UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
decided: October 7, 1974.
CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS EXECUTOR OF THE ESTATE OF JOSEPHINE W. SPETH, DECEASED, PLAINTIFF-APPELLEE,
UNITED STATES OF AMERICA, DEFENDANT-APPELLANT
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 69 C 2257 Richard B. Austin, Judge.
Fairchild, Pell and Stevens, Circuit Judges.
PELL, Circuit Judge.
The Continental Illinois National Bank and Trust Company of Chicago brought this action as executor of the estate of the decedent Josephine W. Speth to recover an alleged overpayment of estate tax and interest.*fn1 After a bench trial, the district court entered judgment in favor of the taxpayer from which the Government has appealed.
The decedent Josephine Speth died on March 28, 1966, at the age of 75. Her sister, Margaret Speth, had died one month earlier on February 21, 1966. By her will, Margaret bequeathed to the decedent a life estate in certain property. At the time of Margaret's death, Josephine was suffering from cancer of the colon with metastasis to the liver.
The taxpayer, in computing the federal estate tax on Josephine's estate, claimed a credit under § 2013 of the Internal Revenue Code of 1954 for the amount of federal estate tax paid by the estate of Margaret on the life estate transferred to Josephine. In calculating the amount of this credit, the taxpayer used the actuarial tables set forth in § 20.2031-7(f) of the Treasury Regulations to value Josephine's life estate at the time of Margaret's death. The indicated table expectancy was approximately six years. The Commissioner disallowed the taxpayer's computation of the credit on the ground that, under Revenue Ruling 66-307, Josephine's actual life expectancy had to be utilized in determining the value of her life estate.*fn2
The district court held, alternatively, that (1) the Revenue Ruling did not control this case, and (2) the Revenue Ruling was invalid. The Government contests both holdings on appeal.
Section 2013 of the Internal Revenue Code was enacted "to prevent the diminution of an estate by the imposition of successive taxes on the same property within a brief period." Sen. Rep. No. 1622, 83rd Cong., 2d Sess. 121 (1954). The section provides for a credit against estate tax where the decedent has received property in a transfer during the previous ten years which transfer was itself subject to estate tax.*fn3 With certain adjustments and limitations not relevant here, the tax credit is the amount which bears the same ratio to the total estate tax paid by the transferor as the value of the property transferred bears to the total value of the transferor's taxable estate. If the transferred property has no value, the credit will, therefore, be zero. The percentage of credit allowed to the transferee's estate decreases ratably over the ten-year period.*fn4
The credit applies to any beneficial interest in property received by the transferee. § 2013(e). Thus, the credit is available for a life estate held by the decedent-transferee, even though the life estate will not be included in his estate and, therefore, cannot itself be the subject of double taxation. See Treas. Reg. §§ 20.2013-1(a) and 20.2013-5(a).*fn5
Section 2013(d) provides, in general, that "the value of property transferred to the decedent shall be the value used for the purpose of determining the Federal estate tax liability of the estate of the transferor" subject to certain adjustments not relevant here. The Code itself does not, however, set forth the manner for computing the value of a life estate in property transferred to the decedent when the property was taxed in the estate of the transferor. The Treasury Regulations state, inter alia, at § 20.2013-4(a), that:
"If the decedent received a life estate or remainder or other limited interest in property included in the transferor's gross estate, the value of the interest is determined as of the date of the transferor's death on the basis of recognized valuation principles (see especially §§ 20.2031-7 and 20.2031-10)."*fn6
Section 20.2031-7 of the Regulations contains the mortality tables for valuing life estates.*fn7
The Government admits that, as a general rule, the § 2013 credit on a life estate is to be calculated by finding the actuarial life expectancy, as determined by the tables in Treasury Regulation § 20.2031-7, of the life tenant as of the transferor's death. The Government contends, however, that there is an exception to this general rule and this exception is embodied in Revenue Ruling 66-307.
Revenue Ruling 66-307*fn8 is predicated upon a factual situation "where it was known at the death of the transferor that the life tenant, afflicted with a ravaging and incurable disease of advanced state, could not survive for more than a year." (Emphasis added.) In this situation, the Revenue Ruling directs that, for the purpose of calculating a § 2013 credit, the life tenant's actual life expectancy, rather than his actuarial life expectancy, as of the transferor's death, be used in valuing the life estate. The Revenue Ruling goes on to state that, as a general rule, such a departure from the mortality tables is proper, for the purpose of § 2013, "if it is known on the valuation date that a life tenant is afflicted with a fatal and incurable disease in its advanced stages, and that he cannot survive for more than a brief period of time." (Emphasis added.)
The Government contends that this Revenue Ruling covers the present case and that, therefore, Josephine's actual life expectancy as of her sister's death should be used in valuing her life estate. The taxpayer, on the other hand, argues that Revenue Ruling 66-307 is invalid and, even if it is valid, it does not cover the present case.
Forceful arguments have been made by both of the litigants with respect to the issue of the validity of the Revenue Ruling. We need not, however, resolve this matter in order to decide this case since, in our opinion, even assuming arguendo that the Revenue Ruling is valid, the present case falls outside the ruling.*fn9
In reaching this conclusion, we are assuming that words used in the Revenue Ruling were employed precisely. Such an assumption is particularly warranted in the field of tax law where the decision is ordinarily determined by the language utilized and not necessarily by application of logical principles. We first note that the statement of the rule is in two-pronged form joined by the conjunctive "and." Thus, we conclude that it is essential not only that it be known that the disease is fatal and incurable in an advanced stage but also that the life tenant cannot survive for more than a brief time. It is at this point that we find ourselves deserted insofar as further guidance is concerned. Outside of the particular fact situation the Ruling presents, we are not advised as to the meaning of "brief," or whether it is an absolute or relative term.
The Government, in its brief, states that departure from the tables is proper if the actual life expectancy is "considerably shorter" or "far less" than that predicted in the mortality tables. Under the Government's interpretation of "brief" as a relative term, a person with a fatal, incurable disease in its advanced stages who had an actuarial life expectancy of 25 years but an actual life expectancy of 5 years would apparently have only a "brief" life span and, therefore, departure from the tables would be proper. As an absolute, as opposed to a relative matter, two years might be deemed by some to be a "brief" life span. Thus, some might consider that a failing nonagenarian whose life expectancy, according to the mortality tables, was approximately two years and who had an actual life expectancy of only slightly less than this actuarial expectancy, had only a "brief" life expectancy. Nevertheless, we doubt that the Government would contend, in this situation, that the "brief" life expectancy (in absolute terms) should require departure from the actuarial tables.
Turning to source books such as Words and Phrases and Black's Law Dictionary, we find no definitions of "brief" in the time sense.*fn10 Webster tells us that "brief" in its duration meaning is synonymous with "short."*fn11 Accepting that definition we construe the Revenue Ruling to be applicable only to a situation in which it is known that death will follow closely after a crucial date. Moreover, although a court might well wish to consider the actuarial life expectancy in determining whether the life tenant's actual life expectancy is "brief," we construe "brief," as used in the Revenue Ruling, to be essentially an absolute, not a relative, term. We are fortified in this interpretation by the prefatory synopsis of the Revenue Ruling which speaks in terms of "where the death of a life tenant from known causes is predictable and imminent on the valuation date." "Imminent," in the time sense, appears unlike "brief" to have been the subject of considerable judicial attention. 20 Words and Phrases 215 (1959). Without citing individual cases, it is clear that "imminent" refers to something which is threatening to happen at once, something close at hand, something to happen upon the instant, close although not yet touching, and on the point of happening. With this construction of the Revenue Ruling in mind, we turn to the evidence adduced in this case.
According to the actuarial tables, Josephine's life expectancy, at the time of her sister's death, was six years. The medical evidence indicated, however, that, at that time, it was known that Josephine was suffering from cancer of the colon which had metastasized to the liver. There was no dispute over the fact that this was a fatal and incurable disease.*fn12
The question of the decedent's actual life expectancy, due to this disease, however, was disputed at the trial. Dr. Myles Cunningham, a cancer expert presented by the taxpayer, testified that, at the time of Margaret's death,*fn13 Josephine did not have any of the clinical signs associated with liver metastasis which would indicate an imminent death. Absent such clinical signs of imminent death, a physician could not predict with reasonable certainty, according to Dr. Cunningham, how long a patient with liver metastasis would live. In particular, Dr. Cunningham noted, "for one patient in the condition that Josephine Speth was in in January of 1966, I don't believe you can place a time span on her expected length of life." Dr. Cunningham further stated that there was a reasonable chance that Josephine could have lived a year or more after Margaret's death, that it was possible that she could have lived 18 months, and that, although it was unlikely, it was not impossible for her to live two years.*fn14 The doctor noted that he himself had "had at least one case who has lived six years now with liver metastasis."*fn15
Dr. Samuel Taylor, a cancer expert presented by the Government, testified that he would have expected Josephine to live four to six months after February 21, 1966. Dr. Taylor admitted, however, that she possibly could have lived for a year. He further noted that "in medicine you can't be too didactic, because someone always surprises you." Finally, Dr. Taylor agreed with Dr. Cunningham that spontaneous remission was a medical fact and could occur in any cancer patient prior to the emergence of clinical signs of imminent death.
The third doctor to testify, Dr. Kenneth Kettleson, was the decedent's physician. Dr. Kettleson was an internist but not a cancer expert. He stated that, in his opinion, Josephine's life expectancy at the time in question was between one and six months.
All three physicians agreed that, on the basis of the autopsy report, cancer may not have been the actual cause of Josephine's death but rather that her death could have been caused by a heart attack or a blood clot in her lung.
The district court found that the present case was distinguishable from the fact situation presented in the Revenue Ruling in that it was possible that, on February 21, 1966, Josephine could have lived for another year. Based on the testimony of Dr. Cunningham, we cannot say that this finding was clearly erroneous. Rule 52(a), Fed. R. Civ. P.; Commissioner v. Duberstein, 363 U.S. 278, 291, 4 L. Ed. 2d 1218, 80 S. Ct. 1190 (1960). To the extent that the doctors disagreed about Josephine's actual life expectancy on February 21, 1966, this was a question of credibility to be determined by the trial judge. Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123, 23 L. Ed. 2d 129, 89 S. Ct. 1562 (1969); Aunt Mid, Inc. v. Fjell-Oranje Lines, 458 F.2d 712, 716 (7th Cir. 1972), cert. denied, 409 U.S. 877, 34 L. Ed. 2d 131, 93 S. Ct. 130.
Moreover, we agree with the district court that the general rule which the Revenue Ruling purports to establish (i.e., that the taxpayer should use the actual life expectancy of the decedent where it is "known" on the valuation date that the life tenant is afflicted with a fatal and incurable disease in its advanced stages, and that he cannot survive for more than a "brief" period of time) does not cover this case. The testimony of the experts indicated that there was a range of longevity among patients with liver metastasis. According to Dr. Cunningham, this range could, for some patients, extend at least as far as six years. Where a particular patient fell within this range of longevity could not, according to Dr. Cunningham, be predicted, absent clinical signs of imminent death. In view of this testimony and the fact that the life expectancy predicted by the mortality tables for the decedent was itself six years, we cannot say that it was "known" that Josephine's actual life expectancy was so "brief" as to require a departure from the tables.
In addition to the Revenue Ruling, the Government relies on a number of cases (most of which concern Code sections other than § 2013), in which departures from the actuarial tables have been permitted for the purpose of valuing life estates. The case before us is, however, readily distinguishable from these cases.
In the majority of these cases permitting departures from the tables, the life tenant's maximum actual life expectancy was one year or less. In Estate of Nellie H. Jennings, 10 T.C. 323 (1948), for instance, the Tax Court held that the life tenant's actual life expectancy should be used in valuing a charitable remainder where, at the time of the decedent-transferor's death, the life tenant was almost totally paralyzed, had a complete loss of memory and was described by his physician as "just an individual protoplasm." 10 T.C. at 327. The life tenant in Jennings had an actual life expectancy, according to the medical experts, of "not more than one year" from the date of the transferor's death. 10 T.C. at 327. Similarly, in Estate of Nicholas M. Butler, 18 T.C. 914 (1952), also a charitable remainder case, a departure from the mortality tables was permitted to value a life estate where the life tenant had cancer and "the facts in existence at the time of [the transferor's] death were such as to render it certain that [the life tenant] would not live more than one year after [the transferor's] death." (Emphasis added.) 18 T.C. at 919-20.*fn16
In Estate of Lion v. Commissioner, 438 F.2d 56 (4th Cir. 1971), cert. denied, 404 U.S. 870, 30 L. Ed. 2d 114, 92 S. Ct. 52, the Fourth Circuit applied the actual life expectancy, rather than the actuarial life expectancy, of a life tenant in determining a § 2013 credit. Lion, however, involved a situation in which the transferor and the life tenant died simultaneously.
The cases permitting the substitution of actual life expectancy for actuarial life expectancy are typically characterized as "exceptional" cases. Miami Beach First Nat'l Bank v. United States, 443 F.2d 116, 120 (5th Cir. 1971); Estate of Lion v. United States, supra at 62; Estate of Carl E. Weller, 38 T.C. 790, 803 (1962). Absent "exceptional" circumstances, the actuarial tables should be used since these tables "afford a reasonable norm and some degree of certainty in ascertaining the value of property and the consequent tax liabilities of the beneficiaries thereof." Miami Beach First Nat'l Bank v. United States, supra at 119. See Simpson v. United States, 252 U.S. 547, 550, 64 L. Ed. 709, 40 S. Ct. 367 (1920). Although the tables prove to be accurate when used in large numbers of cases, discrepancies are bound to occur in individual cases.*fn17 But, as the First Circuit has noted, "the discrepancies may have to be suffered in the interest of a simplified overall administration of the tax laws." McMurtry v. Commissioner, 203 F.2d 659, 667 (1st Cir. 1953). Departures from the tables are permitted, if at all, only where the result of using the tables is "unrealistic and unreasonable," Estate of Carl E. Weller, supra at 803; Estate of Chauncey Stillman, T.C. Memo 1965-94, 24 T.C.M. 478, 497 (1965), or "ignore[s] . . . common sense." Hall v. United States, 353 F.2d 500, 505 (7th Cir. 1965).
Moreover, although the taxpayer has the burden of showing the error in the Commissioner's determination, where the taxpayer proves that normally the actuarial tables provided in the Regulations would be applicable to his case, the burden is on the Government to show that the case is "exceptional," justifying a modification of or departure from the prescribed method. Estate of Carl E. Weller, supra at 803; Estate of Chauncey Stillman, supra at 497; Mercantile-Safe Deposit & Trust Co. v. United States, 368 F. Supp. 743, 746 (D. Md. 1974).
The mere fact that the life tenant is suffering from an incurable and fatal disease is not necessarily sufficient to justify a departure from the actuarial tables. In Estate of Chauncey Stillman, supra, the taxpayer transferred a contingent remainder interest to a trust for the benefit of his daughters. In valuing the gift for gift tax purposes, the taxpayer determined the life expectancy of the life tenant by means of the actuarial tables provided in the Regulations. The Government contended, however, that the actual life expectancy of the life tenant should be used since the life tenant was afflicted, at the time of the gift, with multiple myeloma, a fatal and incurable type of cancer. The tax court noted the expert testimony that the disease, although fatal, was variable among patients and predictions as to individual longevity were therefore impossible. The court held in Stillman that departure from the tables would be improper in this situation.
"[The Commissioner] relies on the Jennings rule. Since the ultimate finding is that on the gift date, the life expectancy of the life tenant was indeterminate and could not be foretold, [the Commissioner's] method of valuation falls. On the evidence, this case is distinguishable from Jennings and the other cases in the Jennings group and the Jennings rule does not apply. . . . In this instance, departure from the method of valuation prescribed in section 25.2512-5(e) is neither justified nor required. . . . [The Commissioner's] determination was little better than a guess which cannot be approved." 24 T.C.M. at 502-503. (Footnote omitted.)
See also, Miami Beach First Nat'l Bank v. United States, supra ; Mercantile-Safe Deposit & Trust Co. v. United States, supra.
In the present case, the Government has failed to show that, assuming arguendo a departure from the prescribed actuarial tables may be proper in certain § 2013 cases, the circumstances here justify such a departure from the prescribed method. Rather, as in Estate of Chauncey Stillman, supra, any determination of Josephine's actual life expectancy as of her sister's death would be "little better than a guess."*fn18 The physicians who testified were candid in admitting their Sybyllic efforts of necessity lacked exactitude. In this situation, departure from the tables is not justified.