The opinion of the court was delivered by: Crabtree
This is a transfer inheritance tax case wherein plaintiff seeks review of defendant's determination of a deficiency in tax due with respect to the estate of Elaine H. Blount, who died testate on March 19, 1990. The deficiency is attributable to defendant's redetermination of the value of decedent's vested remainder interests in three trusts and to a disallowance of a deduction for fees paid to counsel for the beneficiaries of decedent's estate.
At her death, decedent owned vested remainder interests in three trusts: the trust under the will of Paul E. Heller, the Arnaud G. Heller Insurance Trust and the Arthur E. C. Heller Insurance Trust (collectively referred to hereafter as the "trusts"). The trusts all provided for distribution of principal to the decedent upon the death of the last to die of two individuals, both of whom survived the decedent, namely, Ruth Heller Lowe and Gladys Heller Fenlin, who, on the date of decedent's death, were 86 and 81 years old, respectively.
The clear market value of the aggregate remainder interests in the trusts on the date of decedent's death is not in dispute. At issue, in this regard, is the value of the intervening life estates of Ruth Heller Lowe and Gladys Heller Fenlin, which must be subtracted from the date of death value of the principal of the trusts, in order to determine the value of the decedent's remainder interests therein for transfer inheritance tax purposes.
Plaintiff valued the intervening joint life estates by resort to the current valuation table promulgated by the Internal Revenue Service (IRS) asset forth in IRS Publication 1457, issued August 1989. The interest rate was 10.2%, 120% of the so-called federal midterm rate for March 1990. The factor taken from IRS Publication 1457 for two lives, using an interest rate assumption of 10.2%, was 44.773%. IRS Publication 1457 was, in turn, based upon U.S. Decennial Life Tables for 1979-1981, Vol. 1, No. 1, United States Life Tables, Dept. of Health and Human Services Public Health Service Publication No. (PHS) 85-1150-1 August 1985. The factor of 44.773% came from Table 1 of PHS 85-1150-1, Life Table for the Total Population (i.e., a gender-neutral table).
Plaintiff's methodology produced a total value for decedent's remainder interests, after deducting the value of the intervening life estates, of $1,507,387.
Defendant increased the value of the remainder interests to $2,232,245, using the factors set forth in IRS Publication 723A (December 1970), entitled "Actuarial Values II: Factors at 6 percent Involving One and Two Lives." The data set forth in IRS Publication 723A is in turn derived from United States Life Tables 1959-1961, published by the Department of Health, Education and Welfare as Public Health Service Publication No. 1252, issued December 1964. Table LT6 of IRS Publication 723A, using a 6% interest rate assumption, shows a factor of 66.006% for two females aged 86 and 81 years. Defendant applied the latter percentage to the decedent's remainder interests in arriving at its determination of value.
After the complaint was filed, plaintiff revalued the remainder interests using Table 3 of PHS 85-1150-1, Life Table for Females (a gender-specific table), from which he derived a factor of 42.272%, using the same interest rate assumption of 10.2%. This calculation reduced the taxable value of the remainder interests from $1,507,387 to $1,423,185. Plaintiff computed the tax attributable to the difference at $13,472 and claimed a refund of that amount.
Plaintiff's principal witness at the trial was Daniel M. Arnold, a consulting actuary, who qualified as an expert in the field of actuarial science.
He testified that the Department of Health, Education and Welfare (now the Department of Health and Human Services) has produced United States life tables every ten years, starting with the 1900-02 period. The tables are based on the decennial census for the middle year, i.e., the tables for the years 1959-1961 are derived from census data compiled for 1960. The tables used death registrations from the several states for the decennial bracket of three years. The function of the data, Arnold declared, is to indicate probabilities of death. The deaths in the three bracketed years (the year before the census, the year of the census and the year after the census) are aggregated and the total divided by three to arrive at an average number of deaths for each age group. The tables are further refined by gender, by age group and total population. The data thus compiled, combined with interest rate assumptions, are used by the IRS to determine life estate and remainder factors in connection with federal estate and gift taxes.
When the tables are adjusted every decade, the witness went on, they reflect the changes in mortality which have occurred since the previous census.
Since May 1, 1989, Arnold continued, the IRS has valued life estate and remainder interests in accordance with § 7520 of the Internal Revenue Code of 1986. That statute requires that the most recent mortality experience available be utilized and that the mortality tables shall be revised at least once every decade. In addition, § 7520 requires an interest rate equal to 120% of the federal midterm interest rate in effect for the month in which the valuation date falls. The federal midterm interest rate for March 1990, the month in which decedent died, was 8.52%, and 120% of that rate was 10.27%.
The latest mortality tables available for valuation of the remainder interests in question were the U.S. Decennial Life Tables for 1979-81, PHS 85-1150-1, incorporated in IRS Publication 1457, issued in August 1989. Arnold utilized those tables (first the gender-neutral table, later the female table) with the applicable interest rate of 10.2%, and, utilizing his actuarial expertise, calculated the remainder factor following the death of the survivor of two life beneficiaries aged 86 and 81 years, to be, first, 44.773% (Table 1-Total Population), then 42.272% (Table 3-Total Females). Using the same 1979-81 Tables, but with a 6% interest rate, the expert calculated the remainder factor to be, first, 60.362% (Table 1 - Total Population), then 58.238% (Table 3 - Total Females).
The tables used by defendant to arrive at an actuarial factor of 66.006% s66,006% for the remainder interests in question are, as stated above, found in IRS Publication 723A, which is based on deaths in the three-year period 1959-61 and the U.S. Life Tables produced from the 1960 census. None of that data has been adjusted to account for post-1960 changes.
Defendant also disallowed a claimed deduction of $52,000 for counsel fees paid to the law firm of Shanley & Fisher, which represented beneficiaries of the estate. Defendant determined that the fees were not a legal obligation of the estate and were thus ...