Negron v. U.S., 07-4460.

Citation553 F.3d 1013
Decision Date28 January 2009
Docket NumberNo. 07-4460.,07-4460.
PartiesCarol J. NEGRON, Executrix for the Estates of Mary A. Susteric and Mildred Lopatkovich, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Before: SILER and McKEAGUE, Circuit Judges; LUDINGTON, District Judge.*

OPINION

SILER, Circuit Judge.

The United States appeals the district court's order granting partial summary judgment to Plaintiff Carol Negron (executrix of the estates of Mildred Lopatkovich and Mary Susteric). The district court determined that departure from the annuity tables provided by I.R.C. § 7520 and Treas. Reg. § 20.2031-7 (the "IRS annuity tables") was warranted when Negron could show that "(1) the value ascribed by the tables is unrealistic and unreasonable; and (2) there is a more reasonable and realistic means by which to determine its fair market value." Then, it found that "transferability of an annuity would affect its fair market value" and that "the value ascribed by the annuity tables for both estate taxes [was] unrealistic and unreasonable." Because the IRS annuity tables properly value lottery annuities for estate tax purposes, we REVERSE and REMAND for proceedings consistent with this opinion.

I. BACKGROUND
A. Facts

In 1991, Lopatkovich and Susteric, along with an unidentified third party, jointly won the Ohio Super Lotto jackpot of $20 million. Each winner was entitled to receive 26 annual payments of $256,410.26 for a total payment of $6,666,666.67. The first checks were received in January 1991.

Both Lopatkovich and Susteric died in 2001 with fifteen more lottery payments remaining: Lopatkovich on November 27 and Susteric on October 31. These payments were not assignable and could not be used as collateral. The Lorain County Probate Court appointed Negron executrix of both estates. Negron elected for each estate to receive a lump sum cash settlement of the remaining prize awards pursuant to Ohio Rev.Code Ann. § 3770.07.

Each estate was required to include the value of the remaining lottery payments on its estate tax return. I.R.C. §§ 2001, 2031, 2039, 2051. Negron reported the value as $2,275,867 on each return based upon the amount that each estate received from the Ohio Lottery Commission. The Commission calculated the distribution-the present value of the remaining lottery payments-using a discount rate of 9.0% from the state valuation tables in effect on January 19, 1991, the date the lottery prize was won.

The Internal Revenue Service ("IRS") determined that the proper values of the remaining lottery payments were $2,775,209 for Lopatkovich and $2,668,118 for Susteric. It used discount rates of 5.0% for Lopatkovich and 5.6% for Susteric from the IRS annuity tables in effect on the dates of death to calculate the present value of the remaining payments.1 I.R.C. § 7520; Treas. Reg. §§ 20.2031-7(d), 20.7520-1. The IRS assessed an additional tax of $330,302 for Lopatkovich and $141,175 for Susteric. Both estates paid the additional tax, with interest, and filed refund claims. The IRS denied both claims, and the estates filed suit in the district court for a refund.

B. The District Court's Opinion

The Government and Negron filed cross-motions for summary judgment on the proper method of valuation for annuities: the Government arguing that the IRS annuity tables must be used and Negron arguing that an exception was warranted because the tables created unreasonable and unrealistic results. The district court granted Negron's motion in part and denied the Government's. It noted that there was a circuit split on whether the IRS annuity tables accurately reflect the fair market value of future lottery payments with marketability restrictions: the Second and Ninth Circuits have held that they do not, and the Fifth Circuit along with two other district courts have held that they do. See Cook v. Commissioner, 349 F.3d 850, 851 (5th Cir. 2003); Estate of Gribauskas v. Commissioner, 342 F.3d 85, 89 (2d Cir.2003); Shackleford v. United States, 262 F.3d 1028, 1029 (9th Cir.2001); Anthony v. United States, No. Civ.A. 02-304-D-M1, 2005 WL 1670697, at * 13 (M.D.La. June 17, 2005); Estate of Donovan v. United States, No. Civ.A. 04-10594-DPW, 2005 WL 958403, at *6 (D.Mass. Apr.26, 2005). The district court was "more convinced by the reasoning of the Second and Ninth Circuits." It explained that departure from the IRS annuity tables was warranted when the plaintiff could show that "(1) the value ascribed by the tables is unrealistic and unreasonable; and (2) there is a more reasonable and realistic means by which to determine its fair market value." Then, it found that "transferability of an annuity would affect its fair market value" and that "the value ascribed by the annuity tables for both estate taxes [was] unrealistic and unreasonable." Further proceedings were required for Negron to show a more reasonable and realistic valuation method in order to justify departure from the IRS annuity tables.

II. JURISDICTION AND STANDARD OF REVIEW

This court has jurisdiction over the Government's interlocutory appeal under 28 U.S.C. § 1292(b). The district court granted the Government's motion to certify the June 4, 2007, summary judgment order for interlocutory appeal to the Sixth Circuit. It found that the Government showed that (1) the summary judgment order involved a controlling question of law, (2) there was a substantial ground for difference of opinion considering the circuit split on the issue, and (3) an immediate appeal would materially advance the ultimate termination of the litigation. See In re City of Memphis, 293 F.3d 345, 350 (6th Cir.2002). We granted the Government's petition for permission to appeal.

We review a district court's summary judgment order de novo, using the same standard as the district court. FED. R.CIV.P. 56(c); Midwest Media Property, L.L. C. v. Symmes Tp., Ohio, 503 F.3d 456, 459 (6th Cir.2007); Alkire v. Irving, 330 F.3d 802, 809 (6th Cir.2003). The court must construe all inferences in favor of the non-moving party. Alkire, 330 F.3d at 809.

III. ANALYSIS

This appeal boils down to whether the IRS used an appropriate discount rate when calculating the present value of the remaining lottery payments. Negron argues that it is unreasonable that the estates were taxed on a distribution amount in excess of that received. This concern translated into allegations that the IRS annuity tables did not properly take into account marketability restrictions on the lottery annuity and thus did not provide a reasonable assessment of its fair market value.

It is tempting to accept the argument that a person's estate should not be taxed on a lottery annuity amount that it did not receive. This additional tax burden does not seem fair. However, the difference in the amount received and the value for federal tax purposes occurred because of the interaction between the state and federal discount rates: Ohio with a discount rate in effect on the date the prize was won and the IRS with a discount rate in effect on the date of death. See I.R.C. 2031; OHIO ADMIN. CODE § 3770:1-8-01(B)(3). The two discount rates yielded different results because they served different purposes: one approximated the value of the unpaid annuity as if it had been a lump sum from the beginning; the other valued the annuities as an ongoing annuity or a continuing stream of periodic payments. The lump sum calculation was simply an alternate method of valuing lottery winnings and does not make the IRS method unreasonable.

Negron does not facially challenge the tables, and the claim thus reduces to equity. The estates chose to take lump sum payments rather than to continue the annuities. If the estates had chosen to continue the annuities, the Ohio discount rate would not have entered into the equation. It was the estates' choice that made the results of the IRS assessment particularly unpleasant, and "[i]t is not entirely clear how the non-marketability discount can properly address such an equitable concern, beyond simply reducing the scale of the liability." Estate of Donovan v. United States, No. Civ.A. 04-10594-DPW, 2005 WL 958403, at *5 (D.Mass. Apr.26, 2005). Furthermore, equity arguments are insufficient to invalidate properly enacted Treasury Regulations, such as those requiring the use of the IRS annuity tables. See Nichols v. United States, 260 F.3d 637, 654 (6th Cir.2001). Despite the differences in discount rates and resulting present value calculations, the Internal Revenue Code and Treasury Regulations provide a reasonable and proper framework for calculating federal tax liability.

A. Statutory and Regulatory Framework

An estate tax is imposed "on the transfer of the taxable estate" of every deceased United States citizen or resident. I.R.C. § 2001. The taxable estate equals the value of the gross estate less applicable deductions, I.R.C. § 2051, and the gross estate includes "the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated," I.R.C. § 2031. The value of the gross estate reflects the extent of the decedent's property interest at the time of his death. I.R.C. § 2033. The value of annuities obtained after March 3, 1931 are specifically included in the gross estate. I.R.C. § 2039.

The general rule for valuation is that "[t]he value of every item of property includible in a decedent's gross estate ... is its fair market value at the time of the decedent's death," and "fair market value is...

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