Courts split over valuation of lottery prize payments.

• Author: Beavers, James

Two recent district court decisions have been handed down on the issue of whether an estate's rights to a decedent's remaining series of annual lottery prize payments should be valued using the Sec. 7520 annuity tables. Although both courts held that the lack of marketability of remaining lottery payments may justify the use of a valuation method other than the tables in certain circumstances, the decisions show that it may be difficult for a taxpayer to prove to a court that it is entitled to use an alternate method of valuation.

See. 7520

In general, the value of any annuity for estate tax purposes must be determined under annuity valuation tables provided by the IRS in accordance with Sec. 7520. A series of lottery prize payments is an annuity that is potentially subject to valuation according to Sec. 7520 (see Estate of Gribauskas, 116 TC 142 (2001)). However, if a taxpayer can prove that the value produced by the tables is unreasonable and unrealistic and that there is an available alternate valuation method that produces a more reasonable and realistic value, the alternate method may be used (O'Reilly, 973 F2d 1403 (8th Cir. 1992)).

Case Law

The circuits have split on the issue of whether the value of remaining lottery prize payments for estate tax purposes must be determined using the Sec. 7520 annuity tables. The key issue in these cases is the effect of the lack of marketability of remaining lottery prize payments on their value in general and their value as determined using the Sec. 7520 annuity tables.

The Second and Ninth Circuits have held that the lack of marketability of remaining lottery prize payments may justify the use of a valuation method other than the Sec. 7520 annuity tables (Estate of Gribauskas, 342 F3d 85 (2d Cir. 2003), rev'g 116 TC 142 (2001); Shackleford, 262 F3d 1028 (9th Cir. 2001)). Both courts found that the right to transfer property is one of the most important aspects in determining the value of property and that an asset is worth less if it is nontransferable than if it is freely transferable. Both courts also found that the Sec. 7520 annuity tables do not take lack of marketability into account. Therefore, they concluded that it is possible that the use of the tables might (but not necessarily would) produce an unreasonable or unrealistic value in the case of remaining lottery prize payments. In both Gribauskas and Shackleford, the courts held that the tables did produce unrealistic and unreasonable...