Annuity Valuation

Prof. Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Anthony: Absolute Actuarial Tables which also appears in Tax Notes (Vol. 121, No. 4, 2008).

Here is the conclusion of her article:

The mandate in section 7520 to use tables inherently accepts a lack of a correlation between the value as computed using the facts of an individual case and the value computed under the actuarial tables. When their use is required by section 7520, the tables provide a substitute for a facts and circumstances determination of value. In so doing, their appeal is simplicity and ease, not accuracy or equivalence to fair market value in a particular case. As the Supreme Court stated in Ithaca Trust, the use of the tables indicates ‘‘the intention of the lawmakers . . . that the computation of the tax should be made . . . on the basis of a law of averages.’’ That means that since the tables only reflect accurate measures of value in the average case, an individualized facts and circumstances analysis would most often correlate better with the actual value of an annuity than values computed by means of the actuarial tables. Therefore, because Congress has mandated their use, facts that merely individualize valuation rather than undermine the factors integral to the assumptions of the tables should be ignored. Thus the Anthony court correctly applied section 7520 and disregarded non-marketability in valuing the decedent’s annuities.