United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 3, 2004 Decided February 18, 2005
Reissued April 12, 2005
No. 03-1355
AUGUSTIN B. JOMBO ,
APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
Appeal from the United States Tax Court
(No. IRS-99-16627)
Augustin B. Jombo, pro se, argued the cause and filed the
briefs for appellant.
Karen D. Utiger, Attorney, U.S. Department of Justice,
argued the cause for appellee. With her on the brief were Eileen
J. O’Connor, Assistant Attorney General, and Richard Farber,
Attorney, U.S. Department of Justice. Gilbert S. Rothenberg,
Attorney, U.S. Department of Justice, entered an appearance.
Before: HENDERSON, TATEL, and ROBERTS, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: Does a taxpayer who wins a lottery
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in one year but receives installment payments over the next
twenty years constructively receive his entire winnings in the
first year, exempting them from federal taxation in later years?
The Tax Court answered no, and we agree.
I.
In 1989, appellant Augustin Bolsover Jombo was employed
as a clerk at Nigeria’s New York Consulate. After purchasing
twelve one-dollar lottery tickets, he hit the jackpot, winning a
grand total of $26 million. Under then-existing New York State
Lottery (“NYSL”) rules, Jombo did not get his entire winnings
in 1989. Instead, he received the right to approximately $1.2
million per year for twenty years. Although Jombo had several
offers to purchase the rights to his future lottery payments, he
declined to sell. See Jombo v. CIR, 84 T.C.M. (CCH) 496, 497
(2002).
Nineteen eighty-nine was a significant year for Jombo in
another respect. After winning the lottery, he acquired U.S.
permanent resident status, which he maintained at least through
1996.
A cash-accounting-method taxpayer in 1989, Jombo
included the annual lottery payments as gross income in his
1989 and 1990 federal income tax returns. Nothing in the record
indicates how Jombo handled his annual payments for the next
few years, but in 1996—the year at issue here—he refused to
include the annual payment in his tax return, explaining in an
enclosed statement,
Prior audits have denied Mr. Jombo gambling losses against
his lottery winnings under Reg. 1.165-10. The Internal
Revenue Service Agent in charge of the audit ruled that Mr.
Jombo was considered to have won the lottery in 1989,
which is the only year he is considered to have ‘gambling
winnings.’ Therefore, since all his gambling winnings were
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considered to have taken place in 1989, his diplomatic
status would exempt his lottery winnings from income
taxation. Mr. Jombo should not have to pick up gambling
winnings from the twenty-year payout as taxable income,
because he won the lottery in 1989 when he had diplomatic
status.
Id. Unpersuaded, the Commissioner notified Jombo of an
income tax deficiency in the amount of $503,105 and assessed
an inaccuracy penalty of $100,621.
Jombo timely challenged the deficiency notice, and the Tax
Court, following a trial, found that the Commissioner had
correctly calculated the deficiency. See id. at 501; see also
Jombo v. CIR, No. 16627-99 (U.S. Tax Ct. July 2, 2003). The
court held that because Jombo had no right to receive the full
$26 million in 1989, he had not constructively received the
entire amount in that year. See Jombo, 84 T.C.M. (CCH) at 498-
99. Jombo therefore owed taxes on the $1.2 million 1996
payment. See id. at 498. Rejecting Jombo’s corollary argument
that his 1989 diplomatic status removed his winnings from the
Commissioner’s reach, the court found that neither international
treaties nor the U.S. tax code provided such an exemption for
gross income derived from lottery payments. See id. at 499.
The court also rejected Jombo’s argument that the 1996 payment
qualified as an annuity and was therefore properly excluded
from his gross income. See id. at 499-500. Finally, the Tax
Court held that Jombo owed taxes due to an unsubstantiated net
operating loss he had attempted to carry forward. See id. at 500.
Finding that Jombo had reasonably believed that the 1996
lottery payment was nontaxable, the court reduced the
inaccuracy penalty to correspond solely to the claimed net
operating loss. See id.
Jombo appealed to the Fourth Circuit, which transferred the
case here. Venue is proper in this Circuit because Jombo’s legal
residence is now outside the United States—the United
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Kingdom, according to the record. See 26 U.S.C. § 7482(b).
Appearing pro se, Jombo raises only one issue: whether he had
to pay taxes on the installment payment received in 1996.
II.
We review questions of law decided by the Tax Court de
novo. Andantech, LLC v. CIR, 331 F.3d 972, 976 (D.C. Cir.
2003). We review for clear error the Tax Court’s findings of
fact and its disposition of mixed questions of law and fact. Id.
Before turning to the merits of Jombo’s appeal, we must
consider his claim that the Commissioner improperly imposed
the burden of proof on him. In support, he cites Internal
Revenue Code section 7491, which shifts the burden of proof to
the government after a taxpayer presents “credible evidence”
with respect to any factual issue pertaining to the taxpayer’s
liability. That provision, however, applies only in “court
proceedings arising in connection with examinations
commencing after [July 22, 1998].” Internal Revenue Service
Restructuring and Reform Act of 1998 § 3001(c), Pub. L. No.
105-206, 112 Stat. 685, 727 (1998). The Tax Court found that
“[a]bsent any contrary evidence,” the Commissioner’s May 7,
1998 letter informing Jombo that his 1996 return was under
examination provided “the date respondent’s examination of
petitioner’s 1996 tax year began,” and that because that letter
was sent over two months before section 7491’s July 22
effective date, the burden of proof remained on the taxpayer.
Jombo, 84 T.C.M. (CCH) at 498.
Reviewing for clear error, we find none. Although Jombo
insists that the May 7 letter did not commence the examination,
he suggested no alternative date to the Tax Court, nor does he
offer one here. Absent evidence of an alternative start date, we
have no basis for questioning the Tax Court’s conclusion that
section 7491 is inapplicable to this case and that the burden of
proof therefore remains on Jombo.
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In support of his claim that the $1.2 million he received in
1996 did not represent gross income, Jombo argues that he
“constructively received” the entire jackpot in 1989, the year he
won the lottery. In his view, the entire $26 million constituted
income in 1989 when, according to Jombo, his diplomatic status
insulated him from taxation, at least at the U.S. resident rate. If
Jombo is right, moreover, the Commissioner can no longer
pursue a deficiency from 1989 because the statute of limitations
has run, see 26 U.S.C. § 6501(a). Rejecting Jombo’s argument,
the Tax Court found constructive receipt inapplicable because
Jombo lacked an “unqualified, vested right to receive immediate
payment” in 1989. Jombo, 84 T.C.M. (CCH) at 498 (citing
Childs v. Commissioner, 103 T.C. 634, 654 (1994), aff’d without
published opinion, 89 F.3d 856 (11th Cir. 1996)).
This case provides the first opportunity for us to examine
the tax doctrine of constructive receipt. As Jombo notes, it is
“near impossible to find appropriate decided cases” addressing
constructive receipt in the context of lottery winnings.
Appellant’s Br. at 9. Fortunately, the applicable regulations are
directly on point. For cash-accounting-method taxpayers, like
Jombo, “all items which constitute gross income . . . are to be
included for the taxable year in which actually or constructively
received.” 26 C.F.R. § 1.446-1(c)(1)(I). “Gross income”
includes lottery winnings, see United States v. Maginnis, 356
F.3d 1179, 1183 (9th Cir. 2004) (“Lottery prizes are treated by
the tax code as gambling winnings, which are taxed as ordinary
income.”)—doubtless an application of the canon nulli est
homini perpetuom bonum, or “no man has perpetual good
fortune,” see Titus Maccius Plautus, Curculio act 1, sc. 3.
According to the constructive receipt regulation:
[i]ncome although not actually reduced to a taxpayer’s
possession is constructively received by him in the taxable
year during which it is credited to his account, set apart for
him, or otherwise made available so that he may draw upon
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it at any time, or so that he could have drawn upon it during
the taxable year if notice of intention to withdraw had been
given. However, income is not constructively received if
the taxpayer’s control of its receipt is subject to substantial
limitations or restrictions.
26 C.F.R. § 1.451-2(a). The regulation provides an example: “if
a corporation credits its employees with bonus stock, but the
stock is not available to such employees until some future date,
the mere crediting on the books of the corporation does not
constitute receipt.” Id.
We find no error, much less clear error, in the Tax Court’s
rejection of Jombo’s constructive receipt argument. See
Andantech, 331 F.3d at 976; see also Baxter v. CIR, 816 F.2d
493, 494 (9th Cir. 1987) (applying clear error review to the Tax
Court’s application of the constructive receipt doctrine); Byrne
v. CIR, 449 F.2d 759, 760 (8th Cir. 1971) (same). Despite
Jombo’s assertions that NYSL winners receive the legal right to
the total sum once lottery officials acknowledge and validate
their winnings and the winners sign the certificate of term-
payment, nothing in the record even suggests that Jombo could
have obtained the entire $26 million other than through annual
payments. Indeed, Jombo conceded as much before the Tax
Court. Tr. of 10/22/01 Hr’g at 12 (“Today you have an option
to get a lump sum . . . . In that year, 1989, of course there was no
plan like that.”). Because Jombo could not “draw upon [the
entire jackpot] at any time,” 26 C.F.R. § 1.451-2(a), his control
of the lottery winnings was “subject to substantial limitations
and restrictions,” id. As in the regulation’s example, the NYSL
credited Jombo with the entire $26 million, but because the full
amount was “not available . . . until some future date,” the “mere
crediting on the books [did] not constitute receipt.” Id.
Jombo claims that the NYSL would have permitted the sale
of his rights to future payments and that this demonstrates his
unfettered access to the full $26 million. Even assuming that the
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NYSL would have allowed such a sale—a proposition for which
Jombo provides no support—the mere availability of the
transaction would have left unchanged the “substantial
limitations and restrictions” on Jombo’s ability to “draw upon
[the jackpot] at any time.” 26 C.F.R. § 1.451-2(a). We therefore
agree with the Tax Court that Jombo’s alleged ability to sell his
rights in 1989 does not mean Jombo constructively received his
entire winnings in that year. As the Commissioner has
explained in a private letter ruling on this issue, a “lottery
winner’s power to assign his or her rights to a lottery prize does
not accelerate the time in which the Lottery is required to make
prize payments. Accordingly, a lottery winner is not taxable on
the value of an annuitized prize in the year it is won under the
doctrine of constructive receipt.” Priv. Ltr. Rul. 200031031
(Aug. 4, 2000). Though letter rulings are not binding, Inv.
Annuity, Inc. v. Blumenthal, 609 F.2d 1, 7 (D.C. Cir. 1979), we
think the Commissioner’s position makes eminent sense.
Given our conclusion that the annual payment was taxable
in 1996, we have no need to address the parties’ arguments
about Jombo’s 1989 tax status as a consular employee. We also
agree with the Commissioner that Jombo’s physical absence
from the United States in 1996 is irrelevant to the determination
of his gross income, for, as he stipulated in the Tax Court,
Jombo maintained his status as a U.S. permanent resident during
that year. “[A]ll resident alien individuals are liable to the
income taxes imposed by the Code whether the income is
received from sources within or without the United States,” 26
C.F.R. § 1.1-1(b), and individuals qualify as resident aliens if
their permanent residency status has not been revoked,
regardless of their absence from or presence in the United States
during a given year. 26 U.S.C. § 7701(b)(1)(A)(I), (b)(6).
Hedging his bets, Jombo makes an alternative argument.
Assuming the 1996 payment represented income in that year, he
contends, the Tax Court erroneously held that his investment in
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the annuitized lottery payments was “at most $1.” See Jombo,
84 T.C.M. (CCH) at 500. In support of this argument, Jombo
tells us—again without citation—that the NYSL invested $12
million in 1989 to yield twenty $1.2 million annual payments.
According to Jombo, the Code’s exclusion from gross income
of investments in annuities, see 26 U.S.C. § 72(b)(1), thus
entitles him to exclude a “much greater” portion of the annual
payment, Appellant’s Br. at 18.
Like the Tax Court, we will assume without deciding that
the NYSL’s 1996 disbursement to Jombo constituted an annuity
governed by I.R.C. section 72. That section defines an
“investment in [an annuity] contract” for purposes of
determining the excludable amount of an annuity as “(A) the
aggregate amount of premiums or other consideration paid for
the contract, minus (B) the aggregate amount received under the
contract before such date, to the extent that such amount was
excludable from gross income under this subtitle or prior income
tax laws.” 26 U.S.C. § 72(c)(1) (emphasis added). Yet neither
the Code nor the applicable regulation, with the exception of the
provisions governing certain employer-funded pension plans,
specifies who pays the consideration. See generally 26 C.F.R.
§ 1.72. The Third Circuit has interpreted “consideration paid”
as the amount paid by the taxpayer, not the total amount
invested in the annuity. Kute v. United States, 191 F.3d 371,
375 (3d Cir. 1999) (stating that “in general gross income
includes any amount received as an annuity, but I.R.C. § 72(b)
excludes amounts attributable to the taxpayer's investment in the
contract” (emphasis added)). Agreeing with the Third Circuit’s
sensible approach, we uphold the Tax Court’s determination that
Jombo’s excludable investment was $1—the amount he paid for
the winning ticket.
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For all of these reasons, we agree with the Tax Court that
the United States may continue sharing in the fruits of Jombo’s
good fortune. The Tax Court’s finding of a $503,105 deficiency
for the 1996 tax year is affirmed.
So ordered.