## Facts

- Gordon B. McLendon, a wealthy businessman, was diagnosed with esophageal cancer in 1985; after recurrence and aggressive chemotherapy, he achieved documented endoscopic remission by late 1985 and continued treatment into 1986.
- On March 5, 1986, McLendon transferred remainder interests in partnership interests to his son and a family trust in exchange for $250,000 cash and a lifetime annuity.
- The parties valued the annuity using IRS actuarial tables based on McLendon’s age (65) and corresponding actuarial life expectancy, structuring the consideration to approximate the remainder interests’ value and avoid a taxable gift.
- McLendon died relatively soon after the transaction.
- The Commissioner determined McLendon was so near death on March 5, 1986 that the actuarial tables overstated the annuity’s value and treated part of the transfer as a taxable gift, relying on the “terminally ill / death imminent” exception described in Revenue Ruling 80-80.
- The Tax Court upheld the Commissioner, finding McLendon sufficiently close to death to justify departing from the tables.
- The Estate appealed, presenting the question whether McLendon’s condition on the valuation date required departure from the actuarial tables.

## Issues

1. Whether McLendon was, on March 5, 1986, sufficiently close to death or known to be terminally ill such that IRS actuarial tables could not be used to value the annuity and remainder interests for gift tax purposes.
2. Whether the Commissioner properly departed from the actuarial tables based on contemporaneous medical information rather than post-transfer events.

## Decision

- The Fifth Circuit reversed the Tax Court.
- The court held that McLendon was not shown to be so near death on March 5, 1986 that use of the actuarial tables was improper.
- The Estate was entitled to value the annuity and remainder interests using the IRS actuarial tables, defeating the Commissioner’s non-table gift valuation.

## Legal Principles

- IRS actuarial tables are presumptively applicable to value interests dependent on a measuring life; departures are limited to extraordinary circumstances.
- Departure from tables is justified only when, as of the valuation date, the measuring life is known to be terminally ill or death is clearly imminent, based on contemporaneous medical facts.
- Transfer-tax valuation is determined as of the transfer date; later events (including the actual date of death) cannot be used as hindsight to displace actuarial valuation.
- Revenue rulings may be treated as persuasive guidance interpreting the Commissioner’s regulations and may inform the proper standard for when table valuation may be rejected.

## Conclusion

Because contemporaneous medical evidence showed remission and did not establish that death was clearly imminent on March 5, 1986, the Fifth Circuit required use of IRS actuarial tables and rejected the Commissioner’s attempt to impose a taxable gift through a non-table, shortened-life valuation.


Estate of McLendon v. Comm’r of Internal Revenue, 135 F.3d 1017 (5th Cir. 1998)