Menu
Tax Notes logo

Life Insurer Argues Amortization Deductions Improperly Denied

FEB. 25, 2003

Globe Life and Accident Insurance Co. v. United States

DATED FEB. 25, 2003
DOCUMENT ATTRIBUTES
  • Case Name
    GLOBE LIFE AND ACCIDENT INSURANCE COMPANY, Plaintiff-Appellant, v. THE UNITED STATES, Defendant-Appellee.
  • Court
    United States Court of Appeals for the Federal Circuit
  • Docket
    No. 03-5034
  • Authors
    Winslow, Peter H.
    Sergi, Joseph A.
  • Institutional Authors
    Scribner, Hall & Thompson LLP
  • Cross-Reference
    For a summary of Globe Life and Accident Insurance Co. v. United

    States, No. 99-747T (9 Oct 2002), see Tax Notes, Oct. 28,

    2002, p. 502; for the full text, see Doc 2002-23641 (20 original

    pages) [PDF], or 2002 TNT 203-20 Database 'Tax Notes Today 2002', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2003-7943 (191 original pages)
  • Tax Analysts Electronic Citation
    2003 TNT 100-39

Globe Life and Accident Insurance Co. v. United States

 

UNITED STATE'S COURT OF APPEALS FOR THE FEDERAL CIRCUIT

 

 

APPEAL FROM THE UNITED STATES COURT OF FEDERAL CLAIMS

 

IN 99-747T, JUDGE MARIAN BLANK HORN

 

 

CORRECTED BRIEF OF APPELLANT

 

 

PETER H. WINSLOW

 

Scribner, Hall & Thompson, LLP

 

1875 Eye Street, N.W., Suite 1050

 

Washington, D.C. 20006-5409

 

(202) 331-8585

 

Lead Counsel for Plaintiff --

 

Appellant

 

 

Of Counsel:

 

Joseph A. Sergi

 

Scribner, Hall & Thompson, LLP

 

1875 Eye Street, N.W., Suite 1050

 

Washington, D.C. 20006-5409

 

(202) 331-8585

 

Form 6. Certificate of Interest

 

UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

 

 

Globe Life and Accident insurance Company v. United States

 

 

No. 03-5034

 

 

Certificate of Interest

 

 

[1] Counsel for the (petitioner) (appellant) (cross appellant) (respondent) (appellee) (amicus) (name of party) Globe Life and Accident certifies the following (use "None" if applicable; use extra sheets if necessary): Insurance Company

1. The full name of every party or amicus represented by me is:

 

Globe Life and Accident Insurance Company

 

 

2. The name of the real party in interest (if the party named in the caption is not the real party in interest) represented by me is:

 

N/A

 

 

3. All parent corporations and any publicly held companies that own 10 percent or more of the stock of the party or amicus curiae represented by me are:

 

Torchmark Corporation

 

 

4. The names of all law firms and the partners or associates that appeared for the party or amicus now represented by me in the trial court or agency or are expected to appear in this court are.

 

Scribner, Hall & Thompson. LLP

 

 

Peter H. Winslow and Joseph A. Sergi

 

 

Date
Signature of counsel

 

 

Printed name of counsel

 

February 25, 2003

 

TABLE OF CONTENTS

 

 

INDEX TO ADDENDUM

TABLE OF AUTHORITIES

STATEMENT OF RELATED CASES AND PROCEEDINGS

REQUEST FOR ORAL ARGUMENT

JURISDICTIONAL STATEMENT

STATEMENT OF THE ISSUES

STATEMENT OF THE CASE

STATEMENT OF THE FACTS

I. Acquisition and Liquidation

II. Globe's Business as of December 31, 1980

III. Tax Treatment of Globe's Agency Force

IV. Expert Testimony

V. Trial Court's Holding

SUMMARY OF THE ARGUMENT

I. The Trial Court Applied the Wrong Standard of Proof

II. The Trial Court Erroneously Prevented Globe from Relying on Industry-Wide Data to Estimate Useful Life

III. The Trial Court's Findings Are Contrary to the Evidence

STANDARD OF REVIEW

ARGUMENT

I. The Trial Court, as a Matter of Law, Erred in Applying an Incorrect Heightened Standard of Proof to Globe's Estimate of the Useful Life of Its Agency Force

 

A. Standard of Proof for Useful Life

B. The Trial Court Applied the Wrong Standard of Proof

C. The Trial Court's Holding Creates a Catch-22 That Effectively Overrules Newark Morning Ledger

D. The Trial Court Improperly Relies on the Dissent in Newark Morning Ledger

 

II. The Trial Court, as a Matter of Law, Erred in Holding That Industry-Wide Statistical Data May Not Be Relied upon to Establish the Useful Life of Globe's Agency Force

 

A. The IRS Historically Has Shown a Preference for Taxpayers to Rely on Industry-Wide Data in Lieu of Company-Specific Experience

B. Even If the Court Finds That a Taxpayer Must Use Its Own Experience to Estimate Useful Life, Globe Would Still Be Allowed to Rely upon Industry Data

 

III. The Trial Court's Findings of Fact Are Clearly Erroneous

 

A. The Three Years of LIMRA Industry-Wide Agent Survival Rates in the Record Are Reliable

 

1. The Trial Court's Substitution of Its Own Judgment for the Uncontroverted Testimony of Experts Is Clearly Erroneous

2. The Trial Court's Finding That Five Years of Industry Data Is Necessary Is Clearly Erroneous

3. The Trial Court's Finding That There Is "Nothing in the Record" to Indicate That the LIMRA Survival Rates Were Representative of Globe's Actual Survival Rates Is Clearly Erroneous

 

B. The Trial Court's Finding That the LIMRA and Campbell Data Should Yield Inconsistent Estimates of Useful Life Is Clearly Erroneous

C. The Trial Court's Finding That Post-Acquisition Events Make It Difficult to Determine Useful Life Is Clearly Erroneous

D. The Trial Court Erroneously Equates Globe's Agency Force with the Workforce in Ithaca

E. The Trial Court Made Numerous Other Findings of Fact That Contradict the Undisputed Evidence

 

CONCLUSION

JUDGMENT AND OPINION

ADDENDUM OF AUTHORITIES

CERTIFICATE OF SERVICE

CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION

 

INDEX TO ADDENDUM

 

 

Federal Cases

 

 

Skove v. United States, 1967 U.S. Ct. C1. LEXIS 535 (1967)

 

Provisions of the Internal Revenue Code

 

in Effect from 1980 to 1986

 

(unless otherwise noted)

 

 

Section 167(a) and (b)

 

Other Federal Statutes

 

as Currently in Effect

 

 

15 U.S.C. Section 1011.

15 U.S.C. Section 1012.

15 U.S.C. Section 1013.

15 U.S.C. Section 1014.

15 U.S.C. Section 1015.

 

Provisions of the Treasury Regulations on Income Tax

 

in Effect in 1980 to 1986

 

 

Treasury Regulations on Income Tax, Sec. 1.167(a)-1(b)

Treasury Regulations on Income Tax, Sec. 1.167(a)-3

 

Miscellaneous

 

 

Treasury Decision 6182, 1956-1 C.B. 98

Revenue Ruling 90, 1953-1 C.B. 43

Revenue Procedure 62-21, 1962-2 C.B. 418

Announcement 71-76, 1971-2 C.B. 503

Federal Rules of Evidence Rule 703

Actuarial Standards Board, Actuarial Standard of Practice No. 19, "Actuarial Appraisals" (adopted Oct. 1991)

 

TABLE OF AUTHORITIES

 

 

FEDERAL CASES

 

 

Alvary v. United States, 302 F.2d 790 (2d Cir. 1962)

Applegate v. United States, 25 F.3d 1579 (Fed. Cir. 1994)

Burnet v. Niagara Falls Brewing Co., 282 U.S. 648 (1931)

Colorado National Bankshares, Inc. v. Commissioner, 60 T.C.M. (CCH) 771 (1990), aff'd, 984 F.2d 383 (10th Cir. 1993)

Cullers v. Commissioner, 237 F.2d 611 (8th Cir. 1956)

Estate of Ridgely v. United States, 180 Ct. Cl. 1220 (1967)

Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240 (5th Cir. 1973)

Ithaca Industries, Inc.v. Commissioner, 17 F.3d 684 (4th Cir. 1994)

Kentucky Central Life Insurance Co. v. Commissioner, 57 T.C. 482 (1972), acq. 1972-2 C.B. 2

Liquid Paper Corp. v. United States, 2 Cl. Ct. 284 (1983)

Metropolitan Bank v. St. Louis Dispatch Co., 149 U.S. 436 (1893)

Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993)

Prudential Overall Supply v. Commission, 83 T.C.M. (CCH) 1545 (2002)

Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995)

Richard S. Miller & Sons, Inc. v. United States, 210 Ct. Cl. 431 (1976)

Skove v. United States, 1967 U.S. Ct. Cl. LEXIS 535 (1967) (Addendum at ADD-1)

Super Food Services, Inc. v. United States, 416 F.2d 1236 (7th Cir. 1969)

Union Bankers Insurance Co. v. Commissioner, 64 T.C. 807 (1975), acq. 1976-2 C.B.3

 

FEDERAL STATUTES

 

 

Internal Revenue Code of 1954 Section 167 (Addendum at ADD-19)

Internal Revenue Code of 1986

Section 332

Section 334

McCarran-Ferguson Act

15 U.S.C. Section 1011 (Addendum at ADD-20)

15 U.S.C. Section 1012 (Addendum at ADD-21)

15 U.S.C. Section 1013 (Addendum at ADD-22)

15 U.S.C. Section 1014 (Addendum at ADD-23)

15 U.S.C. Section 1015 (Addendum at ADD-24)

INTERNAL REVENUE SERVICE RULINGS AND REGULATIONS

Treasury Decisions T.D. 6182, 1956-1 C.B. 98 (Addendum at ADD-27)

Treasury Regulations

Sec. 1.167(a)-1(b) (Addendum at ADD-25)

Sec. 1.167(a)-3 (Addendum at ADD-26)

Sec. 1.167(a)-11

Revenue Ruling 90,1953-1 C.B. 43 (Addendum at ADD-29)

Revenue Procedure 62-21, 1962-2 C.B. 418 (Addendum at ADD-30)

Announcement 71-76, 1971-2 C.B. 503 (Addendum at ADD-55)

 

MISCELLANEOUS

 

 

Rules of the United States Court of Federal Claims Rule 52(a)

Federal Rules of Civil Procedure Rule 52(a)

Federal Rules of Evidence Rule 703 (Addendum at ADD-77).

Actuarial Standards Board, Actuarial Standard of Practice No. 19, "Actuarial Appraisals" (adopted Oct. 1991) (Addendum at ADD-78)

 

STATEMENT OF RELATED CASES AND PROCEEDINGS

 

 

[2] This case has not previously been presented to this Court or any other appellate court. Counsel for appellant are not aware of any other related cases that are pending in this Court or any other court.

 

REQUEST FOR ORAL ARGUMENT

 

 

[3] Appellant requests oral argument. Appellant believes that oral argument would significantly aid the Court in deciding this appeal.

 

JURISDICTIONAL STATEMENT

 

 

[4] Jurisdiction was conferred on the United States Court of Federal Claims by 28 U.S.C. § 1491(a)(1). Jurisdiction is conferred on this Court by 28 U.S.C. § 1295(a)(3). The United States Court of Federal Claims entered its Judgment on October 9, 2002. The Notice of Appeal filed by Globe Accident And Health Insurance Company on December 3, 2002, was timely pursuant to 28 U.S.C. §§ 2107 and 2522.

 

STATEMENT OF THE ISSUES

 

 

[5] 1. Whether the trial court erroneously applied a heightened standard of proof for Globe's estimate of the useful life of its agency force1 for purposes of depreciation under I.R.C. § 167.2

[6] 2. Whether the trial court erred in holding that industry- wide statistical data may not be relied upon to establish the useful life of Globe's agency force.

[7] 3. Whether the trial court's conclusion that Globe did not satisfy its burden of proof to establish the useful life of its agency force is clearly erroneous.

 

STATEMENT OF THE CASE

 

 

[8] Globe commenced this case on September 3, 1999, by filing a Complaint in the Court of Federal Claims for refund of federal income taxes and related interest for the 1986 taxable year. Globe asserts that it is entitled to amortization deductions under I.R.C. § 167 for its contractual relationships with its agents (its "agency force") because Globe's contractual relationships with its agents are intangible assets, which have an ascertainable value and limited useful life, the duration of which can be determined with reasonable accuracy.

[9] On October 9, 2002, after seven days of trial, the trial court issued a published opinion, reported at 54 Fed. Cl. 132 (Op.3), dismissing the Complaint and holding: "Globe is not entitled to the amortization deductions claimed because it has failed to provide a reasonably accurate estimate of the useful life of its 'agency force."' Op. at 133. The trial court did not address any other issues. The trial court also entered a final Judgment on October 9, 2002. Globe filed a timely Notice of Appeal to this Court on December 3, 2002.

 

STATEMENT OF THE FACTS

 

 

I. Acquisition and Liquidation

[10] Globe was formed in 1979 for the purpose of acquiring Old Globe. (A42-44, A522-44, A1033-52.4) After Globe had acquired all of the stock of Old Globe, on December 31, 1980, Old Globe distributed its property to Globe in a tax-free liquidation under I.R.C. §§ 332 and 334. Thereafter, Globe continued to operate under Old Globe's prior management. (A44, A820-23.)

II. Globe's Business as of December 31, 1980

[11] Globe sold insurance through its sales agents in its branch offices and through agents in its Employee Benefits Division who worked for a nationwide general agent. (A47, A1838-2116.) There were at least 800 sales agents under contract to market Globe insurance products who had successfully remained with Old Globe through year-end 1980 and who had previously sold insurance for Old Globe. Fewer than 150 of these agents were under contract with Globe's Employee Benefits Division. The remaining agents worked out of Globe's branch offices. (A47.)

[12] In 1980, there were 54 multistate geographically grouped branch offices, which sold individual life and accident and health insurance policies to people over age 65 and rural self-employed workers. (A48, A276.) The branch offices were organized into five regions, each headed by a regional manager. These regional managers monitored the sales efforts of the various branches. The regional managers also had sole authority to open new branch offices within the region, to hire or remove branch managers, and to assist branch managers in recruiting and training sales agents. Each regional manager employed up to three trainers to assist branch managers in training new agents. In addition, Globe employed eight to ten trainers who received a salary from the home office. (A48-49.)

[13] Each branch office was headed by a branch manager whose main responsibility was the recruiting, training and supervision of sales agents. A branch office normally was divided into units, a typical unit having four to ten sales agents headed by a unit manager who assisted the branch manager in the recruiting, training and supervising sales agents, and monitored the day-to-day sales effort. The sales agents were independent contractors who worked full-time exclusively for Globe and were paid solely by commissions. (A49-50, A2150-62.) Regional managers, branch managers and unit managers were compensated for their recruiting, training and supervision services by overwrite commissions for policies sold by the agents. (A50, A2150-62.) The relationships between Globe and its regional managers, branch managers, unit managers and agents were governed by written contracts. These contracts had no stated duration, but could be terminated by either party or upon death, disability or retirement of the manager or agent. (A49-50, A2150-62.)

[14] Sales agents working in the branch offices were paid by commissions based upon a schedule set forth in the contracts. Globe's full-time agents were not permitted to sell insurance for any other company. (A50-51, A76, A2163-78.) A major portion of a sales agent's compensation was commissions on renewals of policies they had sold in prior years. If a sales agent's contractual relationship with Globe terminated, the agent forfeited any right to commissions on renewals. However, if an agent remained with Globe for a long enough period, the agent became vested, which meant that Globe would pay renewals to the agent for the rest of his life, whether or not the agent sold additional policies. (A2172, A5431.) Recruiting and training sales agents was the primary and constant activity of regional managers and branch managers. Globe's purpose in recruiting new agents was to expand the agency force so that Globe's overall business would grow. When an experienced agent left, it was not possible to replace that agent with another experienced agent. Experienced agents were more valuable to Globe because they typically generated greater premium volume. (A216.) Their experience and greater value only developed over time. The recruitment and training of new agents was a difficult task and took a large percentage of the branch managers' time. (A76, A5447, A5389.)

[15] Globe's goodwill, going concern and advertising had a very limited role in the agents' success in selling insurance. Instead, the sales agents in the branch offices were responsible for finding customers. Very few customers purchased Globe products on their own initiative without first being solicited by an agent. The methods used by sales agents to prospect for customers included door-to-door canvassing, telephone solicitation, and review of voter rolls and other public records. (A51-52, A2180-338.)

[16] When it acquired Old Globe, Globe did not expect to change management, operations, the insurance products sold, the way in which those products were marketed, or the contracts that would govern Globe's relationships with the sales agents. (A52, A77-78, A82-83, A87, A129, A193-94, A2475-85.) No such changes occurred. (A87.)

III. Tax Treatment of Globe's Agency Force

[17] The Internal Revenue Service (IRS) issued a private letter ruling with respect to the acquisition and liquidation of Old Globe. The ruling held that, for federal income tax purposes, the transactions should be treated as a purchase of Old Globe's assets under I.R.C. § 334(b)(2), with Globe's purchase price of the stock allocated to the acquired assets in an amount equal to the assets' fair market values. (A44, A522-44, A1037-52.) At the conclusion of the administrative process, $24,952,291 of the purchase price remained unallocated. Although the parties agreed that a residual method should be used to allocate any remaining purchase price to intangible assets for which Globe could establish a useful life (A55-56), the IRS argued that any remaining assets were part of goodwill and did not have an ascertainable useful life. Globe disagreed. Based on expert testimony and reports introduced at trial, Globe contended that the residual portion of the purchase price should be allocated to its agency force and should be amortized under I.R.C. § 167 over a six-year period ending in taxable year 1986. Globe was in a loss from operations tax position for 1981 through 1985. As a result, Globe also claimed that allowable amortization deductions in 1981 through 1985 increased Globe's operations loss carryover deduction for 1986. (A138.)

IV. Expert Testimony

[18] Globe retained Richard S. Miller (Miller) to determine the fair market value and useful life of Globe's agency force as of December 31, 1980. Miller is an actuary who worked with Tillinghast Towers-Perrin, a top-tier actuarial consulting firm. (A79, A145.) He has 43 years of experience in the life insurance industry, including extensive experience in valuing life insurance companies and their assets. (A144-46.) Miller testified that Globe's agency force had a fair market value of $29,203,000 as of December 31, 1980, and an average useful life of six years. (A266-68, A6265, A6268.) To reach his conclusions, Miller used the income approach to valuation commonly used in the insurance industry to value agency force. (A173, A198, A274, A276.) Miller determined the six-year useful life of Globe's agency force from industry-wide agent retention data compiled by the Life Insurance Marketing and Research Association, Inc. (LIMRA). (A191, A215.) He corroborated the reliability of the data by comparison to actual Old Globe agent retention rates compiled in 1981 by Paul Campbell (Campbell) of LIMRA, by post-acquisition retention rates experienced by Globe, management interviews, sensitivity testing and comparison with agent retention rates experienced by other companies with which Miller is familiar. (A193, A215.) Miller's work was peer-reviewed by George Hebel, another actuary with Tillinghast. (A180.)

[19] The Government offered the expert testimony of Robert F. Reilly (Reilly), an asset appraiser. Reilly agreed that Globe's agency force had a value and useful life separate from goodwill, which could be ascertained with sufficient data (A372, A374-75, A425), but he did not opine on the fair market value or useful life. (A311.) Reilly's testimony was limited to questioning a few of the assumptions made by Miller in his valuation. As to useful life, Reilly testified that Miller's methodology for estimating useful life was correct. (A425.) Reilly did not criticize Miller's reliance on Globe data to determine useful life, did not testify that LIMRA data are unreliable, and did not dispute that Globe's agency force had an ascertainable useful life of six years.5 (A381-82.) Because the experts agreed that Globe's agency force had an ascertainable useful life, most of the focus of the expert testimony at trial related to the few assumptions made by Miller in his valuation that were questioned by Reilly.

V. Trial Court's Holding

[20] In his opening and closing arguments, Government's counsel argued that Globe's agency force was a mass asset. He did not argue that the LIMRA data were unreliable. (A73-75, A471-74.) Instead, the Government stipulated that LIMRA data are accurate. (A61.) After the trial, the trial court requested post-trial briefing on a number of questions related to the mass asset rule and the valuation of the agency force. The parties were not specifically instructed to address the reliability of LIMRA data or the useful life issues on which the experts were in general agreement. (A474-77.) On October 9, 2002, the trial court held: "Globe is not entitled to the amortization deductions claimed because it has failed to provide a reasonably accurate estimate of the useful life of its 'agency force."' Op. at 133.

[21] Globe now appeals.

 

SUMMARY OF THE ARGUMENT

 

 

I. The Trial Court Applied the Wrong Standard of Proof

[22] Treas. Reg. § 1.167(a)-1(b) provides that a taxpayer's estimate of the useful life of a depreciable asset cannot be challenged by the IRS absent a showing of clear and convincing evidence that the taxpayer's estimate is unreasonable. Case law confirms that the standard of proof for a taxpayer to establish the useful life of an asset is very low. All that is required is a reasonable estimate; "extreme exactitude" is not required. Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240, 1253-54 (5th Cir. 1973).

[23] For customer-based intangibles, case law has developed a two-prong test for establishing an amortization deduction under I.R.C. § 167. The taxpayer must show that the asset "(1) has an ascertainable value separate and distinct from goodwill, and (2) has a limited useful life that can be ascertained with reasonable accuracy." Houston Chronicle, 481 F.2d at 1250. The Supreme Court has noted that, for customer-based intangibles, the taxpayer's burden to show a value and useful life separate from goodwill is substantial. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 566 (1993). However, once this substantial burden is overcome, the very low standard of proof applicable to all depreciable assets for estimating the period of amortization still applies. Treas. Reg. § 1.167(a)-1(b). The trial court erred because it confused the "substantial" standard of proof applicable to determine whether the useful life of customer-based intangibles can be ascertained separate from goodwill and the lower standard of proof applicable to estimate the actual useful life of an otherwise depreciable asset.

[24] Through expert testimony, Globe demonstrated that the useful life of its agency force was six years. Miller estimated the useful life from industry-wide data on agent retention rates compiled by LIMRA. The accuracy of these rates was corroborated by actual pre- acquisition Old Globe agent retention data and post-acquisition Globe agent retention experience through 1993. The Old Globe data was compiled in 1981 by Campbell, an authority on agent retention data working for LIMRA. The Government's expert never challenged Globe's useful life estimates. Nevertheless, the trial court held that Globe had not satisfied its burden of proof. In so doing, the trial court ignored the governing law permitting a low standard of proof for useful life estimates and instead erroneously imposed a very high standard of proof on the basis that Globe's agency force is an intangible asset involving human relations. Application of this high standard of proof is contrary to controlling law and constitutes reversible error.

II. The Trial Court Erroneously Prevented Globe from Relying on Industry-Wide Data to Estimate Useful Life

[25] Since 1934, the administrative policy of the IRS has been to encourage taxpayers to use industry-wide data to estimate useful life, rather than rely on the taxpayer's own individual experience. The reasons for this policy are described in IRS Announcement 71-76, 1971-2 C.B. 503, ADD-55. Generally, in a competitive marketplace, companies tend to operate in a similar manner and their experience relating to the useful life of assets tends to be similar. Thus, according to the IRS, an industry-wide average is a better predictor of useful life than a single taxpayer's prior experience. Although the IRS has always preferred the use of an industry-wide average, Treas. Reg. § 1.167(a)-1(b) was promulgated to provide taxpayers the option to use their own experience. This regulation was intended to give taxpayers more discretion in estimating useful life, not to force taxpayers to use their own experience. In fact, since Treas. Reg. § 1.167(a)-1(b) was issued, the IRS has continued to encourage taxpayers to use industry-wide data to determine useful life. Rev. Proc. 62-21, 1962-2 C.B. 418, ADD-30; Treas. Reg. § 1.167(a)-11. The trial court's holding that a taxpayer is required to use its own experience, and may not rely on industry-wide averages, is contrary to long-standing IRS policy and precedent. IRS Announcement 71-76, 1971-2 C.B. at 509, ADD-61; Rev. Proc. 62-21; Treas. Reg. § 1.167(a)-1(b); Union Bankers Ins. Co. v. Commissioner, 64 T.C. 807 (1975), acq. 1976-2 C.B. 3; Prudential Overall Supply v. Commissioner, 83 T.C.M. (CCH) 1545 (2002); Colorado Nat'l Bankshares, Inc. v. Commissioner, 60 T.C.M. (CCH) 771 (1990), aff'd, 984 F.2d 383 (10th Cir. 1993).

[26] A reasonable estimate of useful life is an issue of judgment, which is the province of experts. Nothing in Treas. Reg. § 1.167(a)-1(b) is intended to preclude a recognized expert from using the best information available to estimate useful life. See Fed. R. Evid. 703 (which permits experts to rely on facts or data upon which experts in the field would reasonably rely). In this case, Globe's expert properly relied on LIMRA industry-wide data because it is the "bread and butter" and the "first choice" in the life insurance industry, and of the actuarial professional, for estimating the useful life of an agency force.

III. The Trial Court's Findings Are Contrary to the Evidence

[27] The trial court's holding that Globe failed to satisfy its burden of proof is based on numerous findings of fact that are contrary to the undisputed evidence. The most glaring error is the trial court's finding that LIMRA industry-wide agent survival data cannot be used because (1) at least five years of LIMRA data is needed to ensure that there is no statistical aberration, and (2) there "is little indication . . . that the LIMRA data was representative of Old Globe's actual termination rate." Op. at 145. Contrary to the trial court's assumption, there is nothing in the record to suggest that LIMRA data of fewer than five years are unreliable. The three years of LIMRA data (1978-1980) relied upon by Miller show agent survival rates that are consistent from year-to- year for all company sizes and even between companies. The thoroughness and reliability of this information make it impossible to conclude, as the trial court did, that an additional two years of LIMRA data are necessary to ensure that no single year aberration exists in the data.

[28] Moreover, the trial court has impermissibly substituted its own judgment for uncontroverted expert testimony. This type of arbitrary rejection of expert opinion is clearly erroneous. Cullers v. Commissioner, 237 F.2d 611, 616 (8th Cir. 1956); Estate of Ridgely v. United States, 180 Ct. Cl. 1220, 1232 (1967).

[29] The trial court's second conclusion that the LIMRA data were not comparable with Globe data is simply wrong. Miller is an expert on the agency forces of life insurance companies and is intimately familiar with the employment circumstances of agents surveyed in the LIMRA reports. Based on the extensive evidence in the record of the employment and training of Globe's agents and two days of interviews with Globe's management, Miller testified that the Globe agents and the agents surveyed by LIMRA were comparable. Not surprisingly, LIMRA's average agent survival rates (rounded to six years) was identical to the actual experience of Old Globe before the acquisition (also rounded to six years). Moreover, Miller conducted sensitivity testing to ensure that his useful life estimate based on LIMRA data was reasonable and consistent with Globe's post- acquisition experience. This testimony was not disputed by the Government's expert. Therefore, the trial court was clearly erroneous when it concluded that there was "nothing in the record" to support the use of LIMRA data to estimate useful life.

[30] In addition, the trial court made numerous errors in the application of the case law to the facts. First, in relying on the dissent in Newark Morning Ledger, 507 U.S. at 579-80, the trial court assumed, contrary to the actual facts, that Globe's business would change after the Old Globe acquisition. Second, the trial court relied on facts relating to newly hired agents to conclude that the average rate of agent retention was too uncertain to estimate, even though Globe's agency force only included experienced agents whose relationship with Globe was stable and whose average expected duration with Globe was predicable. Third, the trial court erroneously equated the diverse workforce of a manufacturing company for which an average useful life could not be determined in Ithaca Industries, Inc. v. Commissioner, 17 F.3d 684 (4th Cir. 1994), with Globe's homogeneous group of skilled and highly compensated professionals, whose relationships with Globe were governed by written contracts. While it may be true that the useful life of a diverse workforce is difficult to estimate,, the same is not true for Globe's agency force. Actuarial tables published by LIMRA make estimation of the useful life of Globe's agency force a relatively easy task.

[31] Finally, the trial court made numerous other factual findings that are clearly erroneous. These errors include misreading LIMRA reports, overlooking testimony that contradicts the trial court's conclusion, and misreading expert testimony. The cumulative impact of these errors mandate a reversal of the trial court's ultimate finding of fact that Globe did not satisfy its burden of proof.

 

STANDARD OF REVIEW

 

 

[32] The trial court made two errors of law, which require de novo review. Applegate v. United States, 25 F.3d 1579, 1581 (Fed. Cir. 1994). First, contrary to established law, the trial court imposed an incorrect standard of proof and did not permit Globe to estimate the useful life of its agency force by a reasonable estimate. Second, the trial court misinterpreted the regulations and erroneously prevented Globe's use of industry-wide data to estimate useful life. Reflectone, Inc. v. Dalton, 60 F.3d 1572, 1575 (Fed. Cir. 1995).

[33] Findings of fact are set aside if they are clearly erroneous. U.S. Ct. Fed. Cl. R. 52(a); Fed. R. Civ. P. 52(a). As explained below, the trial court made numerous factual findings that are clearly erroneous.

 

ARGUMENT

 

 

I. The Trial Court, as a Matter of Law, Erred in Applying an Incorrect Heightened Standard of Proof to Globe's Estimate of the Useful Life of Its Agency Force

A. Standard of Proof for Useful Life

[34] I.R.C. § 167 provides a deduction for a "reasonable allowance" for depreciation. Because of the statutory reference to "reasonable allowance," the taxpayer is only required to make a reasonable estimate of useful life. Treas. Reg. § 1.167(a)-1(b) underscores this liberal standard by stating that the IRS will not redetermine the taxpayer's useful life estimate absent a "clear and convincing basis."

[35] The case law uniformly applies a liberal standard of proof for a taxpayer to estimate the useful life of a depreciable asset. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 655 (1931) ("[A] reasonable approximation of the amount that fairly may be [deducted in] any year is all that is required."); Houston Chronicle, 481 F.2d at 1253-54 ("Extreme exactitude in ascertaining the duration of an asset is a paradigm that the law does not demand."); Super Food Services, Inc. v. United States, 416 F.2d 1236, 1238 (7th Cir. 1969) ("A 'reasonable certainty' or 'reasonable approximation' of the fact and rate of depreciation or exhaustion is sufficient."); Liquid Paper Corp. v. United States, 2 Cl. Ct. 284, 298 (1983) ("[A 'rough estimate' or 'reasonable approximation' of useful life is sufficient."); Richard S. Miller & Sons, Inc. v. United States, 210 Ct. Cl. 431, 445 (1976) ("The useful life of the challenged intangible reasonably may be approximated.").

[36] The liberal standard of proof for estimates of useful life finds its origin in the IRS's rulings and regulations going back to the first income tax law enacted in 1913. Beginning in 1913, taxpayers were given the freedom to estimate the useful life of their depreciable assets. These estimates were not challenged by the IRS unless there was "clear and convincing evidence that they were unreasonable." IRS Announcement 71-76, 1971-2 C.B. at 504, ADD-56. In 1934, Treasury sought to raise revenue by requiring taxpayers to use standardized asset lives published in Bulletin F, even if the standardized asset lives were longer than the taxpayer's own experience. Id. at 505, ADD-57. The use of standardized asset lives caused controversy; taxpayers argued that I.R.C. § 167 allowed a "reasonable estimate" which permitted shorter useful life determinations when the asset lives in their particular business were shorter than the IRS's published averages. Id. at 505, ADD-57. The IRS attempted to reduce these controversies by changing the policy in 1953. In Rev. Rul. 90, 1953-1 C.B. 43, ADD-33, the IRS announced, once again, that it would not disturb the taxpayer's estimate of useful life unless there was a clear and convincing basis for a change. This standard was incorporated into current Treas. Reg. § 1.167(a)-1(b) (The taxpayer's "estimated useful life shall be redetermined only when the change in the useful life is significant and there is a clear and convincing basis for the redetermination.") This regulatory standard was promulgated in the same regulations package as Treas. Reg. § 1.167(a)-3, applicable to intangibles. T.D. 6182, 1956-1 C.B. 98, 101, ADD-27-28. This liberal standard of proof is still in effect and applies to intangible assets.

B. The Trial Court Applied the Wrong Standard of Proof

[37] The liberal standard of proof for determining useful life should not be confused with the substantial burden taxpayers may have in proving that a customer-based intangible6 is separate from goodwill. In Houston Chronicle, the Fifth Circuit held that customer-based intangibles can be amortized if the taxpayer can satisfy a two-prong test by proving that the asset (1) has an ascertainable value separate and distinct from goodwill, and (2) has a limited useful life that can be ascertained with reasonable accuracy. 481 F.2d at 1250. The Supreme Court in Newark Morning Ledger, cited Houston Chronicle with approval, and adopted the Fifth Circuit's two-prong test. Newark Morning Ledge , 507 U.S. at 564. The Supreme Court noted that, because of the inter- relationship between a customer-based intangible and goodwill, it may be difficult for a taxpayer to satisfy its burden of proof that the asset has an ascertainable value or useful life separate from goodwill. Id. at 566. However, the taxpayer can overcome this burden by demonstrating that the asset is not self-regenerating and wastes over time. Id. at 570. The asset is a wasting asset if it can be regenerated "only through . . . substantial efforts" of the taxpayer. Id. at 567. In short, the Supreme Court held that the taxpayer's burden of proof is "substantial" on the first prong of the test -- to establish that a customer-based intangible has a value and useful life separate from goodwill. Once this substantial burden is overcome, however, all that is needed to establish the useful life is to make a reasonable estimate. Id. at 565.

[38] The trial court has confused these two tests and impermissibly merged the two-prong analysis -- each with its own distinct burden -- into a single test. As a result, the trial court imposed on Globe a much higher standard than that envisioned by the Supreme Court, or applicable under I.R.C. § 167 and the relevant regulations. The trial court erred because it confused (1) the question of whether the value and useful life of Globe's agency force can be determined separate from goodwill with (2) the question of what is the proper period of time over which the amount can be amortized. A taxpayer's burden on the first "whether" question may be substantial when customer-based intangibles are involved. However, the taxpayer's burden on the second "period-of- time question is merely to make a reasonable estimate.

[39] Although Globe's agency force is not a customer-based intangible, it is similar to a customer-based intangible in that the value of an agency force, like customer-based intangibles, is based on the expectation of a continuing financial relationship with an individual and is measured by the future profits expected to be derived from that relationship. At trial, Globe presented evidence that its agency force has an ascertainable value and useful life separate and distinct from goodwill (i.e., it is not a mass asset). (A182-84, A267.) The Government's expert agreed with Globe's expert and testified that the separate value and useful life of Globe's agency force were ascertainable. (A372, A374-75, A425.)

[40] Having satisfied the difficult first prong of the test, Globe then was only required to make a reasonable estimate of the fair market value and useful life of its agency force. Through the testimony of its expert, Globe demonstrated a value of $29,203,000 and a useful life of six years. (A244, A266.) The trial court never explicitly reached the issue of whether Globe's agency force had an ascertainable value or useful life separate from goodwill.7 Instead, the trial court skipped directly to the second prong of the test and held that Globe did not satisfy its burden of proof in estimating the useful life of its agency force. In so doing, the trial court made a fundamental error. The court erroneously applied the "substantial" burden test to the wrong question. While this test applies in determining whether a customer-based intangible is separate from goodwill, this test does not apply to the question of whether the estimate of the useful life was reasonable.

 

C. The Trial Court's Holding Creates a Catch-22 That Effectively Overrules Newark Morning Ledger

 

[41] In support of its finding that Globe's agency force does not have a determinable useful life, the trial court relies on evidence that it was difficult for Globe to recruit, train and replace its agents. Op. at 139-41. This evidence was used by Globe in order to establish that Globe's agency force was not a self-regenerating "mass asset." An intangible asset which consists of components that, when lost, are replaced automatically is a "mass asset" not subject to depreciation. Newark Morning Ledger, 507 U.S. at 559. Conversely, an asset that can only be replaced by substantial efforts is a wasting asset with a useful life. Houston Chronicle, 481 F.2d at 1244, 1254. Although the trial court declined to specifically reach the issue of whether Globe's agency force was a mass asset, it found that it was difficult for Globe to train and retain new agents (i.e., Globe's agency force was not self-regenerating). The trial court then utilized this evidence related to the mass asset issue and concluded that, because it was difficult to predict which new agents would succeed and how long they would stay with Globe, the useful-life of Globe's agency force could not be estimated. In other words, according to the trial court, in order to establish that an intangible asset is depreciable, taxpayers must show the asset wastes because it is difficult to replace; but showing that an asset is difficult to replace renders a taxpayer unable to prove that the asset has an ascertainable useful life. This creates an obvious Catch-22 situation, which, as a practical matter, overrules Newark Morning Ledger.8

 

D. The Trial Court Improperly Relies on the Dissent in Newark Morning Ledger

 

[42] The trial court relies on the dissenting opinion of Justice Souter in Newark Morning Ledger to impose a heightened burden of proof. The trial court stated that "the ability of a taxpayer to estimate the useful life of an intangible asset involving human relationships with reasonable accuracy is severely hampered by the variables inherent in the asset itself." Op. at 142. This statement ignores a fundamental principle of statistics -- the law of large numbers. If the analysis takes into account a sufficiently broad sample of observations of similar assets, an average useful life can be determined statistically with reasonable accuracy despite the variables inherent in each asset viewed in isolation.

[43] It may be true that the variables make it difficult to predict with accuracy the actual useful life of a single asset involving human relationships. But, this is true for any asset. For example, even though automobiles may be built to last at least ten years, their average useful life is considerably shorter because some cars are "lemons" and others may be destroyed in accidents. Although these variables cannot be predicted as to any single automobile, all that is needed to determine their useful life is reliance on a statistical average. In the insurance industry, it is routine practice to estimate the useful life of assets that involve human relationships. After the acquisition of a block of insurance contracts, an actuary would determine the average useful life of the contracts from an examination of historical lapse rates on the contracts and from an examination of industry-wide lapse rates on similar contracts. Many courts have recognized that the useful life of insurance contracts can be determined by statistical analysis based on an estimate. Union Bankers Ins. Co. v. Commissioner, 64 T.C. 807 (1975), acq. 1976-2 C.B. 3; Kentucky Central Life Ins. Co. v. Commissioner, 57 T.C. 482 (1972), acq. 1972-2 C.B. 2. The standard of proof to establish an average useful life of insurance contracts is not heightened by reason of the many variables inherent in the human relationships that an insurance company has with its policyholders.

[44] In many respects, the variables inherent in Globe's agency relationships are similar to Globe's relationships with its policyholders. The average useful lives of both types of human relationships are routinely estimated by actuaries from statistical data. If statistical analysis is properly applied to a large enough sample, the variables inherent in the relationships do not make it any more difficult to estimate an average useful life for an agency force than for any other asset (tangible or intangible). This was recognized by the Fourth Circuit in Ithaca where it stated that, "with a large enough sample size and a test period of sufficient length," actuarial analysis commonly used in the insurance industry could identify a useful life. 17 F.3d at 690.

II. The Trial Court, as a Matter of Law, Erred in Holding That Industry-Wide Statistical Data May Not Be Relied upon to Establish the Useful Life of Globe's Agency Force

[45] The unrebutted evidence demonstrated that the useful life of Globe's agency force can be estimated with a high degree of accuracy. Miller estimated the useful life by relying on industry- wide statistics provided by LIMRA. Miller was comfortable relying on industry-wide data because Campbell, an actuary at LIMRA with access to actual Old Globe agent survival data, had verified that Old Globe's experience was consistent with LIMRA data. (A193, A215.) Miller also had verified that Globe's agent survival rates were consistent with industry-wide experience through interviews with company management, statistical testing and verification from actual Globe survival data subsequent to the acquisition. (A190-91, A195, A215-16, A288-89.) Actuaries frequently rely on industry-wide statistical data in their valuations. (A191-92, A216.) In fact, that is what mortality tables are just industry-wide statistical data. (A216.) Using the LIMRA data, Miller estimated an average remaining useful life of six years. (A267-68.)

[46] LIMRA is an organization founded by life insurance companies to study common problems of marketing and insurance agency management. (A61.) Member companies have nearly 90 percent of the life insurance in force in the U.S. and Canada. (A1642.) LIMRA is a very well respected organization in the life insurance industry. (A85, A190.) Each year LIMRA compiles data on insurance agent retention and production, which are set forth in a document entitled "The Manpower and Production Survey" (LIMRA Report). (A85, A190, A1588-1764.) Approximately 70 insurance companies contributed data to the LIMRA Reports, which are included in the record. (A61, A1591, A1640, A1697-98, A1762-63.) The purpose of the LIMRA Reports is to provide industry-wide data on agent retention and production so that member companies can evaluate and compare their own experience to industry-wide data. (A61, A186.)

[47] The LIMRA agent survival rates are broken down for three types of agents (exclusive full-time ordinary agents, personal- producing general agents and combination agents). These survival rates also are broken down by years-of-service because agents who have worked for longer periods tend to have greater persistency. (A191, A216, A1592.) Based on the agent retention data submitted by member companies, the LIMRA Reports determine an overall average expected useful life of agents. This is done by projecting an average expected survival rate of all agents for the four years following the date of the report. Life insurance companies use and regularly rely on these LIMRA useful life projections. (A61, A85, A190-91.) As Miller testified, the LIMRA survival rates are used in the insurance industry and by the actuarial profession as the "bread and butter" and "first choice" in estimating the useful life of an agency force. (A85, A190-92, A216, A288.) The Government stipulated that the LIMRA data, and LIMRA's analytical techniques, are accurate. (A61.)

[48] Miller determined the useful life of Globe's agency force with a high degree of accuracy from three years of LIMRA survival rates (1978-1980) applicable to Globe's type of agents (exclusive full-time ordinary agents) and the particular Globe agent's experience category. (A191, A267-68.) Based upon the LIMRA data, Miller estimated a useful life of 6.34 years, which he rounded to six years. (A224-27, A267-68, A287-88.)9

[49] Miller corroborated the reliability of the LIMRA survival rates by a comparison with the survival rates contemporaneously compiled by Campbell from Globe's own experience. (A215.) Miller knows Campbell, has worked with him in valuing an agency force, and trusts Campbell's professional work and judgment. (A186-87, A190, A216, A302.) Campbell had verified that Globe's survival rates are comparable to those compiled by LIMRA and, therefore, are credible. (A215, A1581-82, A6099-365.) Not surprisingly, use of the Campbell survival rates also yielded an average six-year useful life of the agency force, both in the aggregate and for each of the groups of agents in the branch offices and the Employee Benefits Division. (A267-68, A6268.) Citing Treas. Reg. § 1.167(a)-1(b), the trial court held that only "inexperienced companies" can rely on industry- wide data to establish useful life. Op. at 144. According to the trial court, a company such as Globe, that has its own experience, but has failed to keep adequate records, cannot use industry-wide data to estimate useful life. Id. Under these circumstances, the trial court would never permit the company to claim a depreciation deduction. Id. As explained below, this novel holding of the trial court is directly contrary to well-established rules relating to depreciation and turns on its head the purpose of Treas. Reg. § 1.167(a)-1(b).

 

A. The IRS Historically Has Shown a Preference for Taxpayers to Rely on Industry-Wide Data in Lieu of Company-Specific Experience

 

[50] Historically, the IRS has attempted to standardize depreciation deductions between taxpayers and encourage them to use industry-wide data to determine useful life. IRS Announcement 71-76, 1971-2 C.B. 503, ADD-55. In 1934, the IRS revised Bulletin F to prescribe detailed standardized lives for specific types of assets. Id. at 505, ADD-57. This placed a heavy burden of proof on the taxpayer to sustain any shorter life based on the taxpayer's own experience. Id. Controversies ensued when taxpayers argued that I.R.C. § 167 permits a "reasonable" allowance and, depending on the facts, entitles taxpayers to a shorter useful life than Bulletin F allows. Id. In response to these controversies, Treasury promulgated Rev. Rul. 90, 1953-1 C.B. 43, ADD-29, which adopted a policy "not to disturb depreciation deductions . . . [unless there was] a clear and convincing basis for a change." 1971-2 C.B. at 506, ADD-58. Treas. Reg. § 1.167(a)-1(b) incorporated this policy and permits taxpayers to use their own experience to determine an asset's useful life. Id. In promulgating Treas. Reg. § 1.167(a)-1(b), Treasury did not intend to abandon the use of standardized asset lives. To the contrary, Bulletin F remained in place until 1962. Id. at 507, ADD-59. At that time, the IRS issued Rev. Proc. 62-21, 1962-2 C.B. 418, ADD-30, which allowed the useful life of assets to be established by a "guideline life" determined by reference to industry-wide experience. 1971-2 C.B. at 507-08, ADD-59-60. In general, the guideline lives were "30% to 40% shorter than Bulletin F lives" to encourage the use of the industry- wide guidelines. Id. at 507, ADD-59. Rev. Proc. 62-21 further stated that the IRS was providing wider taxpayer latitude. 1962-2 C.B. at 463-86, ADD-31-54. A taxpayer could make its own best estimate of useful life, or use objective standards based on industry-wide data, which would not be challenged by the IRS. Id.

[51] In 1971, Treasury promulgated Treas. Reg. § 1.167(a)- 11. IRS Announcement 71-76, 1971-2 C.B. at 503, ADD-55. This regulation adopted the Asset Depreciation Range (ADR) system, which permitted taxpayers to elect to determine useful life based on broad classes of assets and industry-wide experience. Id. at 514, ADD-66. Upon adoption of the optional ADR system, the IRS described in detail its position on useful life and on the standards to be applied in interpreting Treas. Reg. § 1.167(a)-1(b), as follows:

 

In holding that a "reasonable allowance" for depreciation (including a "reasonable allowance" for obsolescence) should be based on industry experience, not the individual taxpayer's past experience, ADR adopts a rational concept. Taxpayers in a particular industry, competing in free markets, will tend to move toward similar production processes, will tend to use similar equipment, and will tend to retire equipment on similar schedules. Over any given time period, however, the individual taxpayer is subject to events which are both nonrecurrent and unique to that taxpayer . . . .

Thus, ADR represents the Treasury Department's conclusion that a reasonable allowance for depreciation (including a reasonable allowance for obsolescence) need not necessarily be based on the taxpayer's individualized experience but may be based on industry-wide experience. The past experience of the particular taxpayer is not a better guide to the future period of productivity of assets newly being acquired than the experience in the taxpayer's industry as a whole. The taxpayer's own past experience may well have been affected by a variety of abnormalities -- difficulties in obtaining financing, labor difficulties, a period of depression in the taxpayer's business, or other factors.

 

id.

[52] The problems with the use of taxpayer-specific experience described by the IRS in Announcement 71-76 are echoed in the 1978 LIMRA Report. The trial court quotes this section of the LIMRA Report, which warns that one company's data may be "unstable" because it represents a small sample. Op. at 143-44. (See A1638.) This is why industry-wide agent retention data is collected by LIMRA and relied upon as the "bread and butter" and "first choice" in the insurance industry. (A216.) The LIMRA Reports contain precisely the type of "actuarial compilations used in the insurance industry" that the Fourth Circuit found lacking in Ithaca. 17 F.3d at 690.

[53] The IRS's preference for utilizing industry-wide standards to determine useful life, as articulated in IRS Announcement 71-76, has never changed. Moreover, case law allows industry-wide data to be used. Union Bankers Ins. Co. v. Commissioner, 64 T.C. 807 (1975), acq., 1976-2 C.B. 3; Prudential Overall Supply v. Commissioner, 83 T.C.M. (CCH) 1545 (2002); Colorado Nat'l Bankshares, Inc. v. Commissioner, 60 T.C.M. (CCH) 771 (1990), aff'd, 984 F.2d 383 (10th Cir. 1993).

[54] The holding of the trial court that company-specific data must be used for "experienced" companies is illogical. If the permissible evidence is restricted to the taxpayer's experience, depreciation deductions would be available only for large taxpayers, because small companies with "unstable" experience could never make a reliable useful life estimate. This perverse result of the trial court's interpretation of Treas. Reg. § 1.167(a)-1(b) flies in the face of settled law on the use of industry-wide data to establish useful life.

[55] Moreover, under Rule 703 of the Federal Rules of Evidence, an expert is permitted to base his opinion upon facts or data upon which experts in the field would reasonably rely. The trial court's reading of Treas. Reg. § 1.167(a)-1(b) inappropriately precludes experts from relying on the best data to determine useful life. Miller testified that, in the absence of the Globe data to perform his calculation, "the presence of industry data is an accepted practice in the actuarial profession." (A288.) Campbell, a Fellow of the Society of Actuaries (A144, A1584), also concluded that, "In our opinion, the assumed levels of retention are acceptable as a basis for the valuation." (A1582.) Miller further testified that the available data was sufficient for any competent actuary to determine useful life. (A186.) In fact, the standards of practice governing actuaries state that it may be necessary to rely on industry-wide data when company data is unavailable. Actuarial Standards Board, Actuarial Standard of Practice No. 19, "Actuarial Appraisals" section 5.6 (adopted Oct. 1991) (ADD-87-88.) The regulation cannot be interpreted, as the trial court did, to force experts to change their professional standards and ignore industry-wide data.

 

B. Even If the Court Finds That a Taxpayer Must Use Its Own Experience to Estimate Useful Life, Globe Would Still Be Allowed to Rely upon Industry Data

 

[56] Even if this Court were to agree with the trial court's interpretation of Treas. Reg. § 1.167(a)-(b), and determine that only "inexperienced taxpayers" with no prior experience are permitted to use industry data to determine useful life, Globe would still be entitled to rely on industry data. This is because Globe was newly formed in 1979 and acquired Old Globe's business as a result of Old Globe's liquidation in 1980. (A42-44.) Globe had no experience of its own prior to 1980 upon which to base a useful life analysis. Thus, even under the trial court's holding, Globe is "inexperienced" and can rely on industry-wide data.

III. The Trial Court's Findings of Fact Are Clearly Erroneous

[57] As described above, Miller estimated the six-year useful life of Globe's agency force using three years of industry-wide LIMRA data (1978-1980), which was corroborated by evidence of actual Old Globe and Globe agent survival data. (A267-68.) The actual Old Globe data compiled by Campbell also yielded a six year useful life. Reilly agreed that it is possible to determine an average useful life of Globe's agency force using the data that would have been available in 1980. (A372.) He also agreed that it is reasonable to rely on Campbell's compilation of contemporaneous data to determine useful life. (A301.) Reilly further agreed that the methodology and the termination date criteria used by Miller to determine the useful life were correct. (A425.) Finally, Reilly did not dispute the six-year useful life of Globe's agency force. (A381.) In fact, the Government stipulated to the accuracy of the LIMRA data, specifically "LIMRA's collection and analytical techniques." (A61.)

[58] Although Reilly never challenged Miller's useful life determination or the accuracy of the LIMRA data, the trial court, on its own initiative, found the LIMRA survival rates unreliable to establish useful life for two reasons: (1) the LIMRA data in the record covered only a three-year period, and at least five years of data are needed "to account for variances in any single year"; and (2) there is "nothing in the record" to indicate that the LIMRA survival rates are representative of Globe survival rates. Op. at 144-45. The trial court's conclusions on the reliability of LIMRA data are contrary to the undisputed evidence and are clearly erroneous. Moreover, as explained below, the trial court made numerous other findings, which are not supported by the record and are clearly erroneous.

 

A. The Three Years of LIMRA Industry-Wide Agent Survival Rates in the Record Are Reliable

 

[59] Globe is at a disadvantage here because the trial court's findings as to the reliability of the LIMRA data (as well as to most of the trial court's other arguments and conclusions) were made on the trial court's own initiative. Neither the Government's counsel, nor Reilly, ever asserted that the LIMRA agent survival rates are unreliable because they do not include at least five years of industry-wide data. There is nothing in the record to suggest a minimum five-year standard for reliability of industry-wide statistics generally, or for LIMRA data specifically. If Globe could have guessed that the trial court would go out on its own and adopt this five-year standard, Globe could have introduced into evidence LIMRA Reports for additional years, which are readily available. But, experts do not consider five years of data to be a necessary, much less required, prerequisite to reliance on industry-wide data. Similarly, had Globe known that the trial court, on its own initiative, would question Miller's use of industry data, Globe would have presented further evidence, such as Actuarial Standard of Practice No. 19, "Actuarial Appraisals" section 5.6 (adopted Oct. 1991) (ADD-87-88), which shows the wide-spread use of this data by actuarial experts.

 

1. The Trial Court's Substitution of Its Own Judgment for the Uncontroverted Testimony of Experts Is Clearly Erroneous

 

[60] The trial court's finding that five years of industry data are necessary to determine useful life is unsupported by the record. Miller testified that three years of LIMRA data were sufficient to make an accurate estimate of the useful life of Globe's agency force. (A188.) This testimony was uncontroverted by the Government's expert. (A61, A372, A381.) Nevertheless, the trial court disregarded this testimony and improperly substituted its own judgment for that of the experts. In these circumstances, courts have held that it is reversible error for an expert's opinion to be disregarded where there is no evidence in the record to support the trial court's "conclusion that the evidence of the taxpayers' witnesses is unworthy of belief." Cullers, 237 F.2d at 616; see also Ridgely, 180 Ct. Cl. at 1231; Skove v. United States, 1967 U.S. Ct. Cl. LEXIS 535, 47 (1967), ADD-1.

[61] The trial court apparently derived its five-year standard from Miller's testimony. Op. at 143. Miller stated that, if he had to determine the useful life of Globe's agency force, limited to using solely Globe's own data, he would prefer to use a multi-year sample (typically five years) to ensure that one-year's data were not an aberration. (A286-87.) There is nothing in Miller's testimony, or in the record, to suggest that at least five years of data are always needed. To the contrary, Miller testified that only three years of Globe's own financial experience is needed to ensure that a single year's data contain no aberration. (A188.) In his book, Reilly sets forth an example of the proper method of determining useful life of an intangible asset and, like Miller, uses a three-year test period. (A6620.) In fact, Reilly explains a method for determining useful life where no actuarial data for any year were available. (A6633-36.) More importantly, Miller's statement that five years of data are desirable only relates to a determination of useful life based solely on Globe's data. It does not relate to a useful life determination based on a large sample of LIMRA industry-wide data. In fact, the only testimony in the record is that three years of LIMRA survival rates are sufficiently reliable when determining useful life. (A188.)

[62] The trial court provides no reason to doubt the reliability of Miller's testimony. At trial, the trial court received Miller as an expert in actuarial science, and as an expert in the life insurance industry. (A176.) Op. at 142. Nevertheless, in its opinion, the trial court arbitrarily disregards Miller's testimony, substituting its own standard that five years of industry data are necessary to determine useful life. The establishment of this type of standard, which is dependent upon unique expertise, is not within the province of a trial judge, when the standard finds no support in the record. Alvary v. United States, 302 F.2d 790, 794 (2d Cir. 1962); Ridgely, 180 Ct. Cl. at 1232.

2. The Trial Court's Finding That Five Years of Industry Data Is Necessary Is Clearly Erroneous
[63] To support its conclusion that at least five years of LIMRA data are needed to estimate useful life, the trial court notes that the LIMRA Reports caution readers to review more than one year's data to ensure that unusual events in any single year have not occurred. But, there is nothing in the LIMRA Reports to suggest that a review of five years of data is needed. In Miller's expert opinion, three years of LIMRA data are more than enough to ensure that there was no single year aberration.10 This is demonstrated by the following tables taken from the 1978-1980 LIMRA Reports.

                    LIMRA AVERAGE SURVIVAL RATES

 

Calendar

 

Yr of

 

Service11        1978                1979               1980

 

 

               A12 B  C           A   B    C          A   B   C

 

   2           47 53 48           47  49  48          47  50  44

 

   3           65 65 66           62  64  56          61  64  58

 

   4           75 78 66           73  74  74          72  77  62

 

 

[64] This table shows consistent survival rates from year-to- year and for each year of service. It also shows very little deviation in survival rates by company size. In addition, the agent survival rates of individual companies in the LIMRA Reports are relatively consistent. For example, the average survival rate in 1980 for agents in the fourth year of service for Size A companies is 72%. The survival rates for each of the other companies surveyed are within 11 percentage points of this average. (A1702.) This same pattern appears in each of the LIMRA Reports. (A1588-764.) Thus, the LIMRA Reports show a very high correlation of survival rates between years, by category of company size, and even between companies.

[65] There also is consistency in the LIMRA Reports on the projected four-year retention rates for 1978-1980, as follows (A1592,A1645, A1701):

          1978             1978             1979             1980

 

     Detail Group     All Companies    All Companies    All Companies

 

          15%              16%               15%              15%

 

 

Based on this data for 1978-1980, there is no rational basis for the trial court's conclusion that two additional years of LIMRA data are necessary to ensure that there is no single year aberration.

 

3. The Trial Court's Finding That There Is "Nothing in the Record" to Indicate That the LIMRA Survival Rates Were Representative of Globe's Actual Survival Rates Is Clearly Erroneous

 

[66] Contrary to the trial court's findings, there was substantial unrebutted testimony that the LIMRA agent survival rates were representative of Globe's actual survival rates. The LIMRA data were collected with respect to "exclusive full-time ordinary agents." The key attributes of these types of agents are that they work exclusively for a single company, they are paid by commission, they forfeit rights to renewal commissions if they leave the company, and they are recruited and trained by the company. (A2163-79.) Exclusive full-time ordinary agents sell both life and accident and health insurance contracts; Globe's agents are exclusive full-time ordinary agents and are the type of agents covered by the LIMRA Reports. (A48, A102, A191, A276, A295-96.)

[67] Miller did not make an "unsubstantiated assumption" that Globe's agents and the ordinary agents surveyed by LIMRA were similar. Op. at 145. Based on his 43 years of experience as an actuary, Miller was recognized by the trial court as an expert on the life insurance industry, including agency force. (A176-77.) He testified that he is generally familiar with agency forces of life insurance companies and has specifically valued agency forces of life insurance companies. (A276.) He has been "deeply" involved with how agents are hired, trained and compensated. (A146.) In fact, Miller worked for two of the companies that contributed to the LIMRA data (A1640) and supervised the valuation of agency force for one of those companies in 1980 -- the same year as the Old Globe acquisition. (A146, A170, A186-87.)

[68] There was substantial evidence relating to the employment circumstances and the training of Globe's agents. (A98-103.) The record includes two lengthy depositions devoted to the recruitment and training of Globe agents. (A5417-989.) Based on his experience and the extensive evidence, Miller testified that Globe's agent compensation, training pattern and employment circumstances were "very similar" to the circumstances of the companies in the LIMRA data. (A188, A191, A288.)

[69] In addition to comparing the employment, compensation and training circumstances of Globe's agents with the ordinary agents in the LIMRA survey, Miller also verified -- through two days of interviews with Globe personnel -- that Globe's actual agent survival rates are consistent with industry-wide experience. (A193, A290.) More importantly, Campbell, an expert in this field, verified from a review of contemporaneous data that Old Globe's actual agent survival experience as of 1980 was consistent with LIMRA survival rates. (A215, A1582-83.)

[70] Miller went even further to verify his own conclusion. He tested the survival rates from his own experience and knowledge of the industry and found these to be accurate. (A188.) He also reviewed post-1986 actual agent survival rates of Globe through 1993 to verify that the LIMRA survival rates were a reliable measure. (A196, A6124.) Finally, Miller conducted sensitivity analysis and testing to ensure that his conclusions were correct. (A189, A195-96, A215-16, A302, A6111-12, A6124.) Contrary to the trial court's findings, Miller's conclusion that LIMRA survival rates were representative of Globe's was not "unsubstantiated."

[71] The trial court's specific comments on this matter do not support its finding. The trial court notes that the LIMRA data are broken down into survival rates by three general sizes of companies and that Miller had testified that Globe was smaller than most companies that had contributed to the LIMRA data. Op. at 143-45. However, the LIMRA data reflects that the size of the company makes very little difference in survival rates. This is demonstrated by the following survival rates taken from the 1979 LIMRA Report (A1645-47):

     Calendar Year of         Size A         Size B       Size C

 

         Service

 

            2                  47%             49%          48%

 

            3                  62%             64%          56%

 

            4                  73%             74%          74%

 

 

[72] As this table shows, the size of the company makes very little difference in result.

[73] The trial court undoubtedly is correct that an important consideration is whether the employment circumstances and training of Globe's agents are comparable to the companies in the LIMRA Reports. However, the extensive unrebutted testimony of fact witnesses, coupled with Miller's expertise and explicit finding of comparability, demonstrated that the employment circumstances and training were similar. Moreover, the evidence revealed that there was very little variation in training methods among Globe's branch offices. (A5597.) This, when added to the cumulative unrebutted evidence that Old Globe's actual 1980 agent survival experience is comparable with LIMRA rates; that Globe's management confirmed that Globe's experience is consistent with the industry norm; that post-1980 actual Globe survival data are consistent; and Miller's sensitivity testing, the inescapable conclusion is that the trial court erred when it found: "[T]here . . . is nothing in the record to indicate . . . . that the LIMRA data was representative of Old Globe's actual termination rate." Op. at 144-45.

 

B. The Trial Court's Finding That the LIMRA and Campbell Data Should Yield Inconsistent Estimates of Useful Life Is Clearly Erroneous

 

[74] Miller determined that Globe's agency force had an average useful life of six years using either the LIMRA survival rates or Old Globe's actual survival rates from the Campbell report. (A215, A6261.) The trial court apparently did not believe that the LIMRA and Campbell rates would yield such consistent results. The trial court based its conclusion on the following table, which compares the LIMRA survival rates for 1978-1980 to Campbell's Old Globe survival rates. Op. at 145. (Compare A1585, A1592, A1645, A1701.)

Calendar    LIMRA Rate    LIMRA Rate    LIMRA Rate     Campbell Rate

 

Year of     of Survival   of Survival   of Survival    of Survival

 

Service       (1978)         (1979)        (1980)         (1980)

 

   1            70             69            71             30

 

   2            46             47            47             45

 

   3            63             62            61             65

 

   4            73             73            73             75

 

  5-9           84             83            81         5 only -- 80

 

  6+            9113           89            88             90

 

 

[75] This chart demonstrates that the LIMRA and Campbell survival rates are remarkably similar for agents who are in at least their second calendar year of service. It is true that there is an inconsistency in the table for agents in their first year of service. (A287.) However, Globe's agency force did not include any agents who were still in their first calendar year of service. The agency force in question included only experienced agents who had survived through year-end 1980 and who were in at least their second calendar year of service. (A215.) The figure in the Campbell chart for first year agents is obviously incorrect. It appears that, because Campbell's erroneous first year figure did not relate to the agents he was valuing, he simply overlooked a typographical error that did not matter. In fact, a logical explanation for Campbell's error is that he entered a 30% rate of survival instead of the complement of that amount (70%), which would have been consistent with the LIMRA first year rates. Miller was comfortable with relying on Campbell's conclusions because he knew that Campbell's work was highly credible when the data mattered to the final result. (A188, A215.) In short, because the survival rates are very consistent for the calendar years of service that matter (2+ years), it is not surprising that both yield the same six-year average useful life. The court's finding to the contrary is clearly erroneous.

 

C. The Trial Court's Finding That Post-Acquisition Events Make It Difficult to Determine Useful Life Is Clearly Erroneous

 

[76] The trial court relies on two quotes from the dissent in Newark Morning Ledger, which state, in essence, that in the case of newspaper subscriptions it is difficult to estimate useful life from historical data because, after an acquisition, the new owners may cause customer dissatisfaction resulting in a higher rate of customer cancellations. Op. at 138, citing Newark Morning Ledger, 507 U.S. at 580 n.8. The dissent's concern is absent from Globe's facts. Unlike the taxpayer in Newark Morning Ledger, Globe had no intention of changing the operations of Old Globe after the acquisition. (A820-23.) In fact, there were no changes in the hiring or training of management or agents (A77-78), no product changes, and no increase in lapse rates or growth plans. (A82-83.) Charles Hudson, Old Globe's Vice President and Chief Actuary, testified that there was no interruption in the functioning of the branch office sales force and that the company "continued to function just as before." (A87.) This also was confirmed by Miller through interviews with Globe management, who stated that no changes were planned in the management of the agency force. (A193-94.) Moreover, Miller tested the actual agent retention rates after the acquisition and verified that they were consistent with both Old Globe's experience and LIMRA rates. (A196-97.)

[77] In short, wholly apart from the trial court's inappropriate reliance on the dissenting opinion in Newark Morning Ledger, the unrebutted testimony establishes that the potential difficulties in establishing a useful life in the case of newspaper subscriptions after an acquisition are inapplicable to Globe's agency force.

 

D. The Trial Court Erroneously Equates Globe's Agency Force with the Workforce in Ithaca

 

[78] In Ithaca, the Fourth Circuit, in a split decision, held that an employee workforce of a garment manufacturing company could not be amortized because the company had not produced sufficiently reliable data to establish a useful life. Ithaca, 17 F.3d at 690. The court found that the sample size of over 5,000 employees over only a four-year period with only four classifications of numerous job types was not sufficient to ascertain a useful life with reasonable accuracy. Id. The Fourth Circuit recognized, however, that with a large enough sample size and a test period of sufficient length, reliable patterns of attrition for a workforce can be identified, noting that this is the "purported accomplishment of actuarial compilations in the insurance industry." Id.

[79] The trial court has erroneously concluded that Globe's agency force is similar to the employee workforce in Ithaca. Op. at 138-39. There are many differences. First, unlike the employees in Ithaca, Globe's relationships with its agents were governed by detailed written contracts. The contracts addressed the rates of commissions on first year premiums (direct or overwrite), the right to commissions upon renewal of a policy, and the vesting of renewal commissions. (A50-51, A2163-78.) These contractual provisions provided a framework for an ongoing relationship, which stabilized the agents' longevity and helped make their retention rate predictable. Agents knew that if they stayed with Globe, they would be entitled to renewal commissions, and that if they stayed long enough, the renewal commissions would "vest." (A5431.) This method of compensating agents is relatively uniform in the life insurance industry. (A5591.) These contractual provisions provided a framework and incentives for agent retention, which made the expected duration of the relationship predictable by statistical analysis. (A51, A103, A384.) Thus, the agent contracts provided the important "predetermined limits . . . upon the relationships" between Globe and its agents that were missing in Ithaca. These contracts preclude Globe's relationships with its agents from being characterized as consisting of merely "constantly fluctuating components," a characterization that was key to the majority's holding against the taxpayer in Ithaca. 17 F.3d at 690.

[80] The trial court minimizes this difference by relying on the difficulty Globe had in training and replacing agents. Op. at 141. While the trial court is correct that, during the first year, "few agents would stay with the company for a significant period of time," Id., the trial court fails to see that this fact actually supports Globe's position. Agents who made it past the first year tended to stay. For example, James Narrell, Regional Manager, stated, "Now, the renewals kicked in mostly on the second year. And, if they could last a couple of years, then you had a much lower attrition rate." (A103.)

[81] It is evident that the trial court did not understand that Globe's agency force is limited to those existing agents who already have performed at least one calendar year of service. (A184-85.) That is, Globe's agency force includes only those agents who had survived to year-end 1980, had succeeded in selling insurance, and who would forfeit their renewal commissions if they left. Globe's agents are not those who were recruited and left because they were unsuccessful. The agents in question are the "one-out-of-ten" agents who remained with Globe and who had already obtained the necessary training to be successful. Op. at 140-41.

[82] In short, what the trial court perceives as a weakness in Globe's position is actually a great strength. It was difficult for new agents to sell contracts, and if experienced agents left Globe, they could not take contract renewals with them. (A51, A6107.) As a result, experienced agents would stay with Globe. Miller referred to this as the "glue" that would tie the agent to the company. The trial court correctly points out that the "glue apparently did not bind a large number of agents," particularly in the first year of service. Op. at 140-41. Unfortunately, the trial court fails to recognize that the agents who terminated service during the first year were not included in Globe's agency force. (A184-85.) Miller testified that the forfeiture of renewals "lends definite credibility to the . . . historically exhibited production patterns and the expectation of future business." (A181, A184.)

[83] Another significant difference between Globe's experienced insurance agents and the workers at issue in Ithaca is the "skill set" possessed by Globe's experienced agents. Globe's agents possessed unique talents; the willingness and ability to sell insurance to reluctant customers with whom Globe had no existing business relationship. (A51, A278.) Estimating the average useful life of a homogenous group of highly compensated professionals whose compensation was based in large part on prior-year sales that were forfeited if they left Globe is entirely different than determining the average useful life of a diverse workforce consisting primarily of garment workers.14

[84] Another difference between Globe's agents and the workforce in Ithaca is the unique ability of the insurance industry to gather reliable statistical data. Insurance companies have a special statutory exemption from the antitrust rules, which permits the pooling of resources to compile industry-wide data. McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15 (2003). Unlike companies in other industries, insurance companies have the ability to share sensitive information to compile industry-wide statistics. In other words, as suggested by the court in Ithaca, the insurance industry is in a unique position to establish a reliable useful life of its assets. This is because it utilizes reliable actuarial tables that are based on broad, statistically sound data. Ithaca, 17 F.3d at 690.

 

E. The Trial Court Made Numerous Other Findings of Fact That Contradict the Undisputed Evidence

 

[85] LIMRA Reports. The trial court quotes from the 1978 LIMRA Report to support its conclusion that the expected termination date of a particular agent cannot be estimated from industry averages because an agent's retention may depend on the training he received. Op. at 141-42. (See A1639.) However, the trial court overlooks the fact that the LIMRA Report qualifies this by stating that: "On the factors for which data have been available for several years, the patterns of the overall results have remained stable." (A1639.) In other words, although individual training practices may vary, on average, agent termination rates remain stable. In Globe's case, the training of agents among branch offices was similar. (A5597.) More importantly, Globe's training practices are comparable to those of the companies surveyed in the LIMRA Reports and Globe's actual experience is consistent with LIMRA average rates. (A191, A288.) Thus, the quote relied upon by the trial court actually refutes the trial court's own conclusion that the LIMRA Reports are unreliable to determine the average useful life of Globe's agency force.

[86] Termination Date. The trial court relies upon a quotation from Miller's testimony to find that "it is very difficult to determine an identifiable time when a life insurance agent's relationship with the company can be said to have terminated." Op. at 141. But, the trial court overlooks Miller's answer to the very next question, where he clarified that "from an actuarial and a statistical standpoint [the intangible asset of the agent relationship is lost] when he stops writing business." (A183.) In other words, Miller's actual testimony was that, after the agent ceases writing new business, the economic value of the agent relationship terminates. The Government's expert agreed with Miller. (A425.) Therefore, contrary to the trial court's finding, the actual testimony was that an insurance company does not have difficulty determining the actual economic useful life of an agent relationship.

[87] Agency Force Variables. Throughout its opinion, the trial court finds that it is impossible to determine an average useful life of Globe's agency force because of the many variables-involved in human relationships. However, the trial court's finding is directly contrary to the testimony in the record. Miller stated that "the Globe agency force was large enough to yield statistically significant results." (A6122.) In other words, the size of Globe's agency force was large enough to yield a reliable average useful life determination despite the variables. The Government's expert agreed. (A372, A374, A425.)

[88] Data Relied Upon by Campbell. The trial court assumed that Campbell's opinions as to Globe's actual survival rates were limited to a review of only 1980 termination data. However, Campbell is a respected actuary who has worked for LIMRA. Campbell knew that reliance upon a single year of Globe survival data would be insufficient to ensure the absence of potential single year statistical aberrations. When he performed a valuation of an agency force, Campbell generally required voluminous data. (A187.) Old Globe's chief actuary gave Campbell access to: "everything that would have been required to do an evaluation," including data on termination rates. (A80, A84, A287.) Because Campbell had access to all of Old Globe's data, he undoubtedly reviewed actual survival data for many prior years. After this review, Campbell logically chose to use the most recent experience for his valuation, particularly since it conformed closely to LIMRA averages. In other words, the only logical conclusion that can be drawn from the record is that Campbell reviewed many years of survival data before deciding to base his valuation on 1980 experience. Not surprisingly, the Government's expert testified that the Campbell data was reliable, and that he would have relied on it to determine the useful life of Globe's agency force. (A425.) For this reason, Reilly testified that he would have relied on the Campbell data to determine the useful life of Globe's agency force. (A425.)

[89] Reilly Testimony. The trial court mischaracterizes the testimony of the Government's expert, Robert F. Reilly, regarding the use of Globe survival rates in the Campbell report. Reilly testified that he would have used the Campbell survival rates rather than LIMRA rates because, in his opinion, it was reasonable to assume that Campbell had access to good, contemporaneous data. (A289, A301-03.) Reilly never testified, as the trial court states, that the Campbell rates should be used only if underlying data was available for review. Op. at 143. Reilly actually said just the opposite. (A301-03.) Moreover, the trial court's statement that Campbell himself did not have access to contemporaneous data simply is wrong. (A80, A84, A1579-87.)

[90] The trial court also erroneously implies that Reilly criticized the LIMRA data. Op. at 145. This is not true. Reilly merely testified that he would have preferred to rely on Old Globe's data as compiled by Campbell -- data that yielded the same six-year useful life as the LIMRA data. (See discussion, supra, at 15.)

[91] The Value of an Agent. The trial court relied on an article entitled, The Value of an Agent, published in 1943, by the predecessor of LIMRA, to conclude that there are wide differences in survival rates of agents depending on their ability. Op. at 141. (See A200, A6057-58.). Globe introduced this article into evidence for the sole purpose of demonstrating that the overall methodology used by Miller for valuing an agent has been recognized for over 60 years. The trial court admitted the article into the record for this purpose, but cautioned that, because of its age, the article "really doesn't tell me a whole lot." (A201.) As the trial court itself suggested at trial, this article's observations about the reliability of 1943 agent survival data have no bearing on the reliability of the more comprehensive, contemporaneous 1978-1980 LIMRA-data relied upon by Miller. Unlike the 1943 data in The Value of an Agent, the 1978-1980 LIMRA survival rates are based upon a very broad sample and are broken down by type of agent, size of company and length of service. (A85, A190- 92, A1588-764.) As a result, the concerns of the trial court are not present in the LIMRA data.

[92] Miller's Use of LIMRA data. The trial court incorrectly states that Miller used LIMRA rates, instead of Campbell data, because the Campbell data only included one year of information. Op. at 143. Miller relied upon LIMRA rates because they are the "first choice" for determining useful life and he did not have Campbell's underlying data. (A191, A215, A288, A6258.) Miller possessed a high degree of confidence in Campbell's data. After working with Campbell, Miller knew that the Campbell data would be reliable. (A186-87, A190-91, A216, A302, A6258.) Miller naturally would have assumed that Campbell reviewed "voluminous" data from many years before selecting 1980 termination rates as representative. (A188, A215.)

[93] These erroneous findings of the trial court cumulatively and individually mandate a reversal of the judgment.

 

CONCLUSION

 

 

[94] For the reasons stated above this Court should reverse the decision of the Court of Federal Claims.

February 25, 2003

Respectfully submitted,

 

 

PETER H. WINSLOW

 

Scribner, Hall & Thompson, LLP

 

1875 Eye Street, N.W., Suite 1050

 

Washington, D.C. 20006-5409

 

(202) 331-8585

 

 

Lead Counsel for Plaintiff-

 

Appellant

 

 

Of Counsel:

 

Joseph A. Sergi

 

Scribner, Hall & Thompson, LLP

 

1875 Eye Street, N.W., Suite 1050

 

Washington, D.C. 20006-5409

 

(202) 331-8585

 

FOOTNOTES

 

 

1Throughout this brief "Globe" will refer to Globe Life And Accident Insurance Company and "Old Globe" will refer to the company acquired by, and liquidated into, Globe in 1980. Because the employment circumstances of Old Globe's agency force did not change after the acquisition by Globe, references to Globe's agency force sometimes refer interchangeably to the agency force of Old Globe and Globe.

2Unless noted otherwise, all references herein to "I.R.C. §" refer to a section of the Internal Revenue Code of 1954 (26 U.S.C.) as in effect during the taxable years 1980 through 1986.

3"Op." references are to the trial court's opinion.

4 "A" references are to the joint appendix. "ADD" references are to the addendum attached to this brief.

5Reilly initially was confused and thought Miller's six-year useful life was an average useful life, rather than an average remaining useful life, as of December 31, 1980. (A381- 82.) Miller clarified this matter on rebuttal. (A430-31.) Reilly also questioned whether the six-year useful life was inconsistent with the projected period of profits considered in Miller's valuation. (A381- 82.) This valuation issue was not addressed by the trial court.

6In general, a customer-based intangible is an ongoing relationship with existing customers in which a provider of goods or services has an expectation that the customers will continue their patronage. Newark Morning Ledger, 507 U.S. at 557. By contrast, the value of goodwill can be defined as the excess of the total value of a company as an ongoing enterprise over the sum of the individual values of all the assets of the company. Metropolitan Bank v. St. Louis Dispatch Co., 149 U.S. 436, 441 (1893). Unlike customer-based intangibles, goodwill takes into account the expectation that the company will enter into new customer relationships. Examples of customer-based intangibles include insurance contracts, newspaper subscriptions and bank core deposits. Newark Morning Ledger, 507 U.S. at 557; Houston Chronicle, 481 F.2d at 1248; Union Bankers Ins. Co. v. Commissioner, 64 T.C. 807 (1975), acq. 1976-2 C.B. 3.

7Although the trial court never made an ultimate finding of fact that Globe's agency force is not a mass asset, its opinion, in effect, acknowledges that the agency force is a wasting asset because it can only be regenerated through substantial efforts on Globe's part. Op. at 139-40.

8As explained infra at 46. the origin of the trial court's error is its focus on new agents who had left Globe, while Globe's agency force included only experienced agents who remained with Globe. (A184-85.)

9Miller used standard actuarial techniques to calculate useful life and described the process as "a relatively straight forward calculation." (A224-25.) The trial court states that it was unable to understand Miller's method of computing useful life from his workpapers. However, the Government's expert understood the workpapers and agreed that Miller's methodology is correct. (A376-77, A425.)

10A review of the 1976 and 1977 LIMRA Reports demonstrates consistency with the later years.

11The table does not include the first calendar year of service because Globe's agency force as of December 31, 1980, included only experienced agents who had completed at least one calendar year of service. (A184-85.)

12A, B and C refer to the three categories of company sizes.

13LIMRA data for years of service "5+" is added to the trial court's chart to conform with the comparison made in the Campbell report. (A1585.)

14Moreover, Globe also had a diverse employee workforce but did not seek an amortization deduction for this intangible asset. For' its workforce, Globe did not have the ability to apply widely recognized statistical analysis to determine an average useful life. (A139.)

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    GLOBE LIFE AND ACCIDENT INSURANCE COMPANY, Plaintiff-Appellant, v. THE UNITED STATES, Defendant-Appellee.
  • Court
    United States Court of Appeals for the Federal Circuit
  • Docket
    No. 03-5034
  • Authors
    Winslow, Peter H.
    Sergi, Joseph A.
  • Institutional Authors
    Scribner, Hall & Thompson LLP
  • Cross-Reference
    For a summary of Globe Life and Accident Insurance Co. v. United

    States, No. 99-747T (9 Oct 2002), see Tax Notes, Oct. 28,

    2002, p. 502; for the full text, see Doc 2002-23641 (20 original

    pages) [PDF], or 2002 TNT 203-20 Database 'Tax Notes Today 2002', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2003-7943 (191 original pages)
  • Tax Analysts Electronic Citation
    2003 TNT 100-39
Copy RID