                        T.C. Memo. 2001-170



                      UNITED STATES TAX COURT



               ESTATE OF GLADYS J. COOK, DECEASED,
           VERNA LEE STEELE, EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15284-99.                       Filed July 9, 2001.



     John W. Porter, Walker Arenson, and S. Stacy Eastland, for

petitioner.

     Lillian D. Brigman and Richard T. Cummings, for respondent.



                        MEMORANDUM OPINION

     GERBER, Judge:   Respondent determined a deficiency of

$873,544 and a penalty under section 66621 of $168,999 in the



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the date of decedent’s
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

Federal estate tax of the Estate of Gladys J. Cook, Deceased (the

estate), Verna Lee Steele, executrix.   The facts in this case

have been fully stipulated under Rule 122, and only one issue is

left for our consideration.   After concessions, the issue

concerns the value at decedent’s date of death of her interest in

a limited partnership.   In particular, we must decide whether a

limited partnership’s right to receive 19 annual installment

payments of lottery winnings must be valued in accord with the

private annuity tables in section 20.2031-7, Estate Tax Regs.

(annuity tables).

The Lottery Payments

     At the time of her death, Gladys J. Cook (decedent) resided

in Johnson County, Texas, where her will was probated.   Decedent

regularly purchased lottery tickets to participate in the Texas

Lottery (the lottery).   Decedent and her former sister-in-law,

Myrtle Newby (Newby), had a longstanding informal agreement under

which they jointly purchased lottery tickets and shared the

winnings.

     On July 8, 1995, decedent purchased a winning lottery

ticket, the face value of which was $17 million, payable in 20

annual installments (lottery payments).   Thereafter, pursuant to

the informal sharing arrangement, the State of Texas was

obligated to make lottery payments to decedent and Newby.    The

initial lottery payment of $858,648 was made on July 10, 1995,
                                - 3 -

and subsequent installments of $853,000 were payable on July 15

of each of the next 19 years.

     Texas law provided that lottery prizes payable in

installments could not be transferred without a court order or

converted to a lump sum at any time.    No market existed in Texas

for lottery prizes payable in installments.   No risk of default

or delay encumbered the lottery payments, which were funded

through the purchase of investments in U.S. Government bonds.

The Partnership

     On July 12, 1995, decedent and Newby converted their

informal sharing arrangement to a formal limited partnership, MG

Partners, Ltd. (the partnership).   The lottery ticket was

assigned to the partnership by decedent and Newby, and each

received a 2-percent general partnership interest and a 48-

percent limited partnership interest.

     Decedent died unexpectedly on November 6, 1995 (the

valuation date); her interests in the partnership were still

intact.   The partnership’s assets on the valuation date were the

right to receive 19 future lottery payments and the current

holding of $391,717 in cash.

The Estate Tax Return and the Notice of Deficiency

     The estate’s Federal estate tax return was filed with the

Internal Revenue Service at Austin, Texas, on August 5, 1996.

The estate reported a tax liability of $266,269.   Decedent’s
                                - 4 -

interests in the partnership were included in the gross estate at

a value of $1,529,749, the amount opined by the estate’s

valuation expert, Peter Phalon (Phalon).2   Phalon valued the

lottery payments at $4,575,000.

     Respondent determined that the partnership’s right to

receive the lottery payments had a date of death value of

$8,557,850.    Respondent arrived at this value using the annuity

table.   Respondent then valued decedent’s limited partnership

interest at $3,222,919, allowing discounts for the lack of a

ready market, restrictions contained in the partnership agreement

on transfers and admissions of new partners, and the inability of

a 50-percent partner to control the partnership.

     In response to respondent’s determination, the estate

employed a second expert, William H. Frazier (Frazier), to

prepare a valuation report on the lottery payments and the

partnership.   Frazier valued the lottery payments at $6,053,189

and decedent’s interests in the partnership at $2,067,867.

Respondent employed his own valuation expert, Francis X. Burns

(Burns), to value the lottery payments and the partnership.




     2
       The parties stipulated $1,490,015, but the correct amount
appears to be $1,529,749. This discrepancy does not, however,
affect our decision.
                                 - 5 -

Burns valued the lottery payments at $5,762,7913 and decedent’s

interests in the partnership at $2,406,413.   The experts used

various methods, excluding the annuity tables, to establish the

value of the lottery payments to the partnership.

     The parties have stipulated that if the final judicial

determination requires application of the annuity tables, then

the value of the estate’s interests in the partnership will be

$2,908,605.   If the final judicial determination is that the

application of the annuity tables is not required, then the value

of the estate’s interests in the partnership will be $2,237,140.

Discussion

     Section 2001 imposes a tax on the taxable estate of every

decedent who is a citizen or resident of the United States.     See

sec. 2001; Estate of Kyle v. Commissioner, 94 T.C. 829, 838

(1990).   The term “taxable estate” is defined in section 2051 as

the value of the “gross estate” less applicable deductions.     Sec.

2051; Estate of Kyle v. Commissioner, supra at 838.   Under

section 2031(a), the gross estate includes the value at the time

of death of “all property, real or personal, tangible or

intangible” to the extent provided in sections 2033 through 2045.

Estate of Young v. Commissioner, 110 T.C. 297, 306 (1998); sec.

20.2031-1(a), Estate Tax Regs.


     3
       Respondent’s expert valued the lottery payments without
the use of the valuation tables in the event that departure from
the valuation tables is warranted.
                                - 6 -

      The regulations promulgated under section 2031 generally

provide the methods by which property described in sections 2033

through 2045 is to be valued.    Secs. 20.2031-1 through 20.2031-9,

Estate Tax Regs.   The valuation of any property not specifically

described in sections 20.2031-2 through 20.2031-8, Estate Tax

Regs., is made in accordance with the general principles set

forth in section 20.2031-1, Estate Tax Regs.    See sec. 20.2031-9,

Estate Tax Regs.   Where the property is subject to valuation

using general principles, the value of property includable in the

gross estate is its fair market value.   Sec. 20.2031-1(b), Estate

Tax Regs.    A property’s 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

sell, and both having reasonable knowledge of relevant facts.

Id.

      Section 2033 provides that the value of a decedent’s gross

estate includes the value of all property to the extent of the

decedent’s interest at the time of his death.   Sec. 2033; Estate

of Mellinger v. Commissioner, 112 T.C. 26 (1999).    Decedent owned

a 50-percent interest in the partnership at the time of her

death, the value of which must be included in her gross estate.

Sec. 2033.    On the valuation date, the partnership’s assets

included the right to receive 19 annual lottery payments and

cash.   To establish the value of decedent’s interests in the
                                 - 7 -

partnership, the partnership’s right to receive the lottery

payments must be assigned a value.       Sec. 20.2031-3, Estate Tax

Regs.

     The sole issue for our consideration is whether the

partnership’s right to a fixed stream of lottery payments should

be valued using the annuity tables in section 20.2031-7, Estate

Tax Regs.   As an initial matter, the estate argues that the

partnership’s right to receive lottery payments is not an

annuity.    Respondent argues that the partnership’s right to

receive lottery payments is an annuity which must be valued using

the annuity tables.    At the time the petition was filed in this

case, that question had not been addressed by this Court.

However, the question of whether lottery payments should be

treated as an annuity was recently answered in Estate of

Gribauskas v. Commissioner, 116 T.C. 142 (2001), a case involving

substantially similar circumstances to those before us.

     In Estate of Gribauskas, the decedent and his former spouse

won a Connecticut Lotto prize.    Within a year after winning the

lottery they divorced, and soon after, the decedent died owning

the right to receive half of 18 annual, unassignable,

nontransferable payments that could not be distributed in one

lump sum.   The estate elected an alternate valuation date of

December 3, 1994.
                                - 8 -

       In Estate of Gribauskas, it was argued that the stream of

lottery payments was not an annuity.    We held that a decedent’s

right to receive lottery payments was a private annuity,

includable in the gross estate under section 2033, but which

should be valued pursuant to section 7520, even though the

payments were unmarketable, illiquid, and nontransferable.       Id.

       Generally, the present value of an annuity is determined by

multiplying the stream of future annuity payments by a factor.

The factor incorporates an interest rate component and a

mortality or term of payments component.    Section 7520 provides

that the value of any annuity, any interest for life or a term of

years, or any remainder or reversionary interest shall be

determined under the tables prescribed by the Secretary and using

a rounded interest rate equal to 120 percent of the applicable

Federal midterm rate for the month in which the valuation date

falls.    Sec. 7520(a)(1) and (2); sec. 20.7520-1(b), Estate Tax

Regs.    The mortality component is the life expectancy of the

annuitant if the annuity is measured by a life.    If the annuity

is payable for a fixed term of years, the fixed term is the

mortality component.    The term “annuity” is not defined in

section 7520; however, an annuity is commonly defined as a right

to receive fixed periodic payments, either for life or for a term

of years.    Estate of Shapiro v. Commissioner, T.C. Memo. 1993-

483.    Except as provided in section 20.7520-3(b), Estate Tax
                               - 9 -

Regs. (relating to exceptions to the use of prescribed tables

under certain circumstances), annuities are valued under the

tables set forth in the regulations.4     Sec. 7520.   The factors

for a wide range of interest rates and mortality assumptions are

published in tables found in section 20.2031-7, Estate Tax Regs.

     The estate argues that even if the stream of payments is an

annuity, use of the annuity tables to value the payments creates

an unreasonable and unrealistic result because the valuation

formula in section 7520 does not take into account the lack of

marketability of the lottery payments.     Respondent argues for use

of the annuity tables regardless of whether the right to the

payments was marketable in the hands of the partnership.

Respondent contends that decedent’s interests in the partnership,

not the partnership’s right to receive the lottery payments, is

the property in which the lack of marketability should be

discounted.   We agree with respondent.

     It is well established that the tables should be used where

annuities are being valued “‘unless it is shown that the result

is 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



     4
       Sec. 20.7520-3(a), Estate Tax Regs., provides a list of
exceptions effective May 1, 1989 (none of which are present
here), and sec. 20.7520-3(b), Estate Tax Regs., enumerates
additional exceptions effective after Dec. 13, 1995.
                              - 10 -

and realistic means of determining value is available.’”     Vernon

v. Commissioner, 66 T.C. 484, 489 (1976) (quoting Weller v.

Commissioner, 38 T.C. 790, 803 (1962)); Estate of Gribauskas v.

Commissioner, supra at 160.   The burden of showing that the

result is unreasonable rests with the party seeking to deviate

from the tables.   Bank of Cal. v. United States, 672 F.2d 758,

759 (9th Cir. 1982).

     In support of departure, the estate cites Estate of

Shackleford v. United States, 84 AFTR 2d 5902, 99-2 USTC par.

60,356 (E.D. Cal. 1999) (departure was permitted where right to

receive lottery payments was illiquid).   When first presented

with the opportunity in Estate of Gribauskas, we refused, as we

do here, to follow the anomalous holding in Estate of

Shackleford.   In Estate of Gribauskas v. Commissioner, supra at

163-164, we opined:

     We cannot agree with the District Court for several
     reasons. First, * * * case law offers no support for
     considering marketability in valuing annuities. * * *

          Second, the enactment of a statutory mandate in
     section 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
                              - 11 -

     discount is typically applied. * * * The value of an
     annuity * * * exists solely in the anticipated
     payments, and inability to prematurely liquidate those
     installments does not lessen the value of an
     enforceable right to $X annually for X number of years.

     As we concluded in Estate of Gribauskas v. Commissioner, 116

T.C. at 161, 163, when the asset to be valued is one for which

the tables are generally employed, mere illiquidity and/or lack

of marketability of the asset does not lead to, or create, an

unreasonable result requiring an alternative valuation method.

     In Estate of Gribauskas we found that a fixed stream of

lottery payments, subject to minimal risk of default, was a

private annuity.   Tabular valuation did not lead to an

unrealistic and unreasonable result merely because the annuity,

lacking a corpus from which to draw upon, was unmarketable.     The

estate now asserts arguments similar to those of the taxpayer in

Estate of Gribauskas; however, the estate has not shown any

significant fact that would distinguish Estate of Gribauskas.

Moreover, in Estate of Gribauskas, after a review of the cases

where departure was permitted, we opined that “those [cases]

permitting departure have almost invariably * * * [with the

exception of Estate of Shackleford v. United States, supra,]

required a factual showing that renders unrealistic and

unreasonable the return or mortality assumptions underlying the

tables.”   Id. at 161 (and the cases cited thereat).
                              - 12 -

     Here, the 19 annual payments were backed by investments in

U.S. Government bonds, virtually eliminating the risk of default.

As for the assumptions regarding mortality, both parties agree

that the payments were set to end on a date certain.    Therefore,

use of the tables in this case could hardly create an

unreasonable or unrealistic result.

     In this case, three experts used varying valuation methods

based on a willing-buyer willing-seller approach.   All of them

employed a discount for the inherent lack of marketability of the

lottery payments, none of them used the valuation tables

prescribed by the regulations,5 and none of the valuations were

alike.   The estate suggests that the mere fact that there were

differences among the amounts of the valuations warrants a

departure from the tables.6   However, the three valuations with

various methodologies in this case make a compelling argument

justifying the use of valuation tables.   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


     5
       Respondent offered this expert valuation only in the
alternative--in the event the Court were to reject respondent’s
primary argument that the valuation tables control. See supra
note 3.
     6
       If the valuation tables are used, the net value of the
lottery payments was $8,557,850. The estate’s two experts valued
the lottery payments at $4,575,000 and $6,053,189, and
respondent’s expert found a value of $5,762,791.
                              - 13 -

when applied in large numbers of cases, although discrepancies

inevitably arise in individual cases.”   Bank of Cal. v. United

States, supra at 760.   Moreover, the experts did not provide an

opinion as to the application of the tables with regard to

annuities but merely valued the partnership as though the lottery

payments’ lack of marketability, or other circumstances,

warranted a departure from the tables.   As noted above, we have

already addressed the issue of whether the lack of marketability

inherent in the lottery payments would warrant departure.

     The facts here are substantially similar to those in Estate

of Gribauskas v. Commissioner, 116 T.C. 142 (2001).   The only

significant factual difference is that here a partnership, rather

than an individual, owned the right to receive the lottery

payments. Here, decedent won the lottery and shared the prize

with Newby.   The lottery payments could not be assigned or

transferred without a court order, they could not be distributed

in one lump sum, and they were funded through investments in U.S.

Government bonds.   Additionally, the valuation dates are similar

with regard to the applicable statutes, regulations, and caselaw.

     In the context of resolving the narrow dispute as framed by

the parties concerning the value of the partnership’s right to

the lottery payments, there is no difference between a right to

receive lottery payments that is owned by a partnership in which

decedent owned an interest and an identical right to receive
                                - 14 -

lottery payments that was owned directly by decedent.     In both

instances, the asset must be given a value in order to determine

the tax consequences to the estate.      Sec. 20.2031-3, Estate Tax

Regs.     The rate of return and the risk of return are the same,

and the term of years during which the payments are made ends on

a date certain.     To depart from tabular valuation in this case

simply because the annuity was owned by a partnership would be

contrary to our decision in Estate of Gribauskas v. Commissioner,

supra, as the facts here are otherwise indistinguishable.

        For the foregoing reasons, we hold that the fair market

value of the partnership’s right to receive future lottery

payments should be determined in accord with the actuarial tables

in section 20.2031-7, Estate Tax Regs.     We have considered all

other arguments advanced by the parties, and to the extent that

we have not addressed these arguments, we consider them

irrelevant, moot, or without merit.

        To reflect the foregoing and concessions of the parties,



                                      Decision will be entered

                                 under Rule 155.
