116 T.C. 142 (T.C. 2001), 3107-98, Estate of Gribauskas v. Commissioner of Internal Revenue

Docket Nº:3107-98
Citation:116 T.C. 142, 116 T.C. No. 12
Opinion Judge:NIMS, JUDGE:
Attorney:Michael J. Kopsick and William J. Dakin, for petitioner. Carmino J. Santaniello, for respondent.
Judge Panel:Nims, Arthur L., III
Case Date:March 08, 2001
Court:United States Tax Court

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116 T.C. 142 (T.C. 2001)

116 T.C. No. 12




No. 3107-98

United States Tax Court

March 8, 2001

Decision will be entered under Rule 155.


In late 1992, D and his former spouse won a Connecticut LOTTO prize payable in 20 annual installments. At the time of his death in 1994, D was entitled to receive 18 further annual payments of $ 395,182.67 each.

HELD: The lottery payments must be included in D's gross estate and valued for estate tax purposes through application of the actuarial tables prescribed under sec. 7520, I.R.C.

Michael J. Kopsick and William J. Dakin, for petitioner.

Carmino J. Santaniello, for respondent.

Nims, Arthur L., III



Respondent determined a Federal estate tax deficiency in the amount of $ 403,167 for the estate of Paul C. Gribauskas (the estate). The sole issue for decision is whether an interest held at his death by Paul C. Gribauskas (decedent), in 18 annual installments of a lottery prize, must be valued for estate tax purposes through application of the actuarial tables prescribed under section 7520.

Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.


This case was submitted fully stipulated pursuant to Rule 122, and the facts are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. Decedent was a resident of West Simsbury, Connecticut, when he died intestate in that State on June 4, 1994. His estate has since been administered by the probate

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court for the District of Simsbury. Roy L. Gribauskas and Carol Beauparlant, decedent's siblings, are named co-executors of his estate. At the time the petition in this case was filed, Roy Gribauskas resided in Southington, Connecticut, and Carol Beauparlant resided in Berlin, Connecticut.


In September of 1983, the State of Connecticut (the State) commenced running a biweekly " LOTTO" drawing. During all relevant periods, this lottery was administered by the State of Connecticut Revenue Services, Division of Special Revenue (the Division), in accordance with regulations promulgated to govern the game's operation. Individuals participate in the lottery by purchasing for $ 1.00 a ticket on which they select six numbers. If the six numbers so chosen match those randomly selected at the next LOTTO drawing, the ticketholder becomes entitled to a prize of $ 1,000,000 minimum, with a potentially greater award available if ticket purchases have increased the size of the jackpot. LOTTO prizes in excess of $ 1,000,000 are paid in 20 equal annual installments, each made by means of a check from the State payable to the prizewinner and drawn on funds in the custody of the State Treasurer. Winners are not entitled to elect payment in the form of a lump sum. As in effect during the year of decedent's death, the following administrative regulations prohibited a LOTTO prizewinner from assigning or accelerating payment of the installments:

(d) Prizes non-assignable. A prize to which a purchaser may become entitled shall not be assignable.

(e) Payments not accelerated. Under no circumstances, including the death of a prize winner, shall installment payments of prize money be accelerated. In all cases such payments shall continue as specified in the official procedures. The division shall make such payments payable to the fiduciary of the decedent prize winners'[sic] estate upon receipt of an appropriate probate court order appointing such fiduciary. The division shall be relieved of any further responsibility or liability upon payment of such installment prize payments to the fiduciary of the estate of a deceased installment prize winner or the heirs or beneficiaries thereof named in an appropriate probate court order. [Conn. Agencies Regs. sec. 12-568-5(d) and (e) (1993).]

The Division was authorized to, and did, fund its LOTTO obligations through the periodic purchase of commercial

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annuities. The Division was named as owner of these contracts, and all payments made thereunder were remitted to the State. No specific prizewinner was either a party to or a named beneficiary of the annuity contracts. The record does not reflect the cost of these contracts, presumably because the State typically acquired a combined annuity to provide for payment of all LOTTO prizes won during a specified period of time. Additionally, payment of awards to lottery winners was not guaranteed by any State agency. However, at no time through the submission of this case had the State ever defaulted on amounts due to the approximately 2,000 persons who had won LOTTO jackpots since the game's inception in 1983.


In late 1992, decedent and his wife won a Connecticut LOTTO prize in the amount of $ 15,807,306.60. The award was payable in 20 annual installments of $ 790,365.34 each, commencing on December 3, 1992. After receipt of the first such installment, decedent and his wife were divorced. In conjunction with the ensuing settlement and division of the property rights of the couple, each spouse was to receive one-half of the remaining lottery installment payments. Accordingly, $ 395,182.67, less applicable Federal and State withholding taxes, was remitted to each on December 3, 1993. Thereafter, on June 4, 1994, decedent died unexpectedly while still entitled to 18 further annual payments of $ 395,182.67 each. Since obtaining an appropriate court order as required by the Connecticut LOTTO regulations, these installments have been remitted yearly to the estate.


A United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706, was timely filed with respect to decedent's estate on September 11, 1995. Therein, the estate elected to report the value of assets as of the December 3, 1994, alternate valuation date. Decedent's interest in the lottery installments was characterized on the return as an " Unsecured debt obligation due from the State of Connecticut arising from winning the Connecticut Lottery" and was included in the gross estate at the alleged present value of

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$ 2,603,661.02. Respondent subsequently determined that the present value of the payments should have been reported as $ 3,528,058.22 in accordance with the annuity tables prescribed under section 7520, resulting in the $ 403,167 deficiency in estate tax that is the subject of this proceeding.



As a general rule, the Internal Revenue Code imposes a Federal tax on " the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." Sec. 2001(a). Such taxable estate, in turn, is defined as the " value of the gross estate", less applicable deductions. Sec. 2051. Section 2031(a) then specifies that the gross estate comprises " all property, real or personal, tangible or intangible, wherever situated", to the extent provided in sections 2033 through 2045.

Section 2033 broadly states that " The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death." Sections 2034 through 2045 then explicitly mandate inclusion of several more narrowly defined classes of assets. Among these specific sections is section 2039, which reads as follows:


(a) General. -- The gross estate shall include the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement entered into after March 3, 1931 (other than as insurance under policies on the life of the decedent), if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death.

(b) Amount Includible. -- Subsection (a) shall apply to only such part of the value of the annuity or other payment receivable under such contract or agreement as is proportionate to that part of the purchase price therefor contributed by the decedent. For purposes of this section, any contribution by the decedent's employer or former employer to the purchase price of such contract or agreement * * * shall be considered to be contributed by the decedent if made by reason of his employment.

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An interest included in the gross estate pursuant to one of the above-referenced provisions must then be valued. As to this endeavor, the general rule is set forth in section 20.2031-1(b), Estate Tax Regs.:

The value of every item of property includible in a decedent's gross estate under sections 2031 through 2044 [now 2045 due to addition and renumbering] is its fair market value at the time of the decedents's death, except that if the executor elects the alternate valuation method under section 2032, it is the fair market value thereof at the date, and with the adjustments, prescribed in that section. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. * * *

However, section 7520, enacted...

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