Is it correct that the present value of the gross, (rather than net) annuity payment is included in the lottery winner's gross estate? Is there a cite I can refer to?
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This from Kleinrock's Federal Tax Bulletin, September 15, 2003:
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TAX HIGHLIGHTS
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Code Section 2001
ESTATE NOT REQUIRED TO USE ANNUITY TABLES IN VALUATION OF LOTTO WINNINGS
Standardized valuation tables are not required to calculate the current
value of an estate's installment payments of Lotto winnings for estate tax
purposes. Estate of Gribauskas v. Commissioner, No. 01-
4189 (2d Cir. 8/26/03).
Paul Gribauskas and his wife won in excess of $15 million in the
Connecticut Lottery in 1992. The terms of the lottery required payments in
excess of $1 million to be paid out in twenty annual installments. In
addition, the winners could not assign or transfer future installments to
third parties. After the first installment, the Gribauskas' were divorced,
with each person entitled to receive approximately $395,000 annually.
After the second installment, Paul died without a will, leaving eighteen
remaining installments to be paid.
On the estate tax return, the estate claimed a value of the future
installments at approximately $2.6 million by factoring in the significant
discount for the limited market that existed for unassignable lottery
winnings. The IRS determined that the prize constituted an annuity that
should be valued using the actuarial tables prescribed under Code
Section 7520. Using these tables, the IRS determined the
present value of the winnings to be in excess of $3.5 million and assessed
the estate approximately $400,000 in additional tax.
Subsequently, the estate filed a petition in the Tax Court seeking a
redetermination of the deficiency. The estate argued that the annuity
tables should not be used for valuation because the resulting value was
"unrealistic and unreasonable" based on the reduced marketability of the
payments due to transfer restrictions. Because a market for the payments
did exist, the estate argued that their valuation was correct.
The Tax Court held that the transfer restrictions did not justify the
departure from the use of the actuarial tables. The court concluded that
prior case law was not sufficient to support the deviation on the basis of
the lack of marketability and that holding for the estate would undermine
the policy of favoring the use of standardized tables. The estate
appealed.
The Second Circuit reversed the Tax Court, holding that because a market
did exist for the Lotto winnings, the standardized valuation tables were
not required to calculate the current value for estate tax purposes.
According to the court, the law requires that all relevant facts and
elements of value should be considered in determining the fair market
value of the assets of the gross estate. The court determined that
transferability was a key element in valuing an asset and that the estate
had met its burden of proof in overcoming the presumption for the use of
the actuarial tables. The court noted that because both parties had agreed
that a market existed for the lottery winnings, the additional value
determined by the IRS produced a substantially unrealistic and
unreasonable result. The court remanded the case to the Tax Court to
determine the appropriate estate tax.
For a discussion of determining annuity value for estate tax purposes, see
Kleinrock's Analysis and Explanation, Section 752.10.
Comment