Estate of Allen v. United States

Henrietta Allen created an irrevocable trust naming her sister, Rebecca Ross, as the beneficiary for Ross’s lifetime. Allen reserved a reversionary interest in the trust assets so that if she outlived Ross, the trust assets would be distributed back to her. Allen died in 1971, before Ross. The executors of Allen’s estate (plaintiff), in calculating the value of Allen’s reversionary interest, considered and compared the actual health and well-being of both Allen and Ross and determined that the value of the reversionary interest was less than 5 percent of the total value of the trust assets. They did not include that value as part of the gross estate. The Internal Revenue Service (IRS) (defendant) audited the estate-tax return and found that the reversionary interest should have been valued at about 34 percent of the value of the trust assets, based on mortality and actuarial principles found in regulations issued by the Secretary of the Treasury. Specifically, the IRS determined that Treasury Regulation § 2037(b) allowed only for the use of the Treasury’s mortality and actuarial tables and did not allow consideration of a decedent’s actual health and physical condition. The IRS therefore included the value of the trust assets, minus the value of Ross’s life estate, in Allen’s gross estate and assessed a tax-deficiency notice based on that amount. The estate paid the assessed taxes but sued in order to recover a tax refund.