Taxes Survive Death in IRS Lawsuit Against NY Lottery Winner

On June 8, the IRS filed a complaint against the estate of a man who won $10 million in the New York State Lottery but failed to pay all the taxes on those winnings before he died. Unsurprisingly, on June 28, the taxpayer’s estate settled with the IRS by paying the full $1.5 million of taxes.

The estate, which undoubtedly realized that spending money on a trial would have been a waste, will also pay interest and penalties. The lesson is that taxes—at least federal taxes—are certain, even after death.

Gary F. Owens, who won the “Win for Life Spectacular” instant scratch-off ticket when he was 59, was set to receive the proceeds in quarterly installments for a minimum of 20 years. But he used the prize to borrow money, enabling him to receive advance payments.

Owens failed to pay necessary assessments. Because the liabilities were outstanding at the time of his death, his estate, represented by John C. Patten, was liable as his successor in interest. In other words, Patten’s liability was limited to the estate assets under his control; his personal assets weren’t at risk.

To the IRS, tax consequences from the type of loan Owens received are clear. Under Internal Revenue Code Section 72(e)(4)(A), if, during any taxable year, an individual receives (directly or indirectly) any amount as a loan under an annuity contract, or assigns or pledges (or agrees to assign or pledge) any portion of the contract’s value, that amount is treated as received under the contract as not received as an annuity.

The key phrase “amount not received as an annuity” is important because “any amount received as an annuity” may receive favorable treatment. In contrast, any amount not received as an annuity before the starting date “shall be included in gross income to the extent allocable to income on the contract” and “shall not be included in gross income to the extent allocable to the investment in the contract.”

Owens’s investment in the contract was only $20, so the gross income exclusion wouldn’t have done him much good. He did, however, fail to file an IRS Form 1040 in 2009. In 2014, he filed an IRS Form 1040 but omitted a great deal of income.

The IRS assessed the tax liability for 2009 and 2014. The assessment included interest, an estimated tax penalty, a late filing penalty and an accuracy-related penalty.

The IRS might have chosen to proceed against Patten under Section 6901’s transferee liability procedures. Instead, it proceeded based on Section 7403(b), which provides, “All persons having liens upon or claiming any interest in the property involved in [an] action [in which there has been a refusal or neglect to pay any tax] shall be made parties thereto.”

Owens died at 72 on Nov. 16, 2021, in Palm Beach, Fla. Patten, as the personal representative of Owens’s estate, filed a petition to administer the estate in Palm Beach County on Oct. 14, 2022. On Feb. 22, 2023, the IRS filed a claim against the estate for the unpaid federal income tax, interest, and penalties.

On March 10, 2023, Patten filed an objection in probate court to the IRS’s claim, reasoning that the claim for income tax was untimely.

Patten’s untimeliness objection was based on Florida Statute 733.705(5): A “claimant is limited to a period of 30 days from the date of service of an objection with which to bring an independent action upon the claim.” The Florida Probate Court hasn’t yet ruled on this objection. However, given the settlement, that’s now moot.

In its complaint against Patten, the IRS cited Section 6502, which notes: “Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun—(1) within 10 years after the assessment of the tax.” On that basis, the assessment was timely.

The IRS claims it isn’t bound by a state’s statute of limitations. Instead, it says it’s bound by the longer of the state statute of limitations or the Section 6502(a)(1) 10-year limitations period, citing US v. Summerlin and US v. Johnson. Those cases note that the US isn’t bound by state limitations statute even if action is brought in state court, and state law claim is governed by applicable federal limitations statute because government is proceeding in its sovereign capacity.

An interesting note: Because Owens died while residing in Palm Beach County, the IRS Chief Counsel filed the action in the US District Court for the Southern District of Florida. Recent press reports indicate that cases in this district are randomly assigned to judges.

To tie Owens’s case to current events of seismic importance, the judge randomly assigned is dealing with a case relating to certain events at a home called Mar-a-Lago: Judge Aileen M. Cannon.

The case is: US v. Patten, S.D. Fla., No. 9:23-cv-80892, motion for judgment 6/28/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Bruce Givner is of counsel to KFB Rice LLP in Los Angeles. He has been practicing law for 46 years.

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