Thursday, June 14, 2007

LOTTERY CASE ILLUSTRATES GROSS ESTATE ANNUITY INCLUSION RULES

Lottery cases are often interesting for how they illustrate the application of various tax provisions in an unusual context. A recent tax case relates to the valuation of lottery payments at death.

Mildred Lopatkovich and Mary A. Susteric jointly won a lottery with one other person in Ohio. Their luck ran out and each died about 10 years later when 15 payments remained. Their estates converted the lottery payment obligations into one lump sum payment based on the rules of the Ohio Lottery Commission, and reported the value of the lottery assets at the conversion value.

The IRS audited the returns, and instead valued the lottery assets using the IRS annuity tables. This resulted in over a 20% increase in the reported values, with resulting higher estate taxes. The estates disagreed, and the case ended up in U.S. District Court.

There is a split in the federal Circuit Courts of Appeal as to whether the IRS annuity tables have to be used to value annuity-type payments, or whether other valuation methods are permissible. The District Court noted that the tables must be used to value the lottery payments unless it is shown that the result is so unrealistic and unreasonable that either some modification in the prescribed method should be made, or complete departure from the method should be taken, and a more reasonable and realistic means of determining value is available. The court emphasized that a lack of transferability of an annuity could affect its value. Given that the Ohio rules impacted the value that could be received for the lottery assets, the court found that the estates successfully demonstrated that the value ascribed by the annuity tables was “unrealistic and unreasonable.” The court ordered further proceedings to give the estate an opportunity to show that there was a more reasonable and realistic means to determine the fair market value of the remaining lottery payments.

Negron v. U.S.
, (DC Oh 6/4/2007)
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