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Estate of Charlotte D. M. Cardeza v. United States


decided: November 14, 1958.


Author: Staley

Before GOODRICH, STALEY and HASTIE, Circuit Judges.

STALEY, Circuit Judge.

These appeals present another aspect of the litigation regarding the taxes paid by the Cardeza Estate. The decedent, during her lifetime, transferred a substantial amount of money to a trust established by the will of her father. The decedent's children and their issue were the primary beneficiaries of one-third of this trust. However, if the decedent survived all her children and their issue she became entitled to the income of that share for life with a testamentary power of appointment over the corpus.

In an earlier opinion, Cardeza's Estate v. C.I.R., 1949, 173 F.2d 19, 9 A.L.R.2d 1368, this court held, inter alia, that the decedent's contributions to the share of the trust here involved were includible in her estate as a transfer in contemplation of or intended to take effect in possession or enjoyment at or after death, within the meaning of Section 811 (c) of the Internal Revenue Code of 1939. Under that section property thus transferred was includible in the transferor's gross estate regardless of the value of the reversionary interest.

Subsequent to our decision, Congress enacted the Technical Changes Act of 1949, 63 Stat. 891. Section 7 (a) of the Act amended Section 811 (c) of the Internal Revenue Code of 1939 to provide special tax treatment for a limited class of property transferred on or before October 7, 1949.*fn1 Where the transfer was intended to take effect in possession or enjoyment at or after the transferor's death, the property would not be includible in the gross estate unless the transferor retained an express reversionary interest, the value of which immediately prior to his death exceeded 5 per cent of the value of the property transferred . Relying upon Section 811 (c), as so amended, taxpayer filed a claim for refund with the Commissioner of Internal Revenue. The claim was disallowed by the Commissioner and taxpayer commenced this suit for refund.

The taxpayer moved for summary judgment, which motion was granted by the district court. Judgement was entered in favor of the taxpayer in the amount claimed with interest at 6 per cent computed from the date of the payment of the tax. On appeal by the government, this court vacated the judgment and remanded the cause to the district court for further proceedings.*fn2 The taxpayer renewed its motion for summary judgment. The district court thereupon entered judgment for the taxpayer without interest on the overpayment and rendered an additional opinion explaining the denial of interest.*fn3

These cross appeals followed. Taxpayer's appeal relates solely to the disallowance of interest on the overpayment. The government contends that the district court erred in holding that a reversionary interest such as this is not susceptible of valuation in accordance with "usual methods * * * including the use of tables of mortality and actuarial principles."

Section 7 (a) of the Technical Changes Act provides that the value of the reversionary interest is to be determined "by usual methods of valuation, including the use of tables of mortality and actuarial principles." The Conference Committee Report explains the intention of Congress even more clearly when it states:

"The rule of Robinette v. Helvering (318 U.S. 184 [63 S. Ct. 540, 87 L. Ed. 700]), under which a reversionary interest not having an ascertainable value under recognized valuation principles is considered to have a value of zero, is to apply."*fn4

A regulation issued by the Commissioner of Internal Revenue is substantially similar in portent.*fn5

Robinette v. Helvering, 1943, 318 U.S. 184, 63 S. Ct. 540, 87 L. Ed. 700, concerned the valuation of a contingent reversionary remainder dependent upon survivorship by the grantor of her daughter without issue who should reach the age of 21 years. The Court concluded, 318 U.S. at page 189, 63 S. Ct. at page 542, that the

"Actuarial science may have made great strides in appraising the value of that which seems to be unappraisable, but we have no reason to believe from this record that even the actuarial art could do more than guess at the value here in question."

Appended to the government's opposition to taxpayer's motion for summary judgment in the district court was an affidavit of an actuary. The actuary, purportedly utilizing the latest actuarial tables and approved actuarial principles, fixed an "at least" valuation on the reversionary interest retained by the decedent of 7.976 per cent of the value of the estate. The government here contends that by this affidavit there arose a question of fact which had to be resolved by trial and thus necessarily precluded the district court from entering summary judgment. It, however, fails to recognize that for the purpose of passing upon the motion for summary judgment the district court considered the opinion of the actuary contained in the affidavit and concluded that no weight could be given to it for the reasons set forth in its opinion. This is made clear by the district court in its opinion wherein it states:

"Thus the taxpayer must demonstrate to the court's satisfaction that the best that the actuarial art can do toward establishing the value of the reversion is no more than a guess, but if he can do that by the admitted facts and the defendant's evidence, he need not produce evidence and is entitled to judgment." (Emphasis supplied.)

The government maintains that its actuary in arriving at his conclusion resolved every possible doubt in favor of decedent - specifically, (1) the conclusion is based on tables indicating birth statistics for all fathers aged 55 years or over (decedent's son, Thomas, was 64 years old on the date of decedent's death); (2) no regard was given in the tables to the age of the wives of the "over 55" fathers (Thomas' wife was 59 years old at decedent's death); (3) it was assumed that no father had more than one child; and, lastly (4) it was assumed that all births reported were to married fathers. However, in none of these assumptions has the government attempted to adjust its figures to indicate what the procreative figures would be for 64-year-old men with the decided inducement to have progeny that was present in the instant case.*fn6 In regard to this aspect of the case, the district court aptly stated:

"Granted that the mere fact that an act is voluntary does not defeat the possibility of determining statistically the probability of its occurrence, yet, where inducements of widely varying potency and rewards of widely varying attractiveness are offered to people of widely varying personalities, it is manifestly impossible to arrive at a statistical analysis sufficiently accurate to permit of any intelligent valuation of reversion. Nor, in the nature of things, is any advance in the actuarial art conceivable which would meet the difficulty."

This conclusion is in accordance with our earlier opinion involving this estate, Commissioner of Internal Revenue v. Cardeza's Estate, supra, where, relying upon Robinette v. Helvering, supra, we held that the value of the intestate interest*fn7 was not susceptible of valuation since it was contingent upon Thomas dying without issue and any attempt at valuation would be no more than a guess.

The Supreme Court had occasion to consider the ability of the actuarial art to value a bequest conditioned upon the failure of issue in Commissioner of Internal Revenue v. Sternberger's Estate, 1955, 348 U.S. 187, 75 S. Ct. 229, 99 L. Ed. 246, and held that the art was incapable of doing so. Although the government attempts to distinguish the case as turning upon another issue, the Court of Appeals for the First Circuit has not so construed it. In United States v. Dean, 1 Cir., 1955, 224 F.2d 26, 28 it stated:

"But [the Supreme Court] did not rest its reversal on the broad proposition that charitable bequests which at the decedent's death are not assured but are in fact conditional are never deductible. It rested its reversal on the ground that the actuarial art was unable to cope with the contingency of that particular case . The Court called attention to the fact that the bequest it was considering 'offers to the daughter an inducement of about $2,000,000 to remarry and leave a descendant', and noted that such an inducement would render quite undependable the actuarially computed average probability that a 27-year-old woman would have issue. It then based its reversal on the authority of Humes v. United States, 1928, 276 U.S. 487, 48 S. Ct. 347, 72 L. Ed. 667, in which it was held that no charitable deduction could be taken under § 403 (a) (3) of the Revenue Act of 1918 on account of a bequest to charity conditioned on the death of the decedent's 15-year-old niece without issue before reaching the age of 40, because there was no reliable statistical data from which the chance that the charity would take could be actuarially computed." (Emphasis supplied.)

We agree with this interpretation of the Sternberger opinion and find it to be in accord with the principle set forth in Robinette v. Helvering.*fn8 Since Congress referred to the Robinette case in enacting the Technical Changes Act of 1949 and indicated that it was to be followed in similar cases, we are clear that, as a matter of law, the value of a reversion dependent upon failure of issue is incapable of ascertainment "by usual methods of valuation * * *."

The cases cited by the government are distinguishable inasmuch as they only concern interests subject to defeasance upon remarriage. Brotherhood of Locomotive Firemen v. Pinkston, 1934, 293 U.S. 96, 55 S. Ct. 1, 79 L. Ed. 219; Commissioner of Internal Revenue v. State Street Trust Co., 1 Cir., 1942, 128 F.2d 618, 142 A.L.R. 943; and Commissioner of Internal Revenue v. Maresi, 2 Cir., 1946, 156 F.2d 929.None of these cases are concerned with the valuation of interests conditioned upon the failure of issue in which an inducement to procreate was present. As the district court concluded:

"In such cases the figures supporting the probability of remarriage in the whole population would naturally show a higher probability of remarriage than in a case in which remarriage would lead to the loss of income, and any error in the actuarial result would be on the safe side. On the other hand, in the cases cited by the taxpayer, as well as in the present case, there was a decided inducement to remarry so that the life tenant could leave a descendant. This would tend to make the actuarial figures too low to apply to any case where such inducement existed, but no statistics can possibly even approximate how much too low. If the actuarial estimates of the probability of remarriage are too low, then the estimate of the value of the reversion must be too high, but again there is no possibility of saying how much too high."

In a case such as this we are convinced that any actuarial conclusion would be nothing but a guess. It is clear, therefore, that under Section 811 (c) of the Internal Revenue Code of 1939, as amended, the reversionary interest must be considered to have a valuation of zero.

The thrust of taxpayer's appeal is that the only provision specifically dealing with the allowability of interest on judgments in tax refund suits is contained in Section 2411 (a) of the Judicial Code.*fn9 That being the case, taxpayer contends that the district court erred in disallowing interest on the over-payment of tax. Taxpayer recognizes that Section 7 (b) of the Technical Changes Act of 1949, 26 U.S.C.A. § 811 note states that "No interest shall be allowed or paid on any overpayment resulting from the application of subsection [7] (a) with respect to any payment made prior to the date of the enactment of this Act." Although it is Section 7(a) under which taxpayer seeks to obtain its refund, it contends that Section 7 (b) was merely intended to restrict the right to interest on refunds allowed by the Commissioner of Internal Revenue and not to prohibit interest on judgments obtained following denials of refunds. The short answer to taxpayer's contention is to be found in Section 7 (b) itself, for no limitation upon the clear, all-in-clusive language is contained therein.

The general introductory statement of the Senate Report on H.R. 5268, which ultimately was enacted as the Technical Changes Act of 1949, indicates that the legislation was remedial in nature, designed to "remove certain inequities or hardships in the present Federal tax laws." U.S.Code Cong.Service 1949, p. 2173. This fact alone clearly distinguishes the present case from the two cases cited by taxpayer as supporting its position. Carter v. Liquid Carbonic Pacific Corp., 9 Cir., 1938, 97 F.2d 1; and General Motors Corp., Frigidaire Div. v. United States, 146 F.Supp. 220 (Ct.Cl.1956).The former case dealt with taxes that had been illegally assessed and collected and the latter with expenditures which had been erroneously disallowed. Our earlier opinion is conclusive of the legality of the original assessment by the Commissioner and, therefore, only by virtue of this remedial legislation does taxpayer contend any right to return of the overpayment.

The judgment of the district court will be affirmed.

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