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during the years at issue from the California State Lottery were
an “annuity” within the meaning of the treaty and therefore
exempt from taxation by the United States under Article 20(2)
thereof. While respondent does not dispute that petitioner was a
resident of Israel, entitled as such to the benefits of the
treaty, respondent nonetheless contends that the treaty provides
no exemption for the payments at issue because they are not an
“annuity” as defined in the treaty. Consequently, the payments
are taxable under section 871(a)(1)(A) as U.S.-sourced income of
a nonresident alien.4
To support his position that the payments constitute an
annuity, petitioner relies on our decision in Estate of
Gribauskas v. Commissioner, 116 T.C. 142 (2001), revd. and
remanded 342 F.3d 85 (2d Cir. 2003),5 in which we held that
annual payments of a State lottery prize were an annuity for
4 Petitioner has not claimed he was in the business of
gambling or that the lottery winnings were effectively connected
with a U.S. trade or business within the meaning of sec.
871(a)(1)(A).
5 Although the Court of Appeals for the Second Circuit
reversed our decision in Estate of Gribauskas insofar as it held
that the lottery prize must be valued pursuant to the valuation
tables prescribed in sec. 7520, the Court of Appeals left
undisturbed our holding that the annual payments of the lottery
prize constituted an annuity for purposes of sec. 7520. Estate
of Gribauskas v. Commissioner, 342 F.3d 85 (2d Cir. 2003), revg.
and remanding 116 T.C. 142 (2001); see also Estate of Shackleford
v. United States, 262 F.3d 1028 (9th Cir. 2001)(annual payments
of a lottery prize constitute an annuity, valuation of which is
made outside tables prescribed by sec. 7520).
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