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Ohio Court Turns the Tables on Annuities

BY MELANIE J. EARLES

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What is the estate tax value of future state lottery payments? One might think it would be the present value the state used in calculating a lump sum payout. The IRS, however, relying upon the actuarial tables prescribed by IRC § 7520, came up with a higher number in an Ohio case. Several courts have addressed the reasonableness of the tables and reached conflicting conclusions. Recently, a district court in the Ohio case joined those allowing an alternative method.

Carol Negron was the executrix of two estates whose decedents had won the Ohio Super Lotto jackpot prize. Both winners died in 2001 after receiving 11 of 26 annual payments of $256,410 each. Each estate elected to receive a lump-sum distribution of the remaining 15 payments for $2.27 million. The IRS determined values from the tables of $2.66 million for one decedent and $2.77 million for the other. But Negron contended the tables do not reflect a discount appropriate to Ohio lottery proceeds’ being nontransferable and therefore not marketable. The government argued the tables do include such a discount.

The Ninth Circuit in Shackleford , 88 AFTR2d 2001-5658, has upheld a departure from the tables, as has the Second Circuit, overruling the Tax Court in Gribauskas , 92 AFTR2d 2003-5914. The Fifth Circuit, on the other hand, has concluded that lottery annuity payments are properly valued by the tables (Cook, 92 AFTR2d 2003-7027), as have district courts in Massachusetts, (Donovan, 95 AFTR2d 2005-2131), Louisiana (Anthony , 95 AFTR2d 2005-2905) and elsewhere.

Although the Fifth Circuit ruled against the taxpayer in Cook , the Ohio district court drew from that opinion a two-part test based on principles already well-established by 1962 (Weller , 38 TC 790): Estates may propose an alternative valuation when (1) the value ascribed by the tables is unrealistic and unreasonable, and (2) a more reasonable and realistic means by which to determine a fair market value is available. Negron, the Ohio court said, had satisfied the first prong of the test, and it gave her an opportunity to demonstrate the second.

Negron v. United States , 99 AFTR2d 2007-3127

Prepared by Melanie J. Earles , CPA, DBA, professor of accounting, Tennessee Tech University, Cookeville, Tenn.