In 2011, Troy wins the Connecticut Lotto grand prize of $15 million. The Lotto contest is governed..

In 2011, Troy wins the Connecticut Lotto grand prize of $15 million. The Lotto contest is governed by the following rules.

• The prize money is to be paid in 20 equal annual installments (in this case, $750,000 per year) with no interest provided for.

• The rights to the prize award are not assignable. If a winner dies during the payout period, however, the remaining installment payments are to be made to the winner’s duly appointed executor.

• The prize award is not specifically funded or guaranteed by any state agency. It constitutes a general obligation of the state of Connecticut.

Troy dies in 2013 after having received two payments of $750,000 each. Troy’s estate includes the present value of the remaining $13.5 million prize award in the estate at $4.86 million. This is determined by using the IRS table amount of $6.75 million and discounting it for absence of security (i.e., no separate funding or guarantee of payment by a state agency) and lack of marketability (i.e., the award cannot be assigned). The table used is that issued by the IRS in Reg. § 20.2031-7 under the authority of § 7520. The table is to be used in valuing, among other income interests, private (i.e., noncommercial) annuity contracts.

Upon audit of the estate tax return, the IRS disputes the deviation from the table amount. The IRS argues that the absence-of-security discount is inappropriate because the state of Connecticut has never defaulted on any of its Lotto obligations.

Furthermore, the lack-of-marketability discount is inappropriately applied to annuity type situations. Unlike stocks and bonds and other ownership interests, private annuities are not subject to marketplace valuation procedures.

Partial list of research aids:

§§ 2039 and 7520.

Reg. § 20.7520-3(b).

O’Reilly v. Comm., 92-2 USTC {60,111, 70 AFTR 2d 92-6211, 973 F.2d 1403 (CA-8, 1992).

Shackleford v. U.S., 99-2 USTC {60,356, 84 AFTR 2d 99-5902 (D.Ct.Cal., 1999), aff’d in 88 AFTR 2d 2001-5658, 262 F.3d 1028 (CA-9, 2001).

Estate of Gribauskas, 116 T.C. 142 (2001), rev’d in 2003-2 USTC {60,466, 92 AFTR 2d 2003- 5914, 342 F.3d 85 (CA-2, 2003).

Estate of Donovan v. U.S., 2005-1 USTC {50,322, 95 AFTR 2d 2005-2131 (D.Ct.Mass., 2005).


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