IRS, TC bound by revenue ruling.

• Author: Rea, Robert C.
• Position: Tax Court

The Fifth Circuit recently held that a taxpayer could follow a revenue ruling that clearly allowed him to rely on actuarial tables in structuring transfers to his son and a family trust, that the IRS could not ignore its own ruling, and that the Tax Court was also bound to follow the revenue ruling (Estate of McLendon (5th Cir., 3/9/98)).

Through various partnerships, Gordon McLendon was the principal owner of the Liberty Broadcasting System, radio and television stations and movie theaters. In May 1985, McLendon was diagnosed with cancer. While the cancer initially responded to radiation therapy, it recurred by September 1985 and was described as severe and likely terminal (with a 2 to 3% survival rate). McLendon began a series of chemotherapy treatments and showed remarkable improvement; in December 1985 and again in February 1986, doctors reported that the cancer was in complete remission.

On March 5, 1986, despite reports that McLendon required constant pain medication and nutritional supplements, his doctor expressed the opinion that McLendon was markedly improved and in the best condition he had been in since coming under her care in early 1986. (Later, the IRS would present undisputed expert testimony that McLendon's chance of surviving for more than one year from that date was approximately 10%.)

Also on March 5, 1986, McLendon entered into a private annuity transaction with his son and a family trust. McLendon transferred remainder interests in his partnership holdings to his son and the trust in exchange for $250,000 and an annuity to be paid to McLendon for life. The amount of the annuity was based on the present value of the remainder interests, as determined under the Service's actuarial tables for life expectancy found in Regs. Sec. 25.2512-5(f). According to the tables, McLendon's life expectancy as a 65-year-old man in March 1986 was 15 years. As a result, the remainder interests had a value of $5.9 million, and the amount of the annuity had to be about $865,000.

In late March 1986, McLendon completed chemotherapy. Tests in May 1986, however, revealed a major recurrence of the cancer, and McLendon died in September 1986. From the tune of his first treatment to his death, McLendon survived longer than 75% of patients diagnosed with esophageal cancer.

Round One

McLendon's estate tax return relied on the presumption that he had received adequate and full consideration for the assets transferred in the private annuity...