In United States v. Estate of Shackleford, the Eastern District Court of California ruled a taxpayer’s estate did not have to use IRS valuation tables to calculate the value of lottery annuity payments. It said use of IRC section 7520 tables would result in unrealistic and unreasonable values because of restrictions on the assignment of payments under state law. Therefore, it allowed the Shackleford estate to apply an alternate valuation method for its tax return.
In 1987, Shackleford won a California lottery jackpot of more than $10,160,000. He was to receive his winnings in 20 annual payments of $508,000. Shackleford could not collect his prize in a lump sum, even at a discount. In addition, according to California law, he could not “assign, [pledge] or collateralize” his future payments.
Shackleford died in 1990 after receiving only three payments. At the time of his death, the compound value of the 17 remaining payments was $8,636,000.
When Shackleford’s estate filed a tax return, it reported the present value of these payments at slightly more than $4 million. However, in amended returns, the estate claimed the value of the payments was zero. The IRS disagreed with this claim, contending the $4 million valuation was accurate. The estate sued the IRS, and the case was tried in district court.
In its initial decision, the court ruled the estate had to include the value of the payments that remained unpaid at the time of Shackleford’s death. However, it did not find, as a matter of law, that the payments had to be valued as an annuity using the code tables.
Based on expert testimony, the court ruled that the payments had a value of $2,012,500. Using the IRS tables to value the payments, it said, produced an unrealistic and unreasonable value, because they did not take into account any discount for the prize’s lack of liquidity.
The court, however, refused to allow a zero valuation. It noted that, even though state law restricted assignment of prizes, at least 10 California lottery winners had tried to transfer all or part of their winnings in 1990. In each case the price the winner got for the payments was substantially discounted to take into account the validity of the transactions. Based on these “gray market” transactions, the court allowed a discount that resulted in a $2,012,500 value for the payments in the Shackleford case.
Observation. This ruling applies to situations in which estates include lottery payments and assignment of the payments is restricted. It also applies to other types of private annuities with similar restrictions. Practitioners should review the past and pending tax returns of lottery winners’ estates to see if this ruling warrants an amended return.
( United States v. Estate of Shackleford, 84 AFTR.2d 99-5902).
—James Ozello, Esq.,
Ozello Tax and Legal Consulting,
Ringwood, New Jersey.