The Tax Court has ruled that a decedent's 18 remaining annual payments of lottery winnings must be included in his gross estate and valued for estate tax purposes through application of the actuarial tables under §7520. 

In late 1992, Paul Gribauskas and his wife bought a $1 Connecticut LOTTO ticket and won $15,807,306.60, payable in 20 annual installments of $790,365.34 each. After receipt of the first payment, the couple divorced, and each spouse settled to receive one-half of the remaining annual installments ($395,182.67 each). Paul died suddenly only one month after receiving the second payment, leaving 18 payments remaining. Since then, installments have been remitted yearly to his estate.

On the estate tax return, the remaining installments were characterized as "Unsecured debt obligation due from the State of Connecticut arising from winning the Connecticut Lottery." The estate arrived at a value for estate tax purposes of $2,603,661.02, and did not use the actuarial tables under §7520. The IRS determined that the value should have been reported as $3,528,058.22 using the actuarial tables. The resulting estate tax deficiency was $403,167.

Before the Tax Court, the estate argued that the lottery prize fails to meet the specific requirements of §2039 for classification as an annuity, and therefore §7520, which applies to "annuities," should not apply here. Furthermore, the estate argued that the actuarial tables should be disregarded here because they do not consider

• The unsecured nature of the LOTTO prize obligation,
• The lack of a corpus from which to draw upon, and
• The inability to assign, sell, or transfer the interest.

First, the Tax Court decided that §2039 does not provide the exclusive definition of "annuity" for estate tax purposes, and that certain interests properly characterized as an "annuity" for estate tax purposes may not fall within the purview of §2039. The Court decided that the lottery winnings constitute an annuity for the purposes of §7520.

As for the estate's argument that the actuarial tables should be disregarded, the Court compared the restrictions on the LOTTO winnings to those placed on other "annuities" to which the tables apply. For instance, grantor retained annuity trusts must have restricted liquidity and assignment to produce a qualified interest, and must then be valued under §7520. The Court found no support in case law for considering marketability in valuing annuities (other than Estate of Shackleford v. U.S., 84 AFTR 2d 99-5902, 99-2 USTC par. 60,356 (E.D. Cal. 1999), with which the Tax Court disagreed).

The Court held that the lottery payments must be valued using the actuarial tables prescribed under §7520.

You can view the full text of the decision at the Tax Court's web site at