t c no united_states tax_court estate of paul c gribauskas deceased roy l gribauskas and carol beauparlant co-executors petitioner v commissioner of internal revenue respondent docket no filed date in late d and his former spouse won a connecticut lotto prize payable in annual installments at the time of his death in d was entitled to receive further annual payments of dollar_figure 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 -- - opinion nims judge respondent determined a federal estate_tax deficiency in the amount of dollar_figure 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 annual installments of a lottery prize must be valued for estate_tax purposes through application of the actuarial_tables prescribed under sec_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 background this case was submitted fully stipulated pursuant to rule 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 date his estate has since been administered by the probate_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 the connecticut lotto in september of 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 dollar_figure 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 dollar_figure minimum with a potentially greater award available if ticket purchases have increased the size of the jackpot lotto prizes in excess of dollar_figure are paid in 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 d and e the division was authorized to and did fund its lotto obligations through the periodic purchase of commercial 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 big_number persons who had won lotto jackpots since the game’s inception in decedent’s lotto prize in late decedent and his wife won a connecticut lotto prize in the amount of dollar_figure the award was payable in annual installments of dollar_figure each commencing on date 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 dollar_figure less applicable federal and state withholding taxes was remitted to each on date thereafter on date decedent died unexpectedly while still entitled to further annual payments of dollar_figure each since obtaining an appropriate court order as required by the connecticut lotto regulations these installments have been remitted yearly to the estate the kstate tax_return a united_states estate and generation-skipping_transfer_tax return form_706 was timely filed with respect to decedent’s estate on date therein the estate elected to report the value of assets as of the date 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 dollar_figure respondent subsequently determined that the present_value of the payments should have been reported as dollar_figure in accordance with the annuity tables prescribed under sec_7520 resulting in the dollar_figure deficiency in estate_tax that is the subject of this proceeding - - discussion i general rules 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 such taxable_estate in turn is defined as the value of the gross_estate less applicable deductions sec_2051 sec_2031 then specifies that the gross_estate comprises all property real or personal tangible or intangible wherever situated to the extent provided in sec_2033 through sec_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 sec_2034 through then explicitly mandate inclusion of several more narrowly defined classes of assets among these specific sections is sec_2039 which reads as follows sec_2039 annuities 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 date 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 - jj - bo 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 a sec_1s 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 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 sec_20_2031-1 bstate tax regs the value of every item of property includible ina decedent’s gross_estate under sec_2031 through now 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 sec_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 sec_7520 enacted as part of the technical_and_miscellaneous_revenue_act_of_1988 publaw_100_647 sec a 102_stat_3342 provides a specific rule for valuing enumerated forms of property interests as follows sec_7520 valuation tables a general_rule ---for purposes of this title the value of any annuity any interest for life or a term of years or any remainder or reversionary_interest shall be determined---- under tables prescribed by the secretary and by using an interest rate rounded to the nearest 10ths of percent equal to percent of the federal midterm rate in effect under sec_1274 for the month in which the valuation_date falls b section not to apply for certain purposes ---- this section shall not apply for purposes of part i of subchapter_d of chapter relating to qualified_plans for deferred_compensation or any other provision specified in regulations for transfer_tax purposes regulations promulgated under sec_7520 provide that the relevant actuarial_tables for valuing interests covered by the statute are contained in sec_20_2031-7 estate_tax regs see sec_20_7520-1 estate_tax regs sec_25_7520-1 gift_tax regs see also sec_20_2031-7t d example temporary estate_tax regs fed reg date with effective date date but illustrating the calculation for valuing an annuity of dollar_figure per year payable to a decedent or the decedent’s estate the regulations also delineate exceptions to the mandatory use of the tables in the estate_tax context paragraph a of sec_20_7520-3 estate_tax regs lists exceptions effective as of date while paragraph b gives additional limitations effective with respect to estates of decedents dying - after date see sec_20_7520-3 estate_tax regs these exceptions where pertinent will be discussed in greater detail below il contentions of the parties the fundamental disagreement between the parties concerns whether the stream of lottery payments constitutes an annuity which must be valued pursuant to the actuarial_tables prescribed under sec_7520 the estate concedes that the prize’s value is properly included in calculating decedent’s gross_estate under the general_rule of sec_2033 as an unsecured debt obligation in which decedent had an interest at death however the estate denies that the payments are similarly includible as an annuity under sec_2039 according to the estate the lottery prize fails to meet the specific requirements set forth in sec_2039 for classification as an annuity under that section moreover even if such criteria were deemed satisfied the estate maintains that operation of sec_2039 would result in including only that portion of the asset equal to the dollar_figure purchase_price a de_minimis amount from these propositions and to a significant degree apparently equating the term annuity in sec_2039 with use of the word in sec_7520 the estate argues that the lotto payments need not be valued under the prescribed actuarial -- - tables rather it is the estate’s position that the broader willing-buyer willing-seller standard should control with factors such as lack of marketability taken into account in discounting the prize to present_value in the alternative the estate contends that even if the lottery award is held includible in decedent’s gross_estate as an annuity under sec_2039 deviation from the prescribed table sec_1s warranted in this case the estate claims that the tables may be disregarded when their use would produce an unreasonable result and that due to restrictions on the asset in question such a situation is present here conversely respondent asserts that decedent’s right to fixed annual payments constitutes an annuity which must be valued pursuant to sec_7520 with respect to sec_2039 respondent maintains that the lottery installments satisfy all elements for inclusion in the gross_estate under subsection a and that no grounds are provided in subsection b for limiting such inclusion however regardless of the specific applicability of sec_2039 it is respondent’s position that the lotto prize is an interest to which sec_7520 applies respondent avers that the statute cited for inclusion in the gross_estate is not dispositive of whether tabular valuation is mandated rather it is the nature of the payment stream at issue that controls and respondent contends that the periodic installments here exhibit characteristics consistent with rights properly valued under the sec_7520 tables moreover respondent alleges that neither any general regulatory exceptions nor particular features such as lack of marketability permit departure from the tables in the circumstances of this case hence in essence the parties agree that the value of the lottery installments is to be included in decedent’s gross_estate and that the appropriate methodology for ascertaining such value is to discount the stream of payments to present_value they advance opposing theories however for arriving at the relevant discount rate sec_7520 mandates use of a 4-percent discount rate for annuities valued as of date and respondent contends that this statute is applicable to the facts before us in contrast the estate argues that the discount rate should be determined by consideration of what a willing buyer would pay a willing seller for the asset at issue and further apparently finds that a discount rate of approximately percent adjusting for risk inalienability illiquidity and lack of marketability is proper here lastly we note that for purposes of disposing of the legal issues raised by this proceeding the parties have stipulated that if the court determines departure from the annuity tables is warranted the -- value of the lottery installment payments as of the alternate_valuation_date will be deemed to be the dollar_figure claimed in the estate_tax_return til analysis a relevance of sec_2039 as a threshold matter this case presents a preliminary question regarding the relationship among sec_2033 sec_2039 and sec_7520 specifically is finding that an interest fails to meet the criteria for inclusion in the gross_estate as an annuity under sec_2039 and is so included only under sec_2033 determinative of whether the interest is an annuity within the meaning of sec_7520 we answer this inguiry in the negative for the reasons detailed below the purpose of sec_2039 by its terms is to effect inclusion in the gross_estate of annuity or payment rights meeting certain enumerated criteria at the same time regulations promulgated under the statute indicate that sec_2039 does not provide the exclusive definition of interests which may be considered an annuity for purposes of the internal_revenue_code sec_20_2039-1 estate_tax regs recites the following the fact that an annuity_or_other_payment is not includible in a decedent’s gross_estate under sec_2039 and b does not mean that it is not includible under some other section of part iii of subchapter_a of chapter comprising sec_2031 through the inference to be drawn from this statement is that certain interests properly characterized as an annuity within the meaning of the estate_tax laws may not fall within the purview of sec_2039 this inference is further supported by consideration of the rationale underlying enactment of sec_2039 it has been recognized that congress intended to include in the gross_estate of a decedent for estate_tax purposes the value of interests which under traditional common_law concepts were never part of the ‘estate ’ 410_f2d_1094 3d cir yet an annuity payable to a decedent’s estate would have been considered an estate asset and subject_to probate additionally examples contained in both the legislative_history and the current regulations reveal a focus on nonprobate assets such as annuities payable to a designated surviving beneficiary joint and survivor annuities and employer-provided retirement annuities payable to a named beneficiary see s rept 83d cong 2d sess h rept 83d cong 2d sess sec_20_2039-1 estate_tax regs it therefore would seem reasonable to conclude that sec_2039 did not and does not purport to cover the universe of potential annuities that may be subject_to inclusion and valuation for estate_tax purposes case law also comports with this interpretation for instance in 34_fedclaims_144 -- affd without published opinion 108_f3d_1393 fed cir the court described the interest at issue in that case a stream of payments_to_be_received by the decedent’s estate under a lawsuit settlement agreement as follows this settlement agreement also provided for the funding of an annuity for the sole use and benefit of william arrington specifically the annuity would be for the sum of two thousand twenty seven and dollar_figure dollars per month beginning on date for the remainder of william arrington’ s life guaranteed for a minimum of three hundred and sixty months in the event of william arrington’s death prior to the expiration of three hundred and sixty months the remaining monthly payments in the guaranteed period shall continue to be paid as they fall due on a monthly basis to the estate of william arrington and not in a lump sum the court then went on to hold the installments includible in the decedent’s gross_estate under sec_2033 on the grounds that the decedent was the beneficial_owner of the annuity id pincite arrington v united_states supra thus illustrates that an annuity classification and a sec_2033 inclusion are not mutually exclusive concepts consequently based on the foregoing authorities we are satisfied that the particular section under which an interest might be included in the gross_estate is not dispositive of the interest’s status as an annuity which potentially must be valued under sec_7520 since the estate has conceded and we concur that the subject lottery payments are includible under -- - sec_2033 we find it unnecessary to probe whether the installments would also satisfy all of the specific criteria for inclusion under sec_2039 because an interest need not meet each of the particular requirements of that section to be considered an annuity the only arguments made in connection with sec_2039 that are directly relevant to the dispositive sec_7520 issue are those concerning the meaning of annuity as a stand-alone term accordingly we proceed to analysis of these contentions and we do so in the context of sec_7520’s use of the word b meaning of annuity as used in sec_7520 we are now faced squarely with the guestion of what is meant by the term annuity in sec_7520 the statute itself contains no definition beyond the phrase any annuity any interest for life or a term of years or any remainder or reversionary_interest sec_7520 the regulations under sec_7520 as in effect on date are equally devoid of explicit guidance furthermore we are aware of no cases offering a definition of the word in the context of sec_7520's use thereof in such circumstances the general_rule is -- - that a statutory term should be given its normal and customary meaning 95_tc_348 black’s law dictionary 7th ed defines annuity as an obligation to pay a stated sum usu monthly or annually to a stated recipient and as a fixed sum of money payable periodically webster’s third new international dictionary provides that an annuity is an amount payable yearly or at other regular intervals as guarterly for a certain or uncertain period we likewise pointed out in estate of shapiro v commissioner tcmemo_1993_483 that an ‘annuity’ is commonly defined as a fixed periodic_payment either for life or a term of years additionally although not directly applicable here due to the date effective date we note that sec_20_7520-3 a estate_tax regs now contains the analogous statement that an ordinary annuity interest is the right to receive a fixed dollar amount at the end of each year during one or more measuring lives or for some other defined period in the instant case the estate acknowledges that the lotto installments are consistent with these definitions however the estate further maintains that such definitions standing alone are overinclusive in that they focus solely on the payment stream without taking into account the nature of the underlying corpus or asset giving rise to the right to payments according to the estate an annuity is generally defined as a right to receive fixed periodic_payments either for life or a term of years but an annuity exists only by virtue of a corpus invested to produce an income stream for a specified term pursuant to a contract or other agreement contrary to the suggestion made by the commissioner that the stipulation of facts regarding the source and reason for the payments is immaterial any determination of the nature of this asset requires an analysis of the underlying characteristics and factors that create the right to those payments the estate proceeds to offer a litany of features which would characterize what in the estate’s estimation would customarily be understood as an annuity as described by the estate an annuity is purchased for a premium substantially greater than dollar_figure the annual installments are then derived from this corpus invested by or for the recipient such that an annuity_contract provides for the liquidation of an asset the amount of the installments in turn is a function not only of the invested contribution but also typically of the annuitant’s age gender health and the type of annuity_contract purchased with respect to contract type options available to the purchaser each with a consequent impact on benefit level include an immediate or a deferred_benefit a single or an annual premium a fixed or a variable payment and a termination of benefits on death or a guaranteed minimum number of installments -- - in addition an annuity_contract will usually provide the owner with specific rights during the period the agreement remains in force the contract can generally be alienated and assigned and the owner can elect to name a beneficiary of the contract in contrast the estate emphasizes that a lotto prize is the result of a dollar_figure wager not a substantial invested premium the annual installments are derived from the income and investments of the state not from the corpus supplied by the purchaser the winner’s age gender or health play no role in determining the benefit level additionally the winner lacks any ability to make choices regarding payment commencement amount duration or termination and cannot assign the installments or elect a beneficiary to receive installments upon the winner’s death having thus attempted to demonstrate that the lottery prize does not resemble a typical annuity valued under actuarial_tables the estate then goes on to cite a variety of assets yielding payment streams which according to the estate are valued not under sec_7520 but rather by taking into account the unique characteristics of and restrictions on the asset the implicit invitation is that we determine that the installments here are more analogous to these alternatives and that similar item-specific fair market principles should be used in the prize’s valuation the estate discusses notes receivable leasehold payments patents and royalties we recount features of these assets and their valuation as stipulated by the parties without opining as to the validity thereof for purposes of framing the parties’ respective positions a note receivable represents the promise of the maker to pay the holder a definite sum of money notes receivable although exhibiting a wide array of discrete terms and conditions generally are the product of an agreement that provides for a series of payments over a period not necessarily determined by reference to the holder’s life pursuant to sec_20_2031-4 estate_tax regs the fair_market_value of a note is presumed to be its unpaid principal_amount plus accrued interest however this presumption can be refuted by evidence that the interest rate maturity_date collection risk maker solvency collateral sufficiency or other causes warrant a lesser value a leasehold interest is the product of an agreement providing for a lessor to receive payment for a lessee’s use of property valuation of the resultant payment stream typically relies upon an income capitalization approach to discount the rental installments to present_value factors considered in calculating an appropriate capitalization rate include the nature of the property the positive and negative physical attributes of - - the property the term of the lease the market rate of rent for similar properties and any risk factors that could affect receipt of payments a patent is an exclusive right to make use and sell a patented item as in the case of a leasehold the payment stream available to the holder of a patent is valued by quantifying a variety of factors to reach an appropriate discount or capitalization rate such elements include the age of the patent its economic and legal life the income it generates the products with which the underlying item competes the risks of the relevant industry and the status of the economy a royalty is the income received from another for the other’s use of property and the term is usually employed in reference to mineral rights copyrighted works trademarks and franchise interests the value of a right to royalty payments is again based upon the particular characteristics and risks associated with the payment stream taking into account the annual income produced the length of the agreement’s term the payment history the possibility of sales or volume reduction with respect to the underlying asset any pertinent governmental and industrial restrictions and the nature of the underlying asset including the quantity and quality of reserves for mineral and oil interests --- - thus we have been presented on one hand with elements the estate believes characterize the type of asset that should be considered an annuity subject_to valuation under prescribed tables and on the other hand with features exhibited by other assets yielding payment streams and used to derive an appropriate fair_market_value apart from mere reference to actuarial_tables the estate’s position is that the lotto prize involves a unique bundle of rights and restrictions which like those inherent in notes leaseholds patents and royalties warrants an individualized approach to valuation respondent in contrast maintains that there exist no pertinent differences between the lottery payments and other payment streams valued using the standardized tabular approach taking into account the above body of information and the parties’ contentions with respect thereto we conclude that decedent’s lottery winnings constitute an annuity within the meaning of sec_7520 in reaching this decision we first consider the characteristics of an annuity both as portrayed by the estate and as reflected in case law second we focus on comparing these annuity features with those of assets which the parties agree are valued other than as annuities third we examine how the lottery payments fit within the framework so developed -- - analysis of annuity characteristics we begin with a few comments on the relevance of the estate’s submissions regarding the characteristics of a typical annuity while we do not dispute that the features cited may be widely present in commercially purchased annuity_contracts we point out that to the extent these elements are not also representative of so-called private annuities they offer little insight into the nature of interests intended to be treated under the sec_7520 tables sec_7520 states that the section shall not apply for purposes specified in regulations sec_20_7520-1 estate_tax regs directs generally that annuities be valued in accordance with sec_20_2031-7 estate_tax regs and the tables therein however sec_20_2031-7 estate_tax regs expressly excepts commercial annuities from its operation as follows the value of annuities issued by companies regularly engaged in their sale is determined under sec_20_2031-8 sec_20_2031-8 estate_tax regs in turn provides that the value of such contracts is established through the sale by that company of comparable contracts since the state of connecticut is not in the business of selling annuity_contracts we clarify that the attributes of a commercial_annuity are relevant here only in so far as they parallel what would be found with respect to a private_annuity - - although there are few cases applying sec_7520 to such private annuities this court in estate of cullison v commissioner tcmemo_1998_216 affd without published opinion 221_f3d_1347 9th cir characterized an arrangement as a private_annuity and required its valuation under sec_7520 the agreement at issue there provided that the decedent would convey all of her interest in certain farmland to her grandchildren by warranty deed and that the grandchildren would pay to her dollar_figure annually for the remainder of her life see id the agreement further specified that the decedent would have no further interest in the land after the date the agreement was signed and that the land would not be security for the annuity payments see id in addressing whether any portion of the land transfer constituted a gift the estate argued that the annuity was properly valued apart from the sec_7520 tables on the basis of an interest rate supposedly reflecting that available on land sale contracts in the area see id we however pointed out that unlike a seller under a land sale contract decedent under the private_annuity would have only an unsecured right to receive a specified annual payment during her life id fn ref omitted we then held that such an interest was within the scope of sec_7520 see id -- - in addition cases decided under law preceding sec_7520’s effective date offer a degree of guidance on the concept of a private_annuity for transfer_tax purposes even prior to the enactment of sec_7520 estate and gift_tax regulations had long contained actuarial_tables for use in valuing private annuities life estates and terms of years see 252_us_547 46_tc_796 affd 392_f2d_313 4th cir estate of cullison v commissioner supra estate of shapiro v commissioner tcmemo_1993_483 while no statute mandated their application courts generally approved of and often required their use see dix v commissioner supra pincite estate of shapiro v commissioner supra for instance in dix v commissioner supra pincite we concluded that the regulatory tables were to be used in valuing a lifetime private_annuity paid pursuant to an agreement stating as follows whereas the transferor is willing to bargain sell and transfer to the transferees all the securities so listed in schedule ‘a’ provided however that transferees and each of them will agree to pay the transferor a sum certain annually as hereinafter set forth regardless of the value of the securities so transferred and regardless of the income therefrom received by transferees similarly in estate of shapiro v commissioner supra the will of the decedent’s predeceased wife had established a_trust and instructed the trustee pay to my husband or apply for his - - benefit an annuity of three hundred thousand dollar_figure dollars per year from my date of death during his life we held that the bequest was properly characterized as a lifetime annuity under sec_20_2031-7 estate_tax regs and properly valued by the tables prescribed thereunder id given such cases we are satisfied that the definition of annuity for purposes of sec_7520 is broader than the estate suggests estate of cullison v commissioner supra involved neither a payment stream derived from an invested corpus nor the liquidation of an asset the payments in dix v commissioner supra were equally independent of any underlying corpus the bequest in estate of shapiro v commissioner supra bears little resemblance to the contractual relationship described by the estate--purchase premiums benefit options beneficiary elections etc played no role in the annuity’s genesis or operation moreover the authorities discussed above also make clear that a private_annuity may be nothing more or less than an unsecured debt obligation consequently the estate’s repeated labeling of the lotto prize as such in no way disqualifies it from annuity status that said we turn to those assets that the parties have agreed are in fact not considered annuities for valuation purposes - - comparison of nonannuity and annuity characteristics in seeking to ascertain what might distinguish notes receivable leasehold payments patent rights and royalties from the annuities previously examined we look first at notes receivable furthermore our review thereof convinces us that these assets differ from annuities ina fundamental respect it is the concept of interest which renders valuation of a note a very different enterprise from valuation of an annuity because an annuity involves a series of fixed payments which bear no interest it 1s actuarially valued by discounting the stream to present_value the purpose of doing so is to account for the time_value_of_money in contrast because the vast majority of notes are interest-bearing no such calculation is required the issue of time value is addressed by charging interest on the face_amount such that the outstanding principal typically corresponds to the present_value without need for further manipulation this idea in turn provides the rationale which supports the rule set forth in sec_20_2031-4 estate_tax regs presuming a value equal to the unpaid principal_amount and listing the interest rate or implicitly lack of a market rate of interest as a potential basis for deviation a similar approach presuming a value equal to the face dollar amount of annuity installments could not reasonably be suggested -- p7 - as regards leasehold patent and royalty payments each of these assets unlike an annuity derives from the use of an underlying item of tangible or intangible_property that exists separate and apart from the agreement to make a series of remittances consequently the anticipated payment stream can be affected by a wide variety of external market forces that operate on and impact the worth of the underlying asset this injects into the valuation of these payment streams risks and considerations beyond simply the time_value_of_money hence our review of a sample of nonannuity assets leads us to conclude that the common definition of an annuity is sound a promise to make a series of fixed payments without more may generally be classified as an annuity conversely if the agreement is tied to something further such as an independent underlying asset or an interest rate a different characterization may well be more appropriate with this framework in mind we next focus specifically on decedent’s lottery prize examination of lottery payments based on the principles formulated above we conclude that decedent’s lotto winnings are properly characterized for tax purposes as an annuity as the estate acknowledges the asset at issue here derives solely from the state’s promise to make a series of fixed payments the right to installments is not - - dependent on any particular underlying asset is not subject_to alteration as a result of external market forces and does not bear interest accordingly while we see features which distinguish the payment streams generated by each of the nonannuity assets brought to our attention from the private annuities reflected in case law we find no such characteristics weighing upon decedent’s right to the lottery installments moreover in probing what attributes might differentiate some other form of payment from an annuity we note a conspicuous absence the cases discussed above which declare certain payment arrangements to be a private_annuity never address the contractual options available to the payee for taking advantage of his or her right to the installments whether this right may be transferred or assigned are elements which fail to enter into the courts’ calculus likewise of the stipulated factors that apparently render note leasehold patent and royalty payments unique and individually valued none reflects any concern with the payee’s ability to manipulate the right to receive installments additionally because the estate so emphasizes the concept of marketability we observe as a parallel that the parties provided by stipulation that notes come in a wide variety of types including among other things nonassignable yet no one could contend that lack of assignability converts a note into some other form of asset hence we are satisfied that such - issues are largely subsidiary to determining the basic characterization in the first instance of a payment right whether these features affect the value in a particular case of an asset so classified is a question which we shall take up below at this juncture we first hold that decedent’s lottery winnings constitute an annuity for tax purposes and within the meaning of sec_7520 c valuation of lottery installments under sec_7520 interests within the purview of sec_7520 must be valued in accordance with the prescribed actuarial_tables unless they can satisfy the requisites for an exception to the statute’s use as previously indicated sec_20_7520-3 estate_tax regs provides a list of exceptions effective date none of which has been cited as on point here and sec_20_7520-3 estate_tax regs enumerates additional exceptions effective after date see sec_20_7520-3 estate_tax regs while these latter limitations are not directly applicable to the preamble to t d 1996_1_cb_339 which adopted paragraph b as an amendment to the final regulations under sec_7520 addressed the relationship of the new provisions to prior_law as follows one commentator suggested that the tables prescribed by the regulations must be used for valuing all interests transferred between date the effective date of sec_7520 and date the effective date of the regulations however these regulations generally adopt principles -- - established in case law and published irs positions x there is no indication that congress intended to supersede this well-established case law and administrative_ruling position when it enacted sec_7520 consequently in the case of transfers prior to the effective date of these regulations the question of whether a particular interest must be valued based on the tables will be resolved based on applicable case law and revenue rulings accordingly the estate references both case law and sec_20_7520-3 estate_tax regs to establish that decedent’s lottery winnings even if considered an annuity under sec_7520 need not be valued by means of the prescribed tables at the time sec_7520 was enacted this and other courts had long accepted as a general_rule that interests covered by then-existing regulatory tables were to be valued thereunder unless it is shown that the result 1s so unrealistic and unreasonable that either some modification in the prescribed method should be made or complete departure from the method should be taken and a more reasonable and realistic means of determining value is available ’ 66_tc_484 quoting 38_tc_790 see also 534_f2d_528 2d cir affg 63_tc_601 504_f2d_586 7th cir 100_tc_1 affd without published opinion 46_f3d_1141 9th cir --- - 54_tc_493 affd 480_f2d_171 9th cir it was equally well recognized that the burden of proving that this standard was met rested on the party seeking to deviate from the tables see 672_f2d_758 9th cir vernon v commissioner supra pincite estate of christ v commissioner supra pincite in the instant case the estate maintains that the annuity tables yield an unrealistic and unreasonable result for the decedent’s winnings on the grounds that tabular valuation fails to 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 the estate asserts that the nearly dollar_figure difference between an appraised value which purportedly takes these features into account and the sec_7520 value shows failure by the tables to produce a realistic result respondent’s position on the other hand is that case law authorizes departure from the tables only where one or more of the assumptions on which the tables are based namely probability of survival of the measuring life assumed rate of return or assumed continuous availability of the source of funds for payment of the interest differ significantly - - from the actual facts presented respondent further emphasizes that a quantitative comparison of values obtained under different approaches is no basis for deviation as a preliminary matter in our assessment of the parties’ contentions we reiterate a point made earlier precedent and logic clearly establish that a private_annuity for purposes of the tables may be both unsecured and independent of any particular corpus see 46_tc_796 estate of cullison v commissioner tcmemo_1998_216 hence our analysis here will focus on whether the third of the estate’s alleged reasons for departure from the tables the lack of marketability supports such a deviation a review of the cases addressing attempts to avoid use of the tables reveals that those permitting departure have almost invariably with an exception to be discussed below required a factual showing that renders unrealistic and unreasonable the return or mortality assumptions underlying the tables in general it has been recognized that expert actuarial testimony establishing the commissioner’s tables to be old or outmoded may be cause for deviation see 480_f2d_171 9th cir affg 54_tc_493 434_f2d_892 5th cir estate of cullison v commissioner supra as specifically regards return rights to income from assets shown to be - - nonincome producing see 609_f2d_1078 4th cir berzon v commissioner supra pincite 477_f2d_131 8th cir or to be subject_to depletion prior to expiration of the term_interest see froh v commissioner supra pincite have been held properly valued apart from the tables in contrast where known facts failed to establish a basis for concluding that a previous average rate of return would remain constant into the future even a marked difference between past experience and the prescribed rate has not justified an alternate methodology see vernon v commissioner supra pincite estate of christ v commissioner t c pincite with respect to mortality a known fatal condition leading to imminent death has been ruled to make use of actuarial_tables unreasonable see 18_tc_914 10_tc_323 cf bank of calif v united_states supra pincite continental ill natl bank trust co v united_states supra pincite at the same time the courts repeatedly have emphasized the limited nature of these exceptions and the important role played by the actuarial_tables see bank of calif v united_states supra pincite continental ill natl bank trust co v united_states supra pincite in the words of the court_of_appeals for the ninth circuit actuarial_tables provide a needed degree - -- of certainty and administrative convenience in ascertaining property values and prove accurate when applied in large numbers of cases although discrepancies inevitably arise in individual cases bank of calif v united_states supra pincite there is also in these cases specifically dealing with the standard for departure once again a salient absence of any consideration regarding what rights the payee may have had to liquidate or dispose_of his or her interest in fact the income right at issue in estate of christ v commissioner t c pincite which was held subject_to valuation under the tables of sec_20_2031-7 estate_tax regs was expressly made nonassignable the trust instrument provided the beneficiaries of this trust are hereby restrained from selling transferring anticipating assigning hypothecating or otherwise disposing of their respective interests in the corpus of the said trust or any part thereof and of their respective interests in the income to be derived and to accrue therefrom or any part thereof at any time before the said corpus or the said income shall come into their possession under the terms of said trust id pincite yet no deviation was permitted see id pincite moreover it is noteworthy that other forms of annuity which lack liquidity are expressly required by statutes and regulations to be valued under the commissioner’s prescribed tables for instance in the context of a grantor-retained annuity_trust sec_2702 b mandates valuation of a qualified retained annuity interest under sec_7520 nonetheless in order to -- - create such a gualified interest the trust instrument must prohibit both distributions from the trust to or for the benefit of any person other than the annuitant during the term of the interest and commutation prepayment of the annuity interest see sec_25_2702-3 gift_tax regs similarly the present_value of the annuity portion of a charitable_remainder_annuity_trust is computed under sec_20_2031-7 estate_tax regs notwithstanding that the trust may not be altered to provide for payment to or for the benefit of any noncharitable beneficiary other than the person or persons named in the governing instrument see sec_1_664-2 a c income_tax regs hence we find statutory and regulatory support for the premise that lack of liquidity or marketability is not taken into account in determining whether tabular valuation is appropriate given the foregoing precedent we are convinced that there exists no authority for the anomalous position taken by the u s district_court for the eastern district of california in estate of shackleford v united_states aftr 2d ustc par big_number b d cal estate of shackleford v united_states supra involved facts nearly identical to those now before this court mr shackleford won a california lottery prize to be paid in nonassignable annual installments and then died after receiving only three payments see id pincite2 to - - on the issue of valuing these payments for estate_tax purposes the district_court accepted with little explanation that the prize was an annuity within the purview of sec_7520 see id pincite5 to however the court concluded that departure from the actuarial_tables was warranted because failure to take into account the absolute lack of liguidity of the prize rendered tabular valuation unreasonable id pincite6 we cannot agree with the district_court for several reasons first as indicated above case law offers no support for considering marketability in valuing annuities the only other case cited by the estate for this proposition bamberg executor under the will of mcgrath v commissioner of revenue no wl mass app tax bd date is a state tax case that affords no cogent analysis of the issue for federal tax purposes second the enactment of a statutory mandate in sec_7520 reflects a strong policy in favor of standardized actuarial valuation of these interests which would be largely vitiated by the estate’s advocated approach a necessity to probe in each instance the nuances of a payee’s contractual rights when those rights neither alter or jeopardize the essential entitlement to a stream of fixed payments would unjustifiably weaken the law -- - third as a practical matter we observe that an annuity the value of which consists solely in a promised stream of fixed payments is distinct in nature from those interests to which a marketability discount is typically applied as the estate acknowledges discounts for lack of marketability are most prevalent in valuation of closely held stock or fractional interests in property such is appropriate in that capital appreciation which can usually be accessed only through disposition is a significant component of value the value of an annuity in contrast exists solely in the anticipated payments and inability to prematurely liquidate those installments does not lessen the value of an enforceable right to sx annually for x number of years in connection with the foregoing we further note that any attempted comparison to the small market of those willing to purchase unassignable lottery winnings which the parties stipulated to exist would be inapposite decedent died owning an enforceable right to a series of payments yet any purchaser buys only an unenforceable right and so is necessarily valuing a different species of interest what a lotto prize might be worth to such a speculator hardly reflects its value in the hands of a legitimate owner hence because there is no market for the precise interest held by decedent the need for a standardized approach becomes even more apparent -- - lastly we comment that sec_20_7520-3 estate_tax regs cited by the estate does not cause us to reach a different conclusion sec_20_7520-3 estate_tax regs deals with an exception to sec_7520 for certain restricted beneficial interests and states a restricted beneficial_interest is an annuity income remainder or reversionary_interest that is subject_to any contingency power or other restriction whether the restriction is provided for by the terms of the trust will or other governing instrument or is caused by other circumstances in general a standard sec_7520 annuity income or remainder factor may not be used to value a restricted beneficial_interest the regulation then goes on to cite two examples where its provisions would be applicable one of which involves a power to invade corpus that could diminish the income_interest to be valued and the other of which addresses an annuity_payment measured by the life of one with a terminal illness see id sec_20_7520-3 v example estate_tax regs sec_20_7520-3 example estate_tax regs in light of the examples given and the previously quoted preamble of t d 1996_1_cb_339 we are satisfied that the intent of this provision was to formalize the existing case law regarding the validity of the tabular assumptions in situations where facts show a clear risk that the payee will not receive the anticipated return thus a restriction within the meaning of the regulation is one which jeopardizes receipt of the payment stream not one which merely impacts on the ability of the payee -- -- to dispose_of his or her right thereto we cannot realistically accede to the view that an agreement for fixed payments backed by the full faith and credit of a state government raises any such concerns accordingly even if applicable this regulation would not aid the estate we therefore hold that lottery payment installments at issue here must be valued through application of the actuarial_tables prescribed under sec_7520 additional arguments by the parties to the extent not specifically addressed herein have been carefully considered but found unconvincing irrelevant or moot to reflect the foregoing and to take into account any further allowable deduction under sec_2053 decision will be entered under rule


internal_revenue_service number release date index number --------------------------------------- ----------------------------- --------------------------------------- ------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-138899-09 date date legend x -------------------------------------------------- ----------------------------- d1 country --------------------- -------------- dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as an association for federal tax purposes effective d1 however x inadvertently failed to timely file form_8832 entity classification election to be treated as an association_taxable_as_a_corporation for federal tax purposes law and analysis plr-138899-09 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as a partnership if it has two or more members and at least one member does not have limited_liability or an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with two or more members may elect to be classified other than as provided under the default rules sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d1 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form plr-138899-09 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc