The Sixth Circuit Court of Appeals ruled in Carol J. Negron v. U.S., docket no. 07-4460, that the IRS annuity tables of IRC § 7520 provide a realistic and reasonable estate valuation of a state lottery prize paid as a lump sum. In so doing, it reversed a district court’s allowance of the actual amount of lump-sum payments to the estates of two women who shared an Ohio state lottery prize and of which Carol Negron was the executrix.
The Sixth Circuit thereby joined the Fifth Circuit in disallowing alternate valuation methods for lottery lump sums. However, the circuits are split on this issue, with the Ninth and Second circuits having recognized alternative methods to the tables.
Mary A. Susteric, Mildred Lopatkovich and an unnamed third person split a $20 million Ohio Super Lotto jackpot in 1991. The prize was payable in 26 payments of more than $250,000 annually to each woman. The payments were nonassignable and could not be used as collateral. Both women died in 2001, and their estates, through Negron, elected to receive a lump-sum cash settlement of $2,275,867 each, which Negron reported as their value on the estate returns. To calculate the lump-sum payments, the Ohio Lottery Commission applied a discount rate of 9% from its valuation tables in effect in 1991 in determining the present value of the remaining payments.
The IRS assessed additional tax based on higher amounts from the federal tables and a discount rate of 5% for Lopatkovich and 5.6% for Susteric. The U.S. District Court for the Northern District of Ohio ruled in 2007 that estates may use an alternate valuation when the result of the federal tables is unrealistic and unreasonable and a more reasonable and realistic method of determining fair market value is available. The federal tables are unrealistic and unreasonable when, as in the Ohio lottery, transfer restrictions affect fair market value, the district court said.
The Sixth Circuit, however, noted that any perceived inequity between the federal valuation and the amount received was the result of the estates’ decision to accept the lump-sum payments. The estates did not challenge the federal tables per se, and an equity argument is insufficient to invalidate Treasury regulations such as those requiring use of the federal annuity tables, the court said.
Moreover, the Sixth Circuit agreed with the Fifth Circuit’s holding in Cook v. Commissioner, 349 F.3d 850 (2003), that the IRS tables assume nonmarketability of annuities. It rejected the holding by the Ninth Circuit in Shackleford v. U.S., 262 F.3d 1028 (2001), that the tables “did not accurately reflect economic reality,” and a similar holding by the Second Circuit in Estate of Gribauskas v. Commissioner, 342 F.3d 85 (2003).