Rev. Rul. 80-80

ISSUE

Under what circumstances will the physical condition of an individual justify departure from using the actuarial tables to value property interests for federal estate and gift tax purposes?

LAW AND ANALYSIS

The methods and actuarial tables (based on Table LN) that are to be used in valuing annuities, life estates, terms for years, remainders, and reversions are set forth in section 20.2031-10 of the Estate Tax Regulations, for estates of decedents dying after December 31, 1970, and in section 25.2512-9 of the Gift Tax Regulations for gifts made after December 31, 1970.

The actuarial tables in the regulations are provided as an administrative necessity, and their general use has been readily approved by the courts. See Ithaca Trust Company v. United States, 279 U.S. 151 (1929); Simpson v. United States, 252 U.S. 547 (1920); McMurtry v. Commissioner, 203 F.2d 659 (1st Cir. 1953).

The actuarial tables are not based on data that exclusively involve persons of "good" or "normal" health. They reflect the incidence of death by disease and illness as well as by accident. The actuarial tables are properly applicable to the vast majority of individual life interests, even though the health of a particular individual is obviously better or worse than that of the "average" person of the same age and sex. Occasionally, however, the actual facts of an individual's condition are so exceptional as to justify departure from the actuarial tables.

Rev. Rul. 66-307, 1966-2 C.B. 429, dealing with the value of a transferred property interest for purposes of section 2013 of the Internal Revenue Code, concludes that if it is known on the valuation date that the life tenant is afflicted with a fatal and incurable disease in its advanced stages and cannot survive for more than a brief period of time, the value of the life or remainder interest should be determined by reference to such known facts.

In Continental Illinois National Bank and Trust Company v. United States, 504 F. 2d 586 (7th Cir. 1974), the court analyzed the requirement in Rev. Rul. 66-307 that survival by only a "brief" period must be expected, if the actuarial tables are to be properly avoided. The court rejected the argument that the word "brief" means relatively brief when compared to the life expectancy predicted by the tables. Instead, the word "brief" was interpreted as being an absolute term. The actuarial tables were consequently held to be applicable for purposes of section 2013 of the Code, because the medical experts failed to testify that the transferee's death was "imminent" at the date of death of the transferor.

The cases cited in Rev. Rul. 66-307 were primarily concerned with the maximum period of actual life expectancy. All but one of those cases dealt with persons who were expected to survive by less than one year. The cases decided since Rev. Rul. 66-307 was issued place more emphasis on the immediacy of the individual's death rather than on the maximum period of expected survival. See Miami Beach First National Bank v. United States, 443 F. 2d 116 (5th Cir. 1971); Mercantile-Safe Deposit and Trust Company v. United States, 368 F. Supp. 743 (D. Md. 1974); and especially Continental Illinois, discussed above. These later cases, by focusing on whether the death of the subject individual is "imminent," differ from the cases relied on in Rev. Rul. 66-307.

The Service agrees that the expected death of the individual must be "imminent" in absolute terms rather than in relative terms. Comparison of each subject individual's actual life expectancy to the life expectancy derived from the tables, in order to depart from the tables where the actual life expectancy is "relatively" shorter, would involve the same case-by-case analysis of each individual's physical condition that the tables are designed to avoid.

In view of recent case law, the resulting principle is as follows: the current actuarial tables in the regulations shall be applied if valuation of an individual's life interest is required for purposes of the federal estate or gift taxes unless the individual is known to have been afflicted, at the time of transfer, with an incurable physical condition that is in such an advanced stage that death is clearly imminent. Death is not clearly imminent if there is a reasonable possibility of survival for more than a very brief period. For example, death is not clearly imminent if the individual may survive for a year or more and if such a possibility is not so remote as to be negligible. If the evidence indicates that the decedent will survive for less than a year, no inference should be drawn that death will be regarded as clearly imminent, because this question depends on all the facts and circumstances.

The above principle is applicable to every situation that involves valuation of an interest that is dependent upon the life of one or more individuals for federal estate or gift tax purposes, including valuation with respect to deductions allowable under section 2055 or section 2522 of the Code, with the exception of determinations involving a decedent's own life expectancy under sections 2037 and 2042(2). The Service adheres to the conclusion, stated in Rev. Rul. 66-307, that the actuarial tables must be applied in every case where a decedent's reversionary interest must be valued under sections 2042(2) or 2037 of the Code. See the discussion in Estate of Roy v. Commissioner, 54 T.C. 1317 (1970), which declined to follow Hall v. United States, 353 F. 2d 500 (7th Cir. 1965). See also Estate of Allen v. United States, 558 F. 2d 14 (Ct. Cl. 1977).

The above principle will govern cases involving application of section 2013 of the Code unless a final determination of the federal estate tax liability of the transferor's estate has been made under circumstances that required valuation, by whatever method, of the life interest received by the transferee. If such a valuation was required, then the value of the property transferred, for the purposes of the credit allowable to the transferee's estate, shall be the value determined previously for the transferor's estate. See section 2013(d) of the Code.

HOLDING

The actuarial tables in the regulations may be disregarded only if the individual is known to have been afflicted, at the time of transfer, with an incurable physical condition that is in such an advanced stage that death is clearly imminent.

EFFECT ON OTHER REVENUE RULINGS

Revenue Ruling 66-307 is clarified.