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the California State Lottery (CSL) in effect during 1991, Mr.
Davis became entitled upon winning the lottery to receive the
$13,580,000 in 20 equal annual payments of $679,000 (annual
lottery payments), less certain tax withholding. At the time
that Mr. Davis won the lottery, CSL did not offer to any lottery
winner the option to elect to receive a single lump-sum payment
of the lottery prize.2
On December 13, 1991, CSL sent Mr. Davis a letter which
stated, inter alia:
This letter certifies that on July 10, 1991 you won
$13,580,000 [sic] the California State Lottery’s On-
Line LOTTO game. You have already received your first
payment of $679,000, less 20% for Federal tax withhold-
ing. In addition, you will receive nineteen (19)
subsequent annual payments of $679,000 each, as near as
possible to the anniversary of the day on which you won
your prize, $13,580,000. Please maintain this letter
for your permanent record.
In accordance with Internal Revenue Service regula-
2The parties stipulated that both petitioners won the lot-
tery. That stipulation is not accurate. On July 10, 1991, Mr.
Davis won the lottery, and sometime thereafter he assigned the
right to receive the annual lottery payments to himself and his
spouse, petitioner Dorothy A. Davis (Ms. Davis), as cotrustees of
James and Dorothy Davis Family Trust dated Feb. 6, 1990 (Davis
Family Trust). Mr. Davis and Ms. Davis took all subsequent
actions with respect to the annual lottery payments discussed
herein in their capacity as cotrustees of that trust. They
apparently have taken and continue to take the position, which
respondent does not dispute, that all income of Davis Family
Trust is includable in their income. Thus, as discussed below:
(1) Petitioners reported in their tax return for the taxable year
1997 that they received (a) the $1,040,000 payment at issue and
(b) the $514,000 annual lottery payment that they were entitled
to receive for that year, and (2) respondent determined that
petitioners have a deficiency for that year.
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Last modified: May 25, 2011