this Note will show the Sixth Circuit erred when it found that the results produced by the IRS annuity tables in Negron were reasonable and realistic. 24 This Note will first establish that had the Sixth Circuit considered the issue, it would have found that the future lottery payments with marketability restrictions qualified under the codified restricted beneficial interest exception. 2 5 This Note will explain that the Sixth Circuit would have found that the lottery payments qualified as a restricted beneficial interest because (1) the IRS annuity tables do not assume non-marketability, and (2) a marketability restriction qualifies under the "other restriction" language of the relevant Treasury Regulation. 26 Second, this Note will demonstrate that the Sixth Circuit decided incorrectly that the IRS annuity tables produced a reasonable and realistic result when valuing the Estates' annuities and concluded erroneously that departure was unwarranted. 2 7 This Note will explain that the Sixth Circuit was incorrect for three reasons: (1) it found incorrectly that the facts of the case did not undermine the assumptions underlying the IRS annuity tables; (2) it found incorrectly that the marketability restriction did not affect the relevant value of the Estates' annuities because the relevant value is the ultimate value of the annuity and the marketability restriction 20. Id. at See infra notes and accompanying text. 22. See infra notes and accompanying text. 23. See infra notes and accompanying text. 24. See infra notes and accompanying text. 25. See infra notes and accompanying text. 26. See infra notes and accompanying text. 27. See infra notes and accompanying text.

4 CREIGHTON LAW REVIEW [Vol. 43 affected the annuities' ultimate fair market value; and (3) had it reached the issue, the Sixth Circuit would have found that a more reasonable and realistic valuation method was available. 28 Thus, this Note will conclude the Sixth Circuit erred in Negron when it found that departure from the IRS annuity tables was unwarranted because those tables produced an unreasonable and unrealistic value for the Estates' future lottery payments. 29 II. FACTS AND HOLDING In 1991, Mildred Lopatkovich ("Lopatkovich"), Mary Susteric ("Susteric"), and another unidentified individual, collectively won the Ohio Super Lotto jackpot of $20 million. 30 The Ohio Lottery Commission ("Commission") was to pay each winner a total of $6,666, by way of twenty-six annual payments of $256, The payments could not be used as collateral or assigned. 32 Lopatkovich and Susteric each received their first annual installment payment around January 19, In 2001, both Lopatkovich and Susteric died after receiving only nine lottery payments. 34 The Lorain County Probate Court designated Carol Negron ("Negron") executrix for the estates of both Lopatkovich and Susteric (collectively the "Estates"). 3 5 In August 2002, Lopatkovich's estate filed a federal estate tax return, which reported a tax due of $772, Lopatkovich's estate assessed the remaining lottery payments at $2,275, on the estate tax return. 37 At that time, the Ohio Lottery Regulations permitted Lopatkovich's estate an option to select a lump sum distribution of $1,547,045.00, the net amount after Ohio and federal income tax withholdings. 38 The Commission used a nine percent discount rate to compute the amount of the distribution. 39 Lopatkovich's estate used the gross sum established by the Commission to conclude that the value of 28. See infra notes and accompanying text. 29. See infra notes and accompanying text. 30. Negron v. United States (Negron 1), 553 F.3d 1013, 1014 (6th Cir. 2009). 31. Negron 1, 553 F.3d at Negron v. United States (Negron 1/), 502 F. Supp. 2d 682, 683 (N.D. Ohio 2007). 33. Brief for Appellant at 5, Negron v. United States, 553 F.3d 1013 (6th Cir. 2009) (No ). 34. Negron 1, 553 F.3d at Lopatkovich died on November 27 and Susteric died on October 31, each still entitled to 15 future payments. Id. 35. Id. 36. Negron 1I, 502 F. Supp. 2d at Brief for Appellant at 6, (No ). Lopatkovich's estate valued the remaining payments on Schedule F, Item 2 of the estate tax return. Id. 38. Brief for Appellee at 5, Negron v. United States, 553 F.3d 1013 (6th Cir. 2009) (No ). Lopatkovich's estate elected to accept the lump sum payment. Id. 39. Negron 11, 502 F. Supp. 2d at 683.

5 20101 NEGRON V. UNITED STATES the lottery annuity was $2,275, and therefore paid $772, in federal estate taxes. 40 After auditing Lopatkovich's estate tax return, the Internal Revenue Service ("IRS") valued the remaining payments at $2,775, using Internal Revenue Code ("Code") section and the IRS annuity tables in that section. 42 The IRS annuity tables used a five percent discount rate. 43 The audit and changes made by the IRS increased Lopatkovich's estate's tax liability by $330, Lopatkovich's estate paid the additional tax, including an increase of $36, in estate tax, for a total tax increase of $367, In July 2002, Susteric's estate filed a federal estate tax return, paying $949, in federal estate taxes on Susteric's future lottery payments. 4 6 The Ohio Lottery Regulations also permitted Susteric's estate the option to elect a lump sum distribution of $1,547,045.00, which the Commission derived from the remaining payments. 47 The Commission again used a nine percent discount rate to compute the distribution. 48 Susteric's estate used the gross sum of $2,275,867.00, as determined by the Commission, to value the annuity and paid $949, in federal estate taxes. 49 The IRS, however, valued the remaining lottery payments at $2,668, using a 5.6 percent discount rate as dictated by the IRS annuity tables in section As a result, Susteric's estate tax liability increased by $141, Susteric's estate paid that additional tax as well as an increase of $7, in estate tax, for a total tax increase of $148, After paying the additional taxes, with interest, the Estates filed refund claims. 5 3 The IRS rejected both claims and Negron filed suit in the United States District Court for the Northern District of Ohio to obtain refunds for the Estates. 54 Negron and the IRS filed cross-motions for summary judgment regarding the proper method for valuing 40. Brief for Apellee at 5, Negron v. United States (No ). 41. IRC 7520 (West 2009). 42. Negron H, 502 F. Supp. 2d at Brief for Appellee at 5, Negron v. United States (No ). 44. Negron H, 502 F. Supp. 2d at Id. 46. Id. 47. Brief for Appellee at 6, Negron v. United States (No ). Susteric's estate elected the lump sum option offered by the Ohio Lottery Commission. Id. 48. Id. 49. Id. 50. Negron v. United States (Negron 1), 553 F.3d 1013, 1014 (6th Cir. 2009). 51. Negron v. United States (Negron I), 502 F. Supp. 2d 682, 684 (N.D. Ohio 2007). 52. Id. 53. Negron I, 553 F.3d at Brief for Appellee at 6-7, Negron v. United States (No ).

6 CREIGHTON LAW REVIEW [Vol. 43 annuities. 55 The IRS argued that it appropriately relied on the its annuity tables and that the Code provided a required method for calculating value to annuities with exceptions in certain narrowly defined circumstances, none present in this case. 56 The IRS reasoned that its annuity tables adequately account for lack of marketability because that type of restriction has no effect on the right to receive future payments under the installment payment plan. 57 Negron argued that because the IRS's valuation did not account for the nontransferability of the lottery payments, the IRS valuation was excessive. 58 Therefore, Negron argued, the circumstances warranted an exception to the use of the IRS annuity tables. 59 The district court noted a federal circuit court split as to whether the IRS annuity tables truly reflect the fair market value of future payments with restrictions on marketability. 60 As a result the district court granted Negron's motion in part and denied the IRS's conflicting motion. 6 1 The district court stated that the general rule is that a departure from the IRS annuity tables is warranted where proponent of departure can show that the tables produce an unrealistic and unreasonable result and where there is a more reasonable and realistic means to determine the annuity's fair market value. 62 The district court then found that an annuity's transferability affects its fair market value and that the value determined by use of the IRS annuity tables for the Estates' taxes was unreasonable and unrealistic. 63 Thus, the district court required further proceedings to determine whether a more realistic and reasonable valuation method existed so as to justify departure from the IRS annuity tables. 64 On appeal, the United States Court of Appeals for the Sixth Circuit examined the issue of whether the IRS used the proper discount rate when determining the present value of the future lottery payments. 65 The Sixth Circuit began its analysis by providing the rele- 55. Negron 1, 553 F.3d at Brief for Appellant at 6, Negron v. United States (No ). 57. Id. 58. Id. 59. Negron 1, 553 F.3d at Id. The United States Court of Appeals for the Second and Ninth Circuits have held that the IRS annuity tables do not accurately reflect the fair market value of future lottery payments with marketability restrictions, while the Fifth Circuit and two other district courts have held that the IRS annuity tables do accurately reflect the fair market value. Id. 61. Negron 11, 502 F. Supp. 2d at Brief for Appellant at 7, Negron v. United States (No ). 63. Negron 1, 553 F.3d at Id. 65. Id.

7 2010] NEGRON V. UNITED STATES vant statutory and regulatory framework. 6 6 As the Sixth Circuit explained, the Code provides that an estate tax exists on the transfer of the taxable estate on all deceased United States residents or citizens. 6 7 The Code defines the taxable estate as the value of the gross estate, less applicable deductions. 68 The Code explains that the value of the gross estate is the fair market value of all property included in the decedent's estate, as valued at the time of the decedent's death. 69 Finally, as explained in the Treasury Regulations, the fair market value of an asset equals the price at which the asset would change hands between a willing seller and a willing buyer, both with knowledge of the relevant facts. 70 As the Sixth Circuit noted, the Code provides that the general rule for valuing an annuity is that an annuity shall be valued under the IRS annuity tables unless the regulations provide to the contrary. 7 1 Next, the Sixth Circuit explained that the Treasury Regulations define an annuity as one or more payments that extend over a period of time. 7 2 Finally, the Sixth Circuit added that the Treasury Regulations also state that the fair market value of an annuity equals the present value of the annuity as determined by the standard IRS annuity tables. 73 As the Sixth Circuit explained, two exceptions to this general rule exist: (1) if the annuity is a restricted beneficial interest, or (2) if it is shown that (a) the value derived from the IRS annuity table is so unrealistic and unreasonable, that either a modification or a departure from the method is necessary, and (b) there is a more reasonable and realistic means of determining the value. 74 However, the Sixth Circuit noted that a considerable burden is imposed on those individuals seeking departure from IRS annuity tables by reason of one of these exceptions to show that those tables produced an unreasonable result See id (Providing relevant sections of the Code). 67. Id. (citing I.R.C. 2001). "A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the united states." I.R.C (West 2009). 68. Negron 11, 502 F. Supp. 2d at 685 (citing I.R.C. 2051). 69. Negron 1, 553 F.3d at 1016 (citing I.R.C. 2031, 2033). 70. Negron 1, 553 F.3d at 1016 (citing Treas. Reg (b)). (the "willing buyer/seller test"). 71. Id. (citing I.R.C. 7520(a)-(b)). 72. Id. (citing Treas. Reg (b)). 73. Id. at 1017 (citing Treas. Reg (d)). 74. See id. (citing Treas. Reg (b)(1)(ii)-(iii); Cook v. Commissioner, 349 F.3d 850, (5th Cir. 2003) (quoting O'Reilly v. Commissioner, 973 F.2d 1403, 1407 (8th Cir. 1992))). Treas. Reg (b)(1)(ii)-(iii) was effective for valuation dates after December 14, Id. 75. Id.

8 CREIGHTON LAW REVIEW [Vol. 43 Discussing the existing case law on the application of the IRS annuity tables for valuation dates prior to the 1995 effective date of Treasury Regulation section (b), 76 the Sixth Circuit also noted the federal circuit court split on the issue of whether the IRS annuity tables produce an unreasonable and unrealistic value for lottery payments with restrictions on marketability. 77 Citing Shackleford v. United States, 78 the Sixth Circuit stated the position of the United States Court of Appeals for the Ninth Circuit was based on the reasoning that the right to transfer property is one the most important "sticks in the bundle" of property rights. 7 9 Therefore, as the Ninth Circuit explained, any statutory restrictions on transferability reduce the fair market value of the right to obtain future lottery payments. 8 0 As a result, the Ninth Circuit found the IRS annuity tables did not reflect economic reality. 8 1 The court in Negron also noted that the United States Court of Appeals for the Second Circuit agreed with the reasoning of the Ninth Circuit. 8 2 Citing Cook v. Commissioner, 8 3 the court in Negron stated that the United States Court of Appeals for the Fifth Circuit disagreed with the Second and Ninth Circuits, and instead took the position that the IRS annuity tables do not produce unreasonable results, reasoning that there is an assumption of nonmarketability underlying the annuity tables. 8 4 The Sixth Circuit then noted that some district courts have also declined to follow the Second and Ninth Circuit's reasoning. 8 5 The Sixth Circuit then discussed case law concerning valuation dates after December 14, 1995, which was the effective date of the restricted beneficial interest exception. 8 6 The Sixth Circuit stated the case law suggested that the restricted beneficial interest exception only applied to restrictions that undermine the assumptions of the IRS annuity tables. 8 7 The Sixth Circuit then noted the Fifth Circuit stated that those assumptions involved the interest rate component C.F.R (b) (as amended in 1995). 77. Id. at F.3d 1029 (9th Cir. 2001). 79. Negron 1, 553 F.3d at 1018; 63 C Am. Jur. 2d Property 1 (2009) ("The legal definition of property most often refers not to a particular physical object, but rather to the legal bundle of rights recognized in that object... In its precise legal sense, property is nothing more than a collection of rights."). 80. Negron 1, 553 F.3d at Id. 82. Id F.3d 850 (5th Cir. 2003). 84. Negron 1, 553 F.3d Id. at (citing Davis v. United States, 491 F.Supp. 2d 192 (D.N.H. 2007); Estate of Donovan v. United States, 2005 WL (D. Mass. 2005)). 86. Id. at (citing Treas. Reg (b)). 87. Id. (citing Anthony v. United States, 520 F.3d 374, (5th Cir. 2008)).

9 20101 NEGRON V. UNITED STATES and the mortality component of the IRS annuity tables. 8 8 Marketability or transferability restrictions are not restrictions that would undermine those assumptions. 8 9 Noting that the case law suggested that a restriction on marketability of lottery winnings does not make the proceeds a restricted beneficial interest, the court in Negron then explained that using IRS annuity tables was required unless the results produced were unreasonable and unrealistic. 9 0 Under the unreasonable and unrealistic results exception, the cases cited by the court in Negron acknowledged that an asset is worth less than it would otherwise be if there is a marketability restriction, and therefore a marketability restriction affects a value, just not the relevant value. 9 1 The Sixth Circuit stated that the IRS annuity tables did not produce an unrealistic or unreasonable valuation, and thus the IRS used the tables properly to value the future lottery payments. 92 The court in Negron first found that the district court correctly determined that courts must use the IRS annuity tables unless they produce unreasonable and unrealistic results. 93 The Sixth Circuit explained that the unreasonable and unrealistic results exception guaranteed that Treasury Regulations will apply only when it would not go against the Code, or be capricious or arbitrary. 9 4 The Sixth Circuit therefore disagreed with the district court and opined that the IRS annuity tables did not produce an unrealistic and unreasonable result because the marketability restriction did not affect the relevant value of the annuity. 9 5 The Sixth Circuit reasoned that the Treasury Regulations provide generally that the value of every piece of property is its fair market value. 96 An annuity's fair market value is its present value prescribed by the IRS annuity tables, and non-marketability is an underlying assumption of those tables. 97 Next, the Sixth Circuit stated that the district court determined correctly that it did not need to consider the restricted beneficial interest exception even though the regulation containing the exception applied to the case because the valuation date was after the effective 88. Id. at 1017, 1019 (citing Treas. Reg (b)). 89. Id. at Id. 91. Id. (citing Estate of Donovan v. United States, No. Civ.A DPW, 2005 WL at *3 (D.Mass. Apr. 26, 2005) (stating that a marketability restriction did not affect that relevant value of future lottery winnings)). 92. Id. at Id. at Id. (citing Nichols v. United States, 260 F.3d 637, 644 (6th Cir. 2001)). 95. Id. 96. Id. 97. Id. (citing Treas. Reg (b),-7(d); Cook, 349 F.3d at 856)..

10 CREIGHTON LAW REVIEW [Vol. 43 date of the regulation. 98 The Sixth Circuit reasoned that this was because Negron only argued under the unrealistic and unreasonable results exception in her motion for partial summary judgment, and that the district court need not consider whether the restricted beneficial interest exception applied when it determined that the unreasonable and unrealistic results exception applied. 99 Thus, the Sixth Circuit concluded that the annuity tables fairly reflected the present value of the remaining lottery payments and had to be used to value the Estates' future lottery payments for estate tax purposes III. BACKGROUND A. TREASURY REGULATIONS, INTERNAL REVENUE CODE SECTIONS, AND CASE LAW REGARDING EXCEPTIONS TO USE OF IRS ANNUITY TABLES FOR ESTATE TAX PURPOSES 1. Treasury Regulation Section : Restricted Beneficial Interest Exception Treasury Regulation section defines an ordinary annuity interest as the right to receive annually a fixed dollar amount for some defined period The Internal Revenue Code ("Code"), generally values annuities by the tables prescribed by the Secretary of the Treasury Section , however, provides an exception to this general rule if the annuity is a restricted beneficial interest Section states that an annuity is a restricted beneficial interest if it is subject to any power, contingency, or other restriction, even if the terms of the will, trust, or other governing instrument, or other circumstances provide the restriction Standard annuity factors cannot be used to value a restricted beneficial interest, but special annuity factors may sometimes be used to value a restricted beneficial interest Id. at Id. at Id. at , C.F.R (as amended in 1995) Treas. Reg (b)(1)(i)(A) (as amended in 1995). A standard annuity factor under section 7520 for an ordinary annuity interest signifies the present value of the right to receive $1.00 per year for some defined period using the prescribed interest rate under this section. Id I.R.C. 7520(a) (West 2009) Treas. Reg (b)(1)(ii), (iii) Treas. Reg (b)(1)(ii). "A restricted beneficial interest is an annuity... that is subject to any contingency, power, or other restriction, whether the restriction is provided for by the terms of the trust, will, or other governing instrument or is caused by other circumstances." Id Id.

11 2010] NEGRON V. UNITED STATES 2. Treasury Decision 8630: Explanation of Restricted Beneficial Interest Exception As explained in the Federal Register, Congress did not intend to overrule the well-establish case law interpreting the exceptions to the use of the Internal Revenue Service's ("IRS") annuity tables by enacting the restricted beneficial interest exception Instead, the Federal Register explained that despite the IRS annuity tables prescribed in the regulations, the regulations generally adopt the principles set forth in the well-established case law Internal Revenue Code Section 7520: Statute Setting Forth Factors Present in the IRS Annuity Tables The Internal Revenue Code states that the general rule is that the Internal Revenue Service's annuity tables provide the value for an annuity That value is determined using an interest rate component that is equal to 120 percent, rounded to the nearest two-tenths of a percent, of the federal midterm rate for the month of the valuation date O'Reilly v. Commissioner: The Eighth Circuit Sets Forth the Unrealistic and Unreasonable Results Exception Justifying Departure from the IRS Annuity Tables In O'Reilly v. Commissioner, the United States Court of Appeals for the Eighth Circuit provided a case law exception to the general rule of using the Internal Revenue Service's ("IRS") annuity tables for estate tax valuation, specifically the unreasonable and unrealistic results exception. 112 In O'Reilly, Alma and Charles O'Reilly (the "O'Reillys") donated twenty O'Reilly Automotive shares to five grantor retained income trusts, retaining all income rights during the lifetime of each trust with the stock transferring to their children at 107. Actuarial Table Exceptions, 60 Fed. Reg. 63,914 (Dec. 13, 1995) (to be codified at 26 C.F.R. pt. 1, 20, 25). "These regulations generally adopt the principles established in case law and published IRS positions." Id Actuarial Table Exceptions, 60 Fed. Reg. at 63, I.R.C. 7520(a)(1) (West 2009). "For purposes of this title, the value of any annuity... shall be determined - (1) under tables prescribed by the Secretary, and (2) by using an interest rate (rounded to the nearest 2/10ths of 1 percent) equal to 120 percent of the Federal midterm rate in effect under section 1274(d)(1) for the month in which the valuation date falls." Id Id. 7520(a)(2) F.2d 1403 (8th Cir. 1992) See O'Reilly v. Comm'r, 973 F.2d 1403, 1409 (8th Cir. 1992) (explaining that departure from the tables is justified when the tables produce an unreasonable and unrealistic result for estate tax purposes, and there is a more realistic technique available).

12 CREIGHTON LAW REVIEW [Vol. 43 expiration Despite a history of small dividends, the O'Reillys valued the retained income interests for gift tax purposes utilizing actuarial tables at twenty-five to thirty percent of the full stock value The actuarial table assumed a ten percent rate of return annually The IRS found the use of the actuarial table inappropriate and assessed tax deficiencies based upon the full stock value at the date of the gift As a consequence, the O'Reillys petitioned the United States Tax Court to contest the deficiencies The IRS argued that the income interest was not susceptible to the generally accepted valuation principles, and therefore the gift tax should apply to the entire value of the stock.' 1 8 In contrast, the O'Reillys argued that utilization of the IRS annuity tables in Treasury Regulation section was required to value its assets for gift tax purposes. 120 The tax court found in favor of the O'Reillys, reasoning that the ten percent return assumed by the IRS annuity tables was inconsistent with the income produced by the stock.' 2 1 On appeal, the IRS argued, among other things, that the IRS annuity tables in Treasury Regulation section (e) 122 produced a clearly unreasonable value, and therefore could not be used. 123 In O'Reilly, the Eighth Circuit reversed the decision of the tax court and remanded the case to the tax court to redetermine the value of the gifts by means other than the IRS annuity tables. 124 The 113. O'Reilly, 973 F.2d at Id. At that time, the O'Reilly stock was worth $9, per share, and in the three years prior to the grantor retained income trusts donation, O'Reilly had paid dividends at a yield of only 0.2%. Id. The O'Reilly's basis was $ per share. Id. They valued their income interests using the gift tax actuarial tables as set forth in the Treasury Regulation section (f), Table B. Id Id Id Id. The full value on the date of the gift was $9, per share. Id Id Treas. Reg (West 2009) ("Except as otherwise provided in (b), the fair market value of annuities... is the present value of the interests determined under paragraph (d) of this subsection") O'Reilly, 973 F.2d at Id. at 1405 (citing O'Reilly v. Comm'r, 95 T.C. 646, (1990)). The Tax Court also rejected the IRS's argument because Treas. Reg (e) is not directed to situations where the gift is hard to value despite being an unconditional gift, but is directed towards situations where the conditions do not allow the gift to be valued. Id Treas. Reg (e) (West 2009) If a donor transfers by gift less than his entire interest in property, the gift tax is applicable to the interest transferred... However, if the donor's retained interest is not susceptible of measurement on the basis of generally accepted valuation principles, the gift tax is applicable to the entire value of the property subject to the gift tax. Id O'Reilly, 973 F.2d at Id. at 1408, 1409.

13 20101 NEGRON V. UNITED STATES Eighth Circuit addressed the issue of whether the tax court correctly determined that O'Reillys' retained income interests must be valued by use of the actuarial Table B First, the majority explained that the general and governing principle set forth in Treasury Regulation section is that the value of property is the price at which a willing seller and a willing buyer would complete a transaction while considering all relevant elements of value and fact. 127 The Eighth Circuit then explained that section referred to section for information concerning the valuation techniques of other specific types of properties. 128 The Eighth Circuit explained, however, that those other techniques should not apply if they violate the general and governing principle set forth in section In support of this proposition, the court in O'Reilly cited Hamm v. Commissioner, 130 another Eighth Circuit decision In Hamm, the Eighth Circuit held that for tax purposes, the valuation of property interests is one of fact and not formula, and therefore, courts must consult more than just the regulation's language to properly value an asset. 132 The court in O'Reilly then stated that a long followed tax court rule provides that the IRS annuity tables must be used unless they produce a result so unreasonable and unrealistic that some other valuation technique should be used, and a more realistic and reasonable technique is available. 133 The Eighth Circuit found the simple and predictable valuation rule employed by the tax court unpersuasive and noted that courts have departed from the IRS annuity tables in many cases Thus, the court in O'Reilly agreed with the proposition that the IRS annuity tables should apply unless the tables would pro Id. at Treas. Reg (West 2009). If a gift is made in property, its value at the date of the gift shall be considered the amount of the gift. The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. Id O'Reilly, 973 F.2d at , 1407 (citing Treas. Reg ). (the "willing buyer/seller test") Id. at 1406 (citing Treas. Reg (a)(1)(i), (c), (d)). The properties mentioned were "annuities, life estates, term for years, remainders, and reversions." Id Id. at F.2d 934, (8th Cir. 1963), cert denied, 377 U.S. 993 (1964) Id. (citing Hamm v. Comm'r, 325 F.2d 934, 938 (8th Cir. 1963), cert. denied, 377 U.S. 993 (1964)) Id Id. (citing Weller v. Comm'r, 38 T.C. 790, 803 (1962)) Id. at 1407, 1408.

14 CREIGHTON LAW REVIEW [Vol. 43 duce a substantially unreasonable and unrealistic result, and a more realistic and reasonable valuation technique was available In O'Reilly, the Eighth Circuit reasoned that compliance with the Internal Revenue Code and fairness in a given case required use of the alternative method to assess the fair market value of the gifted property.' 36 Further, the Eighth Circuit concluded that the burden of proof rests on the proponent of departure from the IRS annuity tables. 137 Finding that the IRS met that burden, the Eighth Circuit reversed the tax court's decision and remanded the case to the tax court for redetermination of the value of the gifts. 13 s B. PERTINENT FEDERAL CIRCUIT COURT DECISIONS FINDING MARKETABILITY RESTRICTIONS Do NOT JUSTIFY DEPARTURE FROM THE IRS ANNUITY TABLES 1. Cook v. Commissioner: The Fifth Circuit Provides an Analysis under the Unreasonable and Unrealistic Results Exception and Requires Valuation by the IRS Annuity Tables In Cook v. Commissioner, 139 the United States Court of Appeals for the Fifth Circuit provided another unrealistic and unreasonable results exception analysis, concluding that marketability restrictions do not render the values produced by the Internal Revenue Service's ("IRS") annuity tables unreasonable. 140 In Cook, the estate of Gladys Cook ("Cook") petitioned the United States Tax Court for a redetermination of a tax deficiency as assessed by the IRS In 1995, Cook bought a winning Texas lottery ticket valued at $17 million, which was payable in twenty yearly installments. 142 The initial payment was $858,648.00, while the remaining payments were each to be $853, State law prohibited assignment of the payments Cook and her sister previously had an informal agreement under which they shared any winnings After winning the $17 million prize, Cook and her sister converted that informal agreement into a formal limited partnership and each assigned her respec Id. at Id Id Id. at 1408, F.3d 850 (5th Cir. 2003) Cook v. Comm'r, 349 F.3d 850, (5th Cir. 2003) Cook, 349 F.3d at Id. at Id Id. Texas allowed assignment only by court order and also prohibited any lump sum collection of the payments. Id Id.

15 2010] NEGRON V. UNITED STATES 959 tive portion of the winnings to the partnership In doing so, both sisters received limited partnership interests of forty-eight percent and general partnership interests of two percent Cook died about four months after winning the lottery, and the partnership's assets at that time included the right to receive nineteen of the annual payments, and $391, in cash. 148 Cook's estate hired a valuation expert who valued the partnership's right to the future lottery payments at $4,575, by including a discount for non-marketability, and valued the estate's partnership interest at $1,529, This latter amount was included on the estate's tax return. 150 The IRS rejected the expert's valuation and assessed a deficiency after valuing the partnership's assets pursuant to the IRS annuity tables. 151 The IRS annuity tables produced the value of $8,557, for the future payments, and after determining a different value for the estate's partnership interest, the IRS found a tax deficiency of $873, Cook's estate then petitioned the United States Tax Court for a redetermination, arguing that the IRS should not have valued the future payments pursuant to its annuity tables Cook's estate and the IRS agreed that the only remaining issue was whether the estate had to use the IRS annuity tables to value the future lottery payments The parties also agreed that there was no market for the lottery prize The tax court in Cook followed the tax court's decision in Estate of Gribauskas v. Commissioner, 15 6 to reach its decision that future lottery payments are private annuities and therefore must 146. Id. The estate explained the apparent inconsistency resulting from the transfer of the non-transferrable lottery prize by stating that the partnership itself won the prize, and that the assignment was only a formalization of the already existing partnership and, therefore, there was no violation of the state law. Id. at 852 n Id. at Id. Ms. Cook died on November 6, Id Id Id Id Id. The IRS valued the estate's partnership interest using a discount for lack of control, partnership agreement restrictions, and a lack of a ready market, finding the value to be $3,222, Id Id. The estate retained a second expert witness for this redetermination while the IRS retained its own expert in case the court held that the annuity tables did not apply. Id. The estate's expert valued the payments at $6,053, and the partnership interest at $2,067,867.00, while the IRS's expert valued the payments at $5,762, and the partnership interest at $2,406,413.00, both experts using a nonmarketability discount. Id. n Id. The parties also agreed that if the prize had to be valued pursuant to the annuity tables, the value was $2,908,605.00, and if not, the value was $2,237, Id Id. at T.C. 142 (2001), rev'd, 342 F.3d 85 (2d Cir. 2003).

16 CREIGHTON LAW REVIEW [Vol. 43 be valued pursuant to the IRS annuity tables. 157 The estate appealed to the Fifth Circuit, arguing that the tax court erred in deciding that the IRS annuity tables did not produce an unreasonable result In the majority opinion for the Fifth Circuit, the court began its analysis by providing relevant regulations for estate valuation. 159 First, the Fifth Circuit noted that a taxable estate is taxed when transferred, and a taxable estate is the gross estate minus applicable deductions. 160 Second, the Fifth Circuit explained that the gross estate equals all of the estate's property Third, the Fifth Circuit provided that generally, the value of all property in the gross estate is the property's fair market value at the time of death, and the fair market value equals the price at which a willing buyer would buy the property from a willing seller The Fifth Circuit then noted that generally, the value of a private annuity is determined by the Internal Revenue Code, and is composed of a mortality component and an interest rate component The Fifth Circuit stated that using these two components provides a certain result when valuing an annuity. 164 The Fifth Circuit then explained that by requiring valuation by the IRS annuity tables, Congress demonstrated a preference for certainty and convenience over accuracy in an individual case because overall, the costs of inaccurate results would be small The Fifth Circuit did recognize, however, that the IRS annuity tables are not always used, and when a party shows that the IRS annuity tables produce an unreasonable and unrealistic result, departure from those tables is justified However, the Fifth Circuit stressed that the burden of proof is on the proponent of departure from the IRS annuity tables Id. at 852 (citing Estate of Gribauskas v. Comm'r, 116 T.C. 142 (2001), rev'd, 342 F.3d 85 (2d Cir. 2003)). The Fifth Circuit in Cook noted that the Tax Court decision below had relied on the prior decision of the Tax Court in Gribauskas, a decision which had since been reversed by the Second Circuit. Id Id. The estate also argued that the Tax Court erred by valuing the lottery winnings and not the partnership. Id See id. at 854 (citing 26 U.S.C. 2001(a), 2051; 2031(a); Treas. Reg (b); 26 U.S.C. 7520) Id. at 854 (citing 26 U.S.C. 2001(a); 2051) Id. (citing 26 U.S.C. 2031(a)) Id. (citing Treas. Reg (b)). (the "willing buyer/seller test") Id. (citing 26 U.S.C. 7520). The Fifth Circuit pointed out that the interest rate component is rounded and equal to 120 percent of the Federal midterm rate for the valuation month. Id See id. (explaining the mortality and interest rate component of the IRS annuity tables and stating, "Thus, for the property interests subject to 7520 and the accompanying regulations, the sometimes wide variation produced by experts' fair market valuation methods gives way to certainty produced by the valuation tables") Id Id Id. at (citing O'Reilly, 973 F.2d at 1409).

17 2010] NEGRON V. UNITED STATES The majority opinion in Cook then recognized previous cases in which federal courts had departed from the IRS annuity tables. 168 The Fifth Circuit stated that these courts departed from the IRS annuity tables only when the facts were inconsistent with the assumptions underlying those tables The Fifth Circuit also recognized the United States Court of Appeals for the Second and Ninth Circuits' decisions that have held that marketability must be considered when valuing future lottery payments. 170 Having determined that future lottery payments were annuities, the Fifth Circuit examined whether the IRS annuity tables produced a reasonable result Cook's estate argued that IRS annuity tables produced a result that was unreasonable, as evidenced by how the smallest difference in valuation between those tables and the opinion of any of the estate's experts was $2,504, The Fifth Circuit disagreed with this argument and explained that the difference in numbers was due to the non-marketability discounts applied by the experts, a discount not properly applied to the asset at issue The Cook majority then stated that marketability discounts do not properly apply to lottery prizes because non-marketability of a private annuity is assumed by the IRS annuity tables Cook's estate argued that there is an assumption of marketability underlying the IRS annuity tables because the interest rate component used in those tables is based on the federal government's marketable obligations. 175 However, the Fifth Circuit rejected this argument and stated that the interest rate of federal government marketable obligations determines the discount to present value, but does not indicate that the IRS annuity tables assume marketability. 176 The Fifth Circuit demonstrated that the IRS annuity tables assume non-marketability by providing examples of other non-marketable assets that valued under those tables, and explained that prior cases departed from the IRS annuity 168. Id. at 855 (citing Berzon v. Comm'r, 534 F.2d 528, 532 (2d Cir. 1976); O'Reilly v. Comm'r, 973 F.2d 1403, 1406 (8th Cir. 1992); Froh v. Comm'r, 100 T.C. 1, 5 (1993); Estate of Jennings v. Comm'r, 10 T.C. 323, 327 (1948); Hanley v. United States, 63 F. Supp. 73, (Ct. Cl. 1945)) Id Id. at 855 (citing Estate of Gribauskas v. Comm'r, 342 F.3d 85 (2d Cir. 2003); Shackleford v. United States, 262 F.3d 1029 (9th Cir. 2001)) Id. The Fifth Circuit relied on the decision of the Gribauskas Tax Court, to determine that the future lottery payments constituted an annuity. Id. The Fifth Circuit stated that the payment of a lottery prize is consistent with the meaning customarily given to annuities: an annuity is an obligation to make periodic payments to a stated sum to a stated recipient. Id Id Id. at Id Id. n Id. n.6.

18 CREIGHTON LAW REVIEW [Vol. 43 tables when facts undermined assumptions underlying those tables. 177 The Fifth Circuit then discussed how the Ninth Circuit in Shackleford v. United States 178 and the Second Circuit in Estate of Gribauskas v. Commissioner 17 9 did not follow the longstanding trend of departing from the IRS annuity tables only when facts are inconsistent with the underlying assumptions of those tables The Fifth Circuit described the reasoning of the Second and Ninth Circuits as being based on the ground that the right to alienate is fundamental to the value of any property. 181 The Fifth Circuit found error in this assertion by characterizing future lottery payments as the right to receive money annually for a certain term, independent of market forces. 182 Finally, the Cook majority explained how the unreasonable and unrealistic results exception did not apply because the exception does not include factors that are unnecessary to determine value The Fifth Circuit determined that marketability is important only to value property when capital appreciation is part of the value or when the value is difficult to determine.' 8 4 The majority then stated that marketability does not affect the essential right to a fixed payment stream, and reasoned that the value of lottery winnings is easily determined by aggregation of the payments paid by the lottery commission.' 8 5 The Cook majority then reasoned that lottery winnings do not need to be discounted because they are payable over time and the IRS annuity tables discount the winnings to present value.' 8 6 The Fifth Circuit then concluded that the tax court was correct that deviation from the IRS annuity tables was unwarranted for valuing future lottery payments because a reasonable valuation does not require a nonmarketability discount Id. (citations omitted) F.3d 1028 (9th Cir. 2001) F.3d 85 (2d Cir. 200) Cook, 349 F.3d at 856 (citing Gribauskas, 342 F.3d 85 (2d Cir. 2003); Shackleford v. United States, 262 F.3d 1029 (9th Cir. 2001)) Id. (citing Shackleford, 262 F.3d at 1032) Id Id. at 857. The majority did note, however, that there may be cases that do not resemble previous departure cases in which the facts might justify deviation from the tables. Id Id. The court supported its opinion that the value of annuities are not difficult to ascertain by noting annuities other than lottery winnings which parties have valued pursuant to the annuity tables even though the annuities were not marketable. Id Id Id Id.

19 20101 NEGRON V. UNITED STATES Judge W. Eugene Davis dissented and disagreed with the majority's opinion that only the interest rate and mortality rate components affected the reasonableness of the valuation.' 8 8 Judge Davis maintained that the broad language set forth in O'Reilly v. Commissioner 18 9 permitted any factor that affected the annuity's fair market value to be considered in determining whether the value produced by the IRS annuity table was unreasonable. 190 Judge Davis then noted how the O'Reilly court emphasized that valuing property for tax purposes is a process based on fact and not formula, and therefore, more than just the language of the regulation must be considered Anthony v. United States: The Fifth Circuit Provides an Analysis under the Restricted Beneficial Interest Exception and Finds Private Annuities Are Not Restricted Beneficial Interests In Anthony v. United States, 19 2 the United States Court of Appeals for the Fifth Circuit held that neither the restricted beneficial interest exception nor the unreasonable and unrealistic results exception warranted departure from the Internal Revenue Service's ("IRS") annuity tables when valuing a nontransferable structured settlement payment. 193 In Anthony, James Bankston's ("Bankston") estate filed suit against the United States after the IRS denied Bankston's estate refund claim, asking the United States District Court for the Middle District of Louisiana to determine the proper method for valuing the structured settlement payment. 194 In 1990, Bankston filed suit to seek damages after he was in an automobile accident and sustained injuries In 1991, Bankston became the beneficiary of three annuities, two of which were unassignable, as a result of agreeing to a structured settlement stemming from the automobile accident. 196 Bankston died in 1996 with ten payments remaining due on one of the annuities, and ten years of monthly payments due on the other two annuities Bankston's estate initially 188. Id. at 858 (Davis, J., dissenting) F.2d 1403 (8th Cir. 1992) Cook, 349 F.3d. at 858 (Davis, J., dissenting). (citing O'Reilly v. C.I.R., 973 F.2d 1403 (8th Cir. 1992)) Id F.3d 374 (5th Cir. 2008) Anthony v. United States, 520 F.3d 374, 376, 383, 384 (5th Cir. 2008) Anthony, 520 F.3d at Id. at Id. The annuities were owned by three different insurance companies, and each had payment periods of at least 15 years. Id. One of the annuities guaranteed 15 annual lump sum payments and the other 2 guaranteed monthly payments. Id. n Id. at 376.

20 CREIGHTON LAW REVIEW [Vol. 43 valued the annuities according to the IRS annuity tables at $2,371,409.00, and in 1997 reported a tax liability of $468, After an IRS audit, Bankston's estate was assessed an additional tax of $142,605.00, and thus paid a total of $610, for estate tax purposes, plus interest In 2001, Bankston's estate filed for a tax refund, claiming that the estate itself had overvalued the annuities Bankston's estate argued that due to marketability restrictions, the annuities' fair market values should have been the value of the annuities and not the value set forth in the IRS annuity tables The IRS denied the refund claim, and Bankston's estate filed suit The United States District Court for the Middle District of Louisiana found that the restrictions on assignability did not justify deviation from the IRS annuity tables and that those tables did not produce unreasonable and unrealistic results As a result, the district court found in favor of the IRS and that no tax refund was due because the IRS annuity tables properly valued the annuities; Bankston's estate appealed The Fifth Circuit first examined Treasury Regulation section (b), 20 5 the regulation that sets forth the restricted beneficial interest exception to the IRS annuity tables The Fifth Circuit explained that the Treasury Regulations value a restricted beneficial interest by its fair market value, disregarding the IRS annuity tables The Fifth Circuit then stated that that an annuity is a restricted beneficial interest when it is subject to a power, contingency, or other restriction, whether the governing instrument or other circumstances provide the restriction The Fifth Circuit examined the language and structure of the regulation and found that the "other restriction" language has a narrow definition, and applies only to restrictions that undermine the interest rate and mortality component assumed by the IRS annuity tables The Fifth Circuit stated that it 198. Id. The estate used the annuity tables prescribed by I.R.C Id Id Anthony v. United States, 520 F.3d 374, 376 (5th Cir. 2008). The estate claimed it was due a tax refund of $427, Anthony, 520 F. 3d at Id. at Id. Both parties moved for partial summary judgment regarding the proper method for valuing the annuities. Id Id Id C.F.R (b) (as amended in 1995) Anthony, 520 F.3d at Id. at 378 (citing Treas. Reg (b)(ii), (iii)) Id. at 380 (citing Treas. Reg (b)(ii), (iii)). The estate argued that the court should interpret the term, "other restriction," broadly, to create a marketability restriction exception to the use of the tables. Id Id. at 381.

21 2010] NEGRON V. UNITED STATES interprets regulations first by looking to their plain language, and where language is unambiguous, it would not look beyond the regulation's plain language to interpret the regulation The Fifth Circuit stated that in section (b), "other restriction" follows "contingency" and "power," specific types of restrictions that could undermine the IRS annuity tables' assumptions The Fifth Circuit next identified three examples of when a restricted beneficial interest exception would apply: (1) when it is expected that the annuity will exhaust its funds before making the last payment; (2) when the annuity's funds can be invaded without consent from the beneficiary; and (3) when the individual who is the measuring life of the annuity is terminally ill.212 The Fifth Circuit stated that these examples involved restrictions dissimilar from a marketability restriction The Fifth Circuit then noted Treasury Decision 8630,214 published contemporaneously with the restricted beneficial interest exception regulation, which states that the IRS annuity tables cannot be used if, under the applicable local law, the annuitant is not afforded the degree of beneficial enjoyment typically associated with the property interest The Fifth Circuit noted that the Treasury Decision explains that there will be beneficial enjoyment if the trust corpus is preserved Consequently, the Fifth Circuit found that beneficial enjoyment of an annuity is the ability of the corpus to withstand its periodic payments and not the annuitant's ability to transfer that annuitant's interest Relying on the conclusion in Cook v. Commissioner, 2 18 that the IRS annuity tables assume non-marketability, and having found that the restricted beneficial interest exception only applies when the circumstances of a given case undermine the assumptions of the those tables, the Fifth Circuit in Anthony found that the Bankston estate's annuities were not restricted beneficial interests because of the marketability restrictions The Fifth Circuit reasoned that this result was consistent with the preference for convenience 210. Anthony v. United States, 520 F.3d 374, 380 (5th Cir. 2008) Anthony, 520 F.3d at Id. at Id. at Table Exceptions, 60 Fed. Reg. 63,914 (Dec. 13, 1995) (to be codified at 26 C.F.R. pt. 1, 20, 25) Anthony v. United States, 520 F.3d 374, 381 (5th Cir. 2008) (citing 60 Fed. Reg. 63,913). The estate argued that the right to alienate a private annuity is necessary to the beneficial enjoyment of that interest, noting how common it is for one to market a structured settlement. Id Anthony, 520 F.3d at Id F.3d 850 (5th Cir. 2003) Anthony, 520 F.3d at 382.

22 CREIGHTON LAW REVIEW [Vol. 43 over certainty and accuracy in a given case Consequently, the Fifth Circuit affirmed the district court decision that the Bankston estate's annuities were not restricted beneficial interests Finally, the Fifth Circuit examined whether the unreasonable and unrealistic results exception applied to the Bankston estate's annuities The Fifth Circuit again relied heavily on Cook and found that the exception did not apply for two reasons First, the Fifth Circuit reasoned that the difference in the fair market value of the estate compared to the value prescribed by the IRS annuity tables was $1,176,810.00, while in Cook the disparity was even greater and still the Cook court did not depart from the IRS annuity tables. 224 Second, the court in Anthony explained that the court in Cook stated that under the unreasonable and unrealistic results exception, departure cannot be warranted when the disparity is due to a non-marketability factor Consequently, the Fifth Circuit agreed with the district court and determined that the results produced by the IRS annuity tables were not unreasonable and unrealistic " C. PERTINENT FEDERAL CIRCUIT COURT DECISIONS FINDING MARKETABILITY RESTRICTIONS Do JUSTIFY DEPARTURE FROM THE IRS ANNUITY TABLES 1. Shackleford v. United States: The Ninth Circuit Provides an Analysis Under the Unreasonable and Unrealistic Results Exception To Justify Departure from the IRS Annuity Tables In Shackleford v. United States, 227 the United States Court of Appeals for the Ninth Circuit provided an analysis under the unreasonable and unrealistic results exception to determine whether the Internal Revenue Service's ("IRS") annuity tables must be used to value future lottery payments for estate tax purposes. 228 After an analysis using the O'Reilly v. Commissioner 22 9 exception, the Ninth 220. Id. The tax court explained that probing the intricacies of an individual's contractual rights in each instance would unreasonably weaken the law. Id. at Id. at Id. at Id. at 384 (citing Cook v. Commissioner, 349 F.3d 850, (5th Cir. 2003) See id. (citing Cook, 349 F.3d at , and reasoning that the difference between the fair market value and the value produced by the table was less than that in Cook where the court did not depart from the tables and that departure is not warranted when the disparity is due to a non-marketability factor) Id. (citing Cook, 349 F.3d at 856) Id F.3d 1028 (2001) Shackleford v. United States, 262 F.3d 1028, (9th Cir. 2001) F.2d 1403 (8th Cir. 1992).

23 2010] NEGRON V. UNITED STATES Circuit concluded lottery payments with anti-assignment restrictions on lottery payments justified departure from the IRS annuity tables for estate tax valuation purposes In Shackelford, a retired Air Force officer, Thomas J. Shackleford ("Shackleford"), won $10 million playing the California Lotto Shackleford died with seventeen of his twenty un-assignable $508, annual payments still owed to him Under the IRS annuity tables, the remaining payments were valued at $4,023, so that Shackelford's estate owed federal estate taxes equaling $1,543, After paying $1,543,397.00, Shackelford's estate filed refund claims and amended tax returns, arguing the IRS annuity tables produced an unreasonable and unrealistic result and did not accurately reflect the asset's fair market value. 234 The IRS rejected Shackelford's estate's claim, and the estate then filed a refund claim in the United States District Court for the Eastern District of California The United States District Court for the Eastern District of California found that the lack of marketability must be considered for a fair evaluation of an asset for estate tax purposes, and that the IRS annuity tables produced unreasonable and unrealistic results inasmuch as those tables do not consider marketability The district court then looked outside the IRS annuity tables and valued the remaining payments at $2,012, On appeal, the Ninth Circuit began by citing numerous sections of the Internal Revenue Code ("Code"). 238 First, the Ninth Circuit noted that there is an estate tax for the taxable estate of every decedent Second, the Ninth Circuit explained that the taxable estate is the value of the gross estate less any allowed deductions. 240 Third, the Ninth Circuit pointed out that the gross estate is the value of all of the 230. Shackleford, 262 F.3d at 1029, Id. at Id. Under California law, assignment of lottery payments was prohibited. Id Id. I 234. Id. California law provided annuity terms that dictated how future payments were to be made to the decedent's estate while the federal estate tax was based on the present value of the income steam, which was due on a much shorter schedule. Id Id Shackleford v. United States, 262 F.3d 1028, 1030 (9th Cir. 2001). The IRS moved for summary judgment, arguing that the estate could not get a refund because the remaining payments were an annuity which was properly valued by the tables in 26 C.F.R Id. The court disagreed and held that departure from the tables would be warranted if the estate could show that the actual value was significantly lower than the value produced by the tables. Shackleford, 262 F.3d at Id See id. at 1031 (citing various sections of the Code and the United States Code) Id. (citing 26 U.S.C. 2001) Id. (citing 26 U.S.C. 2051).

24 968 CREIGHTON LAW REVIEW [Vol. 43 decedent's property at the time of the decedent's death, and that annuities owned by a decedent are part of the decedent's property Next, the Ninth Circuit noted that the fair market value of property included in the gross estate is the value of the property at the time of death. 242 The Ninth Circuit then stated that the Treasury Regulations explain that the fair market value of property equals the price at which it changes hands between a willing seller and a willing buyer, considering all relevant elements of value and fact The Ninth Circuit then explained that the Code values non-commercial annuities, like lottery payments, according to the IRS annuity tables unless some other provision applies. 244 Citing the United States Court of Appeals for the Eighth Circuit's decision in O'Reilly, the Ninth Circuit stated that the fair market value provision set forth in Treasury Regulation section (b) 24 5 is one of the provisions that would warrant a departure over the general valuation rule for non-commercial annuities if the IRS annuity tables produce a value that is unreasonably different from the fair market value of the annuity The court in Shackleford then explained that even though the IRS annuity tables were presumptively valid, federal courts have recognized that departure is warranted when those tables produce a substantially unreasonable and unrealistic result and when a more reasonable and realistic valuation technique is available The Ninth Circuit explained that the IRS annuity tables were presumed valid because they provided convenience and certainty in many cases; however, when those tables produced unreasonable results, faith that the IRS annuity tables will average out over time would not suffice The Ninth Circuit then noted that due to the presumption that the IRS annuity tables produce a correct result, a considerable burden of proof is placed on the proponent of departure from those tables Nonetheless, the Ninth Circuit reasoned that fairness in a given case demands deviation from the IRS annuity tables when those tables produce unreasonable and unrealistic results Id. (citing 26 U.S.C. 2031, 2033, 2039) Shackleford v. United States, 262 F.3d 1028, 1031 (9th Cir. 2001) (citing Treas. Reg (b)) Shacleford, 262 F.3d at 1031 (citing Treas. Reg (b)) (the "willing buyer/seller test") Id. (citing 26 U.S.C. 7520) C.F.R (b) (West 2009) Shackleford, 262 F.3d at 1031 (citing O'Reilly, 973 F.2d at 1407) Id. at 1031, 1032 (citing Weller v. Comm'r, 38 T.C. 790, 803 (1962); O'Reilly v. Comm'r, 973 F.2d 1403, 1409 (8th Cir. 1992)) (citations omitted) Id. (citing O'Reilly, 973 F.2d at 1409) Id. at 1032 (citing O'Reilly, 973 F.2d at 1408) Id. at 1031 (citing O'Reilly, 973 F.2d at 1409).

25 20101 NEGRON V. UNITED STATES The Ninth Circuit then cited two Supreme Court of the United States decisions to support the conclusion that an anti-assignment restriction justified departure from the IRS annuity tables because it reduces the fair market value of future lottery payments In Helvering v. Safe Deposit Trust Co. of Baltimore, 2 52 the Supreme Court stated that a significant factor in valuing a decedent's assets is the reality of the decedent's economic interest in that asset In Guggenheim v. Rasquin, 25 4 the Supreme Court stated that one must consider each characteristic of a property interest to determine the asset's value for estate tax purposes The court in Shackleford also cited another Ninth Circuit decision, affirmed by the Supreme Court, in which the Ninth Circuit stated that one of the most important "sticks in the bundle" of property rights is the right to transfer Following this line of reasoning, the Ninth Circuit in Shackelford affirmed that district court finding that the IRS annuity tables produced an unreasonable and unrealistic result because those tables did not take into account any discount reflecting the non-marketability of the future payments.257 The Ninth Circuit then refuted the IRS's arguments that the lack of a market due to a restriction on assignability meant that the asset can be valued only by the IRS annuity tables and that considering alienability when determining fair market value would go against the bright line regulatory rule of those tables In regards to the IRS's lack of a market argument, the Ninth Circuit stated that where a willing buyer and a willing seller do not exist, the court will presume both the buyer and seller's presence in a hypothetical sale The Ninth Circuit refuted the IRS's bright line rule by first noting how the IRS often has sought departure from its annuity tables when it was the disadvantaged party and believed the value derived from those tables under-valued the particular asset The Ninth Circuit also noted that the presumption that the IRS annuity tables are correct unless they produce unreasonable and unrealistic values is not affected by 251. Id. at 1029, The majority noted that tax theory is consistent conclusion. Id U.S. 56 (1942) Shackleford v. United States, 262 F.3d 1028, 1032 (9th Cir. 2001) (citing Helvering v. Safe Deposit & Trust Co. of Baltimore, 316 U.S. 56 (1942)) U.S. 254 (1941) Shackleford, 262 F.3d at 1032 (citing Guggenheim v. Rasquin, 312 U.S. 254, 257 (1941)) Id. (citing Youpee v. Babbitt, 67 F.3d 194, 197 (9th Cir. 1995), affd Babbit v. Youpee, 519 U.S. 234 (1997)) Id. at Id. at Id Id.

26 CREIGHTON LAW REVIEW [Vol. 43 including the consideration of marketability restrictions in a fair market analysis, and therefore, courts are free to use an alternative valuation method if that alternative method more closely approximates an asset's fair market value Estate of Gribauskas v. Commissioner: The Second Circuit Provides an Analysis under the Unreasonable and Unrealistic Result Exception to Use of the Annuity Tables to Justify Departure from the Annuity Tables In Estate of Gribauskas v. Commissioner, 2 62 the United States Court of Appeals for the Second Circuit determined that departure from the Internal Revenue Service's ("IRS") annuity tables was required after engaging in an unreasonable and unrealistic results exception analysis In Gribauskas, Paul Gribauskas ("Gribauskas"), the decedent, and his wife won the Connecticut Lotto with a prize of $15,807,306.60, paid in twenty $790, annual installments Thereafter, pursuant to Gribauskas and his wife's divorce settlement, Gribauskas was entitled only to annual payments of $395, Gribauskas died intestate having received only two of the twenty payments, and his estate filed an estate tax return that discounted the value of the remaining payments to account for the assignment restrictions imposed by Connecticut Gribauskas's estate and the IRS stipulated that, at the time Gribauskas's estate filed its estate tax return, there was a market for un-assignable winnings, but at a significant discount Gribauskas's estate valued the future lottery payments at $2,603, on its return after taking into account the market discount The IRS disagreed with Gribauskas's estate's valuation, and asserted that the IRS annuity tables should have been used to value the future lottery payments because the future lottery payments constituted an annuity The IRS used its annuity tables and determined the value of the future payments was $3,528,058.22, and assessed Gribauskas's estate a $403, tax deficiency Id F.3d 85 (2003) Estate of Gribauskas v. Comm'r, 342 F.3d 85, (2d Cir ) Gribauskas, 342 F.3d. at Id Id. Mr. Gribauskas died on June 4, 1994, and his estate filed the tax return on September 11, Id. The restrictions imposed by the State of Connecticut provided that all prizes exceeding $1 million were payable in twenty equal payments, paid annually; those payments could not be accelerated and winners could not assign or transfer their rights to receive the payments to a third party. Id Id Id Id. at (citing I.R.C. 7520) Estate of Gribauskas v. Comm'r, 342 F.3d 85, 87 (2d Cir. 2003).

27 2010] NEGRON V. UNITED STATES Gribauskas's estate responded by filing a petition in the United States Tax Court, arguing that it should not be required to use the IRS annuity tables because those tables produced an unreasonable and unrealistic result by not accounting for any loss of value as a consequence of the restrictions on marketability. 2 7 ' The tax court held that marketability restrictions by themselves did not justify departure from the IRS annuity tables because deviation on the basis of marketability restrictions would undermine the policy favoring standardized annuity valuation. 272 The Second Circuit disagreed, stating that the desire for standardization is not that demanding The Second Circuit began its analysis by citing the relevant Internal Revenue Code ("Code") sections and Treasury Regulation section for taxing an estate First, the Second Circuit noted that the Code imposes a tax on the value of every decedent's taxable estate Second, the Second Circuit explained that the Code defines the fair market value of the decedent's assets as the value of the gross estate, and that the Treasury Regulations determine that fair market value equals the price a willing buyer would pay a willing seller for the asset, considering all relevant elements of value and facts. 276 Third, the Second Circuit pointed out that the Code provides the general rule that a taxpayer must use the IRS annuity tables to value an annuity The Second Circuit then explained the case law exceptions to the general rule that the IRS annuity tables determine the value of an annuity. 278 Citing O'Reilly v. Commissioner, 2 79 the Second Circuit stated that departure from the IRS annuity tables to value an annuity is warranted when those tables produce unreasonable and unrealistic results and that the proponent of departure has the considerable burden of proving the IRS annuity tables result in an unreasonable and unrealistic result The Second Circuit relied on the United States Court of Appeals for the Ninth Circuit's decision in 271. Gribauskas, 342 F.3d at 87. The estate first argued that the future payments did not constitute an annuity, and therefore, should not have been valued pursuant to the IRS tables. Id. n.1. The United States Tax Court rejected this argument, holding that the lottery prize was an annuity. Id. n Id. (citing Estate of Gribauskas v. Comm'r, 116 T.C. 142, 165 (2001)) Id See id. (citing relevant sections of the Code and the United States Code) Id. (citing 26 U.S.C. 2001, 2051). The taxable estate is the gross estate less applicable deductions. Id Id. (citing U.S.C. 2031; 26 C.F.R (b)). (the 'willing buyer/seller test") Estate of Gribauskas v. Comm'r, 342 F.3d 85, 87 (2003) (citing 26 U.S.C. 7520(a)) Gribauskas, 342 F.3d at 87 (citing O'Reilly, 973 F.2d 1403 (8th Cir. 1992)) F.2d 1403 (8th Cir. 1992) Gribauskas, 342 F.3d at 87 (citing O'Reilly, 973 F.2d at 1408).

28 CREIGHTON LAW REVIEW [Vol. 43 Shackleford v. United States 28 1 as a guidepost and followed the Ninth Circuit's reasoning that noted that the right to transfer property is one of the most essential "sticks in the bundle" of property rights, and therefore an asset subject to marketability restrictions is worth less than an identical item that has no such restrictions Noting that the valuation of the lottery winnings was $900, below the valuation prescribed by the IRS annuity tables, the Second Circuit stated that application of those tables produced an unreasonable and unrealistic result, and therefore held that it was error to value the winnings pursuant to the IRS annuity tables The Second Circuit then rejected the IRS's argument that, despite the broad language in cases that find departure from its annuity tables appropriate, departure from those tables is appropriate only when the party seeking departure can show some inconsistency between the facts of the given case and the assumptions underlying the IRS annuity tables The Second Circuit stated that it was unadvisable to distinguish cases where the facts are inconsistent with IRS annuity tables' assumptions from cases that look only to an error in the ultimate value The Second Circuit reasoned that the departures in the earlier cases were based completely on errors in the ultimate valuation and that the governing principle was that deviation from the IRS annuity tables is permitted if the tables produce an unreasonable and unrealistic result The Second Circuit opined that the need for consistency and efficiency does not always justify application of the standardized IRS annuity tables because the law sufficiently accounts for this policy concern by placing the burden on the proponent of departure to prove that the IRS annuity tables produce unreasonable and unrealistic results IV. ANALYSIS In the case of Negron v. United States, 28 8 the United States Court of Appeals for the Sixth Circuit analyzed the federal circuit split on the issue of whether the Internal Revenue Service's ("IRS") annuity tables must be used to value future lottery winnings for estate tax F.3d 1028 (9th Cir. 2001) Gribauskas, 342 F.3d. at (citing Shackleford, 262 F.3d at 1032) Id. at Id. at Examples given by the Commissioner of when the facts are inconsistent with the assumptions include when the rate of return is lower than the rate assumed under the tables, or when the death of the measuring life is due to a terminal illness. Id. at Gribauskas, 342 F.3d at Id. at Id F.3d 1013 (6th Cir. 2009).

29 2010] NEGRON V. UNITED STATES purposes The United States Court of Appeals for the Second and Ninth Circuits have found that if the results produced by the IRS annuity tables are unreasonable and unrealistic, regardless of the cause, then departure from those tables may be warranted. 290 On the other hand, the United States Court of Appeals for the Fifth Circuit has found that departure from the IRS annuity tables is warranted only when a case's facts undermine the IRS annuity table's factual assumptions Having decided that the IRS annuity tables assume nonmarketability, the Fifth Circuit stated that the results produced by the IRS annuity tables cannot be unreasonable and unrealistic due to a marketability restriction In Negron, the Sixth Circuit found the reasoning of the Fifth Circuit persuasive, and determined that the IRS properly valued the future lottery payments for estate tax purposes by using the IRS annuity tables because those tables did not produce an unreasonable or unrealistic result In Negron, Carol Negron ("Negron"), as executrix for the estates of Mildred Lopatkovich and Mary Susteric (collectively the "Estates"), both lottery winners with future lottery payments still to be received at the time of their respective deaths, brought suit against the IRS for a tax refund after the IRS denied Negron's refund claims Negron had not used the IRS annuity tables contained in the Internal Revenue Code ("Code") to value the future lottery payments for estate tax purposes, which caused the IRS to assess a tax deficiency The United States District Court for the 289. Negron v. United States (Negron 1), 553 F.3d 1013, (8th Cir. 2009) See Gribauskas, 342 F.3d at (finding that the IRS annuity tables produced unreasonable and unrealistic results because the governing principle behind the unreasonable and unrealistic results exception is a difference in the ultimate valuation, regardless of whether the facts undermine the assumptions of the tables); see also Shackleford v. United States, 262 F.3d 1028, (finding that the tables produced an unreasonable and unrealistic result because the tables did not account for the marketability restriction which affected the value of the asset) See Cook v. Comm'r, 349 F.3d 850, 856 (5th Cir. 2003) (affirming the holding of the district court that the IRS annuity tables produced reasonable and realistic results, reasoning that previous cases have departed from the tables only when the facts in a given case undermine the tables' assumptions See Cook, 349 F.3d at 855 (stating that the values produced by the IRS annuity tables were not unreasonable because the disparity between the IRS annuity table's valuation and the expert's valuation was due to a marketability discount and that nonmarketability is assumed by the IRS annuity tables) Negron 1, 553 F.3d at Id. at Both parties filed motions for summary judgment, regarding the proper valuation method for annuities, with the United States District Court for the Northern District of Ohio. Id. at Id. at Negron reported the value of the future lottery payments at $2,275, based on the amount received from the Ohio Lottery Commission. Id. The IRS valued the future lottery payments at $2,775, for Lopatkovich, and $2,668, for Susteric, pursuant to the annuity tables. Id. To value the remaining payments, the Ohio Lottery Commission used a discount rate of 9.0%, pursuant to

30 CREIGHTON LAW REVIEW [Vol. 43 Northern District of Ohio found that a marketability restriction affects an annuity's fair market value. 296 As a consequence, the district court asserted that the result produced by the IRS annuity tables was unreasonable and unrealistic, and a departure from those tables was warranted to value the Estates' lottery winnings if Negron could show a more realistic and reasonable valuation method was available The Sixth Circuit reversed the decision of the district court because it determined the IRS annuity tables did not produce an unreasonable and unrealistic result In reviewing the decision of the district court, the Sixth Circuit examined the case law regarding application of the IRS annuity tables and the exceptions to its use The Sixth Circuit first determined that the district court was correct that the IRS annuity tables must be used unless the proponent of departure showed both that the result produced was unreasonable and unrealistic and there was a more realistic and reasonable valuation method available Relying on the Fifth Circuit decision in Cook v. Commissioner, 30 1 however, the Sixth Circuit then stated that the result produced by the IRS annuity tables was not unreasonable and unrealistic despite the marketability restriction affecting the annuities' fair market values The Sixth Circuit reasoned that the IRS annuity tables did not produce an unreasonable and unrealistic result because those tables assume non-marketability and the future lottery payments were a guaranteed income stream Finally, the Sixth Circuit in Negron opined that the district court did not err by not addressing the restricted beneficial interest exception to the use of the IRS annuity tables The Sixth Circuit reasoned that because Negron had not argued that the restricted beneficial interest exception applied, the district court did not need to determine whether the restricted beneficial interest exception should apply when it consid- Ohio's state valuation tables, while the IRS used a discount rate of 5.0% for Lopatkovich and 5.6% for Susteric, pursuant to the IRS annuity tables. Id Id Id. In reaching its conclusion, the district court examined the circuit split on the issue of whether the annuity tables produced a value that reasonably reflects the fair market value of an annuity with marketability restrictions. Id. The district court was persuaded by reasoning of the United States Court of Appeals for the Second and Ninth Circuits. Id Id at Id. at Id. at F.3d 850 (5th Cir. 2003) Negron I, 553 F.3d at Id Id. at

31 2010] NEGRON V. UNITED STATES ered whether the case law exception warranted departure from the IRS annuity tables This Analysis will argue that the Sixth Circuit concluded incorrectly that an exception did not warrant departure from the IRS annuity tables due to the marketability restrictions on the future lottery payments This Analysis will demonstrate that if the Sixth Circuit had considered the restricted beneficial interest exception in Treasury Regulation section (b), 30 7 the court would have found that the restricted beneficial interest exception applied to the Estates' future lottery payments because the IRS annuity tables do not assume non-marketability and a marketability restriction falls under the language, "other restriction," found in Treasury Regulation section (b) This Analysis will then argue that the Sixth Circuit erred when it decided that the IRS annuity tables did not produce an unreasonable and unrealistic result First, the court in Negron relied on the faulty reasoning of the Fifth Circuit in Cook to conclude that the facts did not undermine the factual assumptions of the IRS annuity tables Second, the court in Negron relied on the faulty reasoning of the court in Cook and of certain district courts to find that a marketability restriction does not affect the relevant value of future lottery payments The Sixth Circuit was incorrect about these two propositions because the unreasonable and unrealistic results exception, as articulated by the United States Court of Appeals for the Eighth Circuit in O'Reilly v. Commissioner, 3 12 is concerned with the ultimate valuation of the asset, and a marketability restriction affects the ultimate valuation of any asset Finally, this Analysis will argue that had the Sixth Circuit reached the question, it would have found that there was a more reasonable and realistic valuation method available Id. at See infra notes and accompanying text C.F.R (b) (as amended in 1995) See infra notes and accompanying text See infra notes and accompanying text See infra notes and accompanying text See infra notes and accompanying text F.2d 1403 (8th Cir. 1992) See infra notes and accompanying text See infra notes and accompanying text.

32 CREIGHTON LAW REVIEW [Vol. 43 A. THE RESTRICTED BENEFICIAL INTEREST EXCEPTION: HAD IT CONSIDERED THE ISSUE, THE SIXTH CIRCUIT WOULD HAVE FOUND THAT THE RESTRICTION ON FUTURE LOTTERY PAYMENTS QUALIFIED AS A RESTRICTED BENEFICIAL INTEREST The United States Court of Appeals for the Sixth Circuit in Negron v. United States 3 15 did not address whether the future lottery payments fell under the codified restricted beneficial interest exception to use of the Internal Revenue Service's ("IRS") annuity tables If it had, the Sixth Circuit would have found that the marketability restriction placed upon the future lottery payments of both the estate of Mildred Lopatkovich and the estate of Mary Susteric (collectively the "Estates") as a restriction within the purview of the restricted beneficial interest exception The Treasury Regulation section (b) 3 18 provides expressly that a restricted beneficial interest is an annuity that is subject to any power, contingency, or other restriction When the Sixth Circuit discussed the relevant case law, it discussed reasoning from the United States Court of Appeals for the Fifth Circuit, which had held that payment of the future lottery winnings was not a restricted beneficial interest. 320 A review of the relevant Treasury Regulations and prior case law from the United States Court of Appeals for the Eighth, Second, Ninth, and Fifth Circuits, however, establishes that the presence of a marketability restriction on the Estates' future lottery payments meant there was a restricted beneficial interest and, thus, the restricted beneficial interest exception should have applied The Non-Marketability of an Annuity Is Not an Assumption Underlying the IRS Annuity Tables Treasury Regulation section (b)(1)(i)(A) 3 22 defines an ordinary annuity interest as the right to receive an annual fixed dollar amount for some defined period Internal Revenue Code section provides that the general rule for valuing an ordinary annuity interest is to value it pursuant to the Internal Revenue Service's F.3d 1013 (6th Cir. 2009) Negron v. United States (Negron 1), 553 F.3d 1013, (6th Cir. 2009) See infra notes and accompanying text C.F.R (b) (as amended in 1995) Id See Negron I, 553 F.3d at 1019 (discussing the holding in Anthony v. United States, 520 F.3d 374 (5th Cir. 2008)) See infra notes and accompanying text C.F.R (b)(1)(i)(A) (as amended in 1995) Treas. Reg (b)(1)(i)(A) (West 2009) I.R.C. 7520(a)(1) (West 2009).

33 20101 NEGRON V. UNITED STATES ("IRS-) annuity tables Section 7520 is silent, however, as to whether the value of an annuity with a marketability restriction is calculated by using the IRS annuity tables In Estate of Gribauskas v. Commissioner, 32 7 the United States Court of Appeals for the Second Circuit stated that, as a rule, an asset subject to marketability restrictions has less value than an identical asset that is marketable. 328 The United States Court of Appeals for the Ninth Circuit in Shackleford v. United States agreed that an asset is less valuable if its marketability is restricted than if its marketability is not restricted, and as a consequence, concluded that the use of the IRS annuity tables to value an annuity with a marketability restriction produced an unreasonable and unrealistic result because those tables did not reflect a discount for non-marketability The Ninth Circuit in Shackleford could not have concluded that the IRS annuity tables produced an unreasonable and unrealistic result if those tables assumed non-marketability because, if the annuity tables assumed non-marketability, then the result produced by those tables would be reasonable or realistic as compared to the fair market value Thus, the IRS annuity tables do not assume non-marketability because if those tables did, they would produce either the same value as the fair market or at least a value that is reasonable and realistic compared to the fair market value of an annuity with a marketability restriction A Marketability Restriction Is an "Other Restriction" which Means the Sixth Circuit Should Have Concluded that the Restricted Beneficial Interest Applied and Deviation from the IRS Annuity Tables Was Warranted The United States Court of Appeals for the Fifth Circuit in Anthony v. United States 33 3 stated that courts interpret regulations 325. I.R.C. 7520(a)(1) (West 2009) See I.R.C. 7520(a)(1) (stating the general rule is that an annuity is valued pursuant to the IRS annuity tables) F.3d 85 (2d Cir. 2003) Estate of Gribauskas v. Comm'r, 342 F.3d 85, 88 (2d Cir. 2003) F.3d 1028 (9th Cir. 2001) Shackleford v. United States, 262 F.3d 1028, (9th Cir. 2001) See Shackleford, 262 F.3d at (concluding that IRS annuity tables produced an unreasonable and unrealistic value for an annuity with a marketability restriction explaining that the IRS annuity tables did not reflect accurately economic reality because the tables do not account for a marketability discount) See supra notes and accompanying text; see also Gribauskas, 342 F.3d at 88 (explaining that the IRS annuity tables overvalued the annuity by over $900, because it did not take into account a market discount attributable to the marketability restriction) F.3d 374 (5th Cir. 2008).

34 CREIGHTON LAW REVIEW [Vol. 43 first by looking to their plain language In Anthony, the Fifth Circuit explained that where the language is unambiguous, courts do not look beyond that plain language to interpret the meaning of a regulation. 335 Treasury Regulation section (b) 33 6 states that an annuity that is subject to any power, contingency, or other restriction is a restricted beneficial interest, and that the governing instrument or other circumstances can provide or cause that restriction Under section (b), if the annuity is subject to a "restriction," the restricted beneficial interest exception applies such that deviation from the Internal Revenue Service's ("IRS") annuity tables is permitted In Anthony, the Fifth Circuit identified three examples of instances in which a restricted beneficial interest exists, and thus, the restricted beneficial interest exception would apply: (1) when it is expected that the annuity will exhaust its funds before making the last payment; (2) when the annuity's funds can be invaded without consent from the beneficiary; and (3) when the individual who is the measuring life of the annuity is terminally ill As the Fifth Circuit observed, these are all situations in which the restriction may cause the annuitant not to receive the full value of the annuity. 340 In Shackleford v. United States, 3 41 the United States Court of Appeals for the Ninth Circuit found that marketability restrictions reduce an asset's value and may cause the annuitant to receive less than the full value of the annuity In Negron v. United States, 34 3 there was a marketability restriction on the future lottery payments of both the estate of Mildred Lopatkovich and the estate of Mary Susteric estate (collectively the "Estates"). 344 That restriction would cause the Estates to receive less than the full value of those payments because the Estates' future lottery payments were of less value than identical future payments not so burdened Anthony v. United States, 520 F.3d 374, 380 (5th Cir. 2008) Id C.F.R (b) (as amended in 1995) Treas. Reg (b)(ii) (as amended in 1995) See Treas. Reg (b) (explaining that the actual fair market value is based on all facts and circumstances if the interest is a restricted beneficial interest) Anthony, 520 F.3d at Cf id. (stating that these are examples that may cause the corpus that funds the payments to exhaust prematurely) F.3d 1028 (9th Cir. 2001) See Shackleford v. United States, 262 F.3d 1028, 1032 (9th Cir. 2001) (explaining that if an asset's marketability is restricted, it is less valuable than identical but marketable asset) F.3d 1013 (6th Cir. 2009) Negron 1, 553 F.3d at Compare Negron I, 553 F.3d at 1014 (noting that there was a marketability restriction placed upon the estate's future lottery payments), with Shackleford, 262 F.3d