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Click here for the full text of this decision FACTS: Gladys Cook and Myrtle Newby had an informal agreement under which they jointly purchased Texas lottery tickets and shared the winnings. On July 8, 1995, Cook purchased a winning ticket valued at $ 17 million, payable in 20 annual installments. On July 12, 1995, Cook and Newby converted their informal partnership to a formal limited partnership, which holds the lottery winnings. Cook died on Nov. 6, 1995. Because Texas law prohibits an assignment of the lottery prize, the parties agree that no market for the right to lottery payments existed at the time of Cook’s death. The valuation expert for her estate valued the partnership’s right to lottery payments using a discounted cash flow method and including a discount for non-marketability of the lottery prize. Cook’s interest in the partnership was included on the estate’s tax return. The IRS rejected the expert’s valuation and instead valued the partnership’s right to the lottery payments using 26 U.S.C. �7520 and the accompanying regulations (the “Annuity Tables”), which govern the valuation of private annuities. The only remaining disputed issue between the parties is whether the lottery prize must be valued according to the Annuity Tables for purposes of valuing the partnership interest. The tax xourt found that the Annuity Tables apply. The estate appeals. HOLDING: Affirmed. The estate’s tax return must value property at its fair market value at the time of Cook’s death. The fair market value of private annuities is determined under the Annuity Tables. Congress prescribed use of the tables to provide uniformity to the wide variations that would otherwise result from assorted valuation methods. The Annuity Tables must be used to value annuities unless doing so produces a result “so unrealistic and unreasonable” that a modification or departure should be made. Courts have previously departed from the Annuity Tables only when an individual case involves facts substantially at variance with the factual assumptions underlying the tables. Two recent cases in the Second and Ninth Circuits have broadened the exception, however, holding that marketability must be considered in valuing the enforceable right to receive a series of cash payments. The court disagrees with these circuit decisions and instead agrees with the court below. As the Tax Court considered the estate’s claim, it relied upon its own decision in Estate of Gribauskas v. Comm’r, 116 T.C. 142 (2001). The Gribauskas court reasoned that a lottery prize is within the customary meaning of the term annuity, i.e., the right to a series of fixed payments independent of market forces. By contrast, the value of non-annuity assets is dependent on market forces that affect the value of the underlying asset or the likelihood of continued payments. The lottery prize falls within the definition of a private annuity, valuable under the Annuity Tables. Such a result is reasonable. Wide discrepancies between the three expert valuations and the tables accentuate the importance of standardizing valuation. Further, the disparities in valuation are attributable to a marketability discount, which is not properly applied to the lottery prize. To the contrary, the non-marketability of a private annuity is an assumption underlying the annuity tables. Previous cases departed from the tables only when the cases involved facts that disproved assumptions underlying the tables. The 9th U.S. Circuit Court of Appeals and 2nd U.S. Circuit Court of Appeals departed from this longstanding rule based on the premise that the right to alienate is fundamental to the valuation of any property. The right to alienate is necessary to value a capital asset, but it is unreasonable to apply a non-marketability discount when the asset to be valued is the right, independent of market forces, to receive a certain amount of money annually for a certain term. Marketability is important to the valuation of an asset when capital appreciation is an element of value or when the value would otherwise be difficult to ascertain. But non-marketability does not alter the essential entitlement to a stream of fixed payments for a private annuity. A reasonable valuation of the lottery prize does not require a discount for non-marketability. OPINION: Duhe, J.; before Davis, Smith, and Duhe, JJ. Davis, J. dissenting. DISSENT: Davis, J. As a court determines whether the valuations in the Annuity Tables are unjustified and unreasonable in a particular case, it should consider any factor that affects the annuity’s fair market value, such as non-marketability or any other legitimate factor affecting the value of an annuity.

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