Appeal from a judgment of the District Court for the Southern District of New York, Charles E. Stewart, Jr., Judge, invalidating on equal protection grounds the use of gender-based mortality tables to calculate, for estate tax purposes, the value of a reversionary interest in a trust. Reversed. Judge Newman dissents in a separate opinion.
Before: VAN GRAAFEILAND, NEWMAN, and PRATT, Circuit Judges.
The question presented in this appeal by the United States from the summary judgment in Manufacturers Hanover Trust Co. v. United States, 576 F. Supp. 837 (S.D.N.Y. 1983), Charles E. Stewart, Judge, is whether the Internal Revenue Service's use of gender-based mortality tables to value reversionary interests of a decedent's estate under 26 U.S.C. § 2037 violates the equal protection guaranteed by the due process clause of the fifth amendment. The IRS, following regulations in effect from 1970 to 1983, used gender-based mortality tables to calculate the estate tax owed by plaintiff Manufacturers Hanover Trust Company, as executor of the estate of Charlotte C. Wallace. The district court held that the IRS practice was unconstitutional, and it therefore awarded plaintiff a tax refund of $455,581.71 plus interest.
We reverse. Although the challenged IRS practice did distinguish between males and females, the gender classification was substantially related to the important governmental objective of promoting equity and fairness in estate taxes by accurately valuing reversionary interests. The challenged practice lacks those characteristics that make gender classifications invidious. There is no evidence that the challenged practice distributes burdens or benefits in a way that disadvantages the class of women as a whole, or that disadvantages the class of men as a whole. The gender classification does not demean the ability or social status either of women or of men, and it is not based on assumptions that women or men will choose stereotyped or traditional social roles. The gender-based mortality tables realistically reflect the fact that men and women have different average life expectancies, and the government's use of these averages for determining values in estate taxation does not create an unacceptable risk of discriminating against those who are not within the statistical norm. In light of all these circumstances, there is nothing unconstitutional about the challenged practice.
On November 5, 1923, Charlotte C. Wallace established a trust that provided income to her for her life and, on her death, income to her son, Howard. The corpus of the trust would pass by the terms of Howard's will if he outlived his mother, but by the terms of Charlotte's will if he predeceased her. Charlotte died on February 28, 1976, at the age of 88; she was survived by Howard, who was then 57 years old. The estate tax law provides that if the value of a decedent's reversionary interest in a trust immediately before death exceeds 5 percent of the trust's value, then the trust corpus must be included in the gross estate. 26 U.S.C. § 2037(a)(2) (1982).
Charlotte's executor calculated the value of her reversionary interest at 4.9867 percent, using Unisex Table 1 of the United States Life Tables: 1959-61, published by what was then known as the United States Department of Health, Education and Welfare. Because the value fell below the statutory 5 percent cutoff, the estate paid no tax on the trust corpus.
The Treasury regulations in effect at the time of Charlotte's death, however, required the value of a reversionary interest in a trust to be computed according to gender-based mortality tables. See Treas. Reg. §§ 20.2031-7(a), 20.2031-10(d), (e), (f), 20.2037-1(c) (3);Rev. Rul. 66-307, 1966-2 Cum. Bull. 429. Using gender-based tables, IRS calculated the value of the reversionary interest at 6.654 percent and assessed the estate with an aggregate deficiency, plus additions, of $458,662.98.
The estate paid the deficiency and, after an administrative claim for a refund was denied, file this refund suit. The district court granted the estate's motion for summary judgment, 576 F. Supp. 837 (S.D.N.Y. 1983), holding that use of gender-based mortality tables violated the equal protection component of the fifth amendment. This appeal followed.
"Statutory classifications that distinguish between males and females are 'subject to scrutiny under the Equal Protection Clause.'" Craig v. Boren, 429 U.S. 190, 197, 50 L. Ed. 2d 397, 97 S. Ct. 451 (1976) (quoting Reed. v. Reed, 404 U.S. 71, 75, 30 L. Ed. 2d 225, 92 S. Ct. 251 (1971)). "To withstand constitutional challenge * * * classifications by gender must serve important governmental objectives and must be substantially related to achievement of these objectives." Craig v. Boren at 197. In the present case the government argues, first, that the challenged statutory scheme does not treat men and women differently, and second, that even if the statutory scheme does treat men and women differently, the differences in treatment are justified and not invidious. We find the arguments supporting the first point to be unpersuasive, but on the second point we agree with the government that there is nothing invidious or unjustified in the way this particular statutory scheme makes use of distinctions between men and women.
A. Are similarly situated men and women treated differently because of classification by gender?
The government argues that the IRS practice does not treat men and women differently because "under the 5 percent rule of section 2037, the estates of decedents of both sexes are includable, and trusts established for the benefit of members of both sexes are taxable. The key is not the grantor's or the grantee's sex, but the value of the grantor's reversionary interest."
This argument is unconvincing. While it is true that estates of both male and female decedents are includable under the rule, and that trusts may be taxed whether their beneficiaries are men or women, nevertheless, what the government calls the "key" of section 2037 - the value of the grantor's reversionary interest - is determined by calculations that treat similarly situated men and women differently. As a result the amount of the estate tax will sometimes depend upon whether the decedent or beneficiary is male or female. This comes about in the following way
For purposes of the estate tax, the value of the grantor's reversionary interest in a trust requires calculating the probability that a person at the age of the grantor, just prior to death, would outlive the trust's beneficiary. The figures on life expectancies come from standard mortality tables, and gender-based tables reflect the undisputed fact that, on the average, women live longer than men at every age. This statistical fact then affects the calculation of a reversionary interest in two ways.
First, when gender-based tables are used, the likelihood that a female trust settlor will outlive her beneficiary is greater than the likelihood that a male trust settlor in similar circumstances will outlive his beneficiary. (Similar circumstances, for present purposes, occur when the male trust settlor's beneficiary is the same age and gender as the female trust settlor's beneficiary.) Therefore, when gender-based tables are used in calculating the estate tax, the fact that the decedent is female will increase the value of the reversionary interest over what that value would be if the decedent were male.
A second effect of using gender-based tables comes from the role played by the life expectancy of the beneficiary. When gender-based mortality tables are used, the likelihood that a female beneficiary will outlive her trust settlor is greater than the likelihood that a male beneficiary in similar circumstances will outlive his trust settlor. (Similar circumstances occur here when the male beneficiary's trust settlor is the same age and gender as the female beneficiary's trust settlor). When gender-based tables are used, therefore, the fact that the beneficiary is female will decrease the value of the reversionary interest from what it would be if the beneficiary were male.
It is therefore possible that in certain circumstances the sex of the decedent or of the beneficiary will determine whether or not the value of the reversionary interest exceeds the 5 percent of the trust corpus that requires the trust to be included as part of the gross taxable estate. The effect of using gender-based tables is illustrated in the following table, which shows the percent to be used for calculating the value of a reversionary interest in a trust created by a person who died at Charlotte's age with a beneficiary at Howard's age.
Decedent Age 88 Beneficiary Age 57 Tables
The table demonstrates that whatever the sex of the beneficiary, the value of a reversionary interest is greater for a female decedent (6.654% with male beneficiary and 3.520% with female beneficiary) than for a similarly situated male decedent (6.415% for male beneficiary and 3.390% for female beneficiary). Similarly, whatever the sex of the decedent, the value of a reversionary interest is less with a female beneficiary (3.390% with male decedent and 3.520% with female decedent) than with a similarly situated male beneficiary (6.415% with male decedent and 6.654% with female decedent). The table also shows that if Howard had been female instead of male, the trust would not have been included in the taxable estate because the value of the reversionary interest would have been 3.520 percent of the trust corpus.
It is apparent, therefore, that under the IRS practice of using gender-based mortality tables, similarly situated men and women are treated differently in a way that may affect the tax-payer's ultimate tax ...