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Jewish World Review May 3, 2001 / 9 Iyar, 5761

Tax Tales by A. J. Cook

A.J. Cook
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Consumer Reports


Creative thinking maximizes heirs' take from lottery

http://www.jewishworldreview.com -- THOMAS J. SHACKLEFORD won $10 million in the lottery, received three of the 20 annual payments less income taxes and died. Do his heirs owe any estate taxes? How much?

His $1 ticket won the California lottery to be distributed at $508,000 a year.

The executor filed an estate tax return valuing the remaining payments as follows: He first determined the total to be received, $508,000 times 17 payments, or $8.6 million. Because these payments wouldn't be received immediately, he discounted this to $4 million.

The Internal Revenue Service accepted the value and the resulting tax of $1.5 million.

But wait. The estate came up with a great thought - estate tax numbers are based on market value, and because in California these remaining payments would be difficult to sell, they have no market value. So it filed an amended return showing a zero value and requested a refund.

The executor based his theory on a unique provision in California law: A lottery prize generally cannot be sold, mortgaged or given away. It may be transferred only to an estate or to a person designated by court order. A purchaser would be limited to someone the court took a fancy to. This uncertainty of receiving court approval greatly diminishes the amount someone would pay for the remaining payments - and thus diminishes the market value. It's this value, what a theoretical purchaser would pay in a bona fide transaction, that is listed on the estate return. Because the amount of the value was up for grabs, the estate said it was zero.

To no one's surprise, the IRS didn't buy this.

The judge issued a Solomon decision. He agreed that California law restricting the transfer of the prize reduced its value, but not to zero. He dropped the value from the original $4 million to $2 million, reducing the estate tax substantially. So the estate got back most of its money.


A.J. Cook, lawyer and accountant, is counsel with the law firm of Pietrangelo Cook PLC. Comment by clicking here.


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