T.C. Memo. 2002-273
UNITED STATES TAX COURT
AUGUSTIN B. JOMBO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16627-99. Filed October 29, 2002.
Augustin B. Jombo, pro se.
C. Ted Li, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a deficiency in
petitioner’s 1996 Federal income tax of $503,105 and an accuracy-
related penalty under section 6662 of $100,621.
Petitioner worked for the Consulate General of Nigeria in
New York City in 1989. In that year, he won about $26 million in
the New York State Lottery (NYSL). The winnings were payable in
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20 equal annual installments beginning in 1989. In 1996,
petitioner received $1,238,100 as lottery winnings, and he no
longer worked for the Nigerian Consulate General. He disclosed
his lottery winnings on his 1996 income tax return and claimed
that the winnings were not taxable in 1996 because, inter alia,
he was employed by the Consulate General of Nigeria when he won
the lottery. Following a concession by petitioner, the issues
for decision are:
1. Whether petitioner bears the burden of proof. We hold
that he does.
2. Whether petitioner constructively received all of his
lottery winnings in 1989. We hold that he did not.
3. Whether petitioner may exclude the lottery winnings he
received in 1996 because he was employed by the Consulate General
of Nigeria in 1989 when he won the lottery. We hold that he may
not.
4. Whether petitioner had a $4,237 net operating loss
carried over to 1996. We hold that he did not.
5. Whether petitioner is liable for the accuracy-related
penalty under section 6662 for 1996. We hold that he is not to
the extent described below.
Unless otherwise provided, section references are to the
Internal Revenue Code in effect for the applicable years, and
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Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner resided in the United Kingdom when he filed his
petition. He has a master’s degree in business administration.
Petitioner began working as a clerk for the Consulate
General of Nigeria in New York City in 1987. In 1989, petitioner
bought 12 NYSL tickets for $1 each. On January 4, 1989,
petitioner won about $26 million from the NYSL, payable in 20
equal annual installments beginning in 1989. The NYSL did not
offer petitioner the option of receiving a lump-sum payment in
1989. Petitioner was employed by the Consulate General of
Nigeria when he won the lottery. He used the cash method of
accounting in 1989.
Petitioner received two or three offers to buy the rights to
his future lottery winnings for about 50 cents on the dollar. He
did not sell his rights.
Petitioner acquired permanent U.S. resident status on
November 24, 1989, and he maintained that status in 1996. The
NYSL paid petitioner $1,238,100 in 1996.
On a Form 8275, Disclosure Statement, attached to his 1996
return, petitioner reported that he received $1,238,100 from the
NYSL, and said:
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Augustin B. Jombo had diplomatic status when he won the
New York Lottery in 1989. His winnings are being paid
out over a twenty-year period. 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 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.
Petitioner claimed a $4,237 net operating loss (NOL) on his
1996 return. In a separate statement attached to his 1996
return, petitioner identified the NOL as a “net operating loss
carryover”, but he did not state from which year or years he was
carrying the loss. Respondent sent petitioner a letter dated May
7, 1998, informing him that his 1996 Federal income tax return
had been selected for examination.
OPINION
A. Petitioner’s Contentions
Petitioner contends that: (1) Respondent bears the burden
of proof for all issues; (2) he is not liable for tax on his 1996
lottery payment because he constructively received all of his
lottery winnings in 1989 when he was a tax-exempt employee of the
Nigerian Consulate General; (3) his 1996 lottery winnings are a
nontaxable annuity; (4) he is entitled to a net operating loss
carryover deduction of $4,237 in 1996; and (5) he is not liable
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for the accuracy-related penalty under section 6662 because he
disclosed his lottery winnings on his 1996 return.
B. Burden of Proof
Petitioner contends that respondent bears the burden of
proving that the NYSL winnings petitioner received in 1996 are
taxable income. We disagree.
Under section 7491, the burden of proof is placed on the
Secretary under certain circumstances. Section 7491 applies to
court proceedings arising in connection with examinations
beginning after July 22, 1998. Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(a), 112 Stat. 726. Respondent sent a letter to petitioner
dated May 7, 1998, informing him that his 1996 Federal income tax
return had been selected for examination. Absent any contrary
evidence, we treat that date as the date respondent’s examination
of petitioner’s 1996 tax year began. Thus, section 7491(a) does
not apply, and respondent’s determination is presumed to be
correct and petitioner bears the burden of proof on all issues in
this case. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115
(1933).
C. Whether Petitioner Constructively Received All of His
Lottery Winnings in 1989
Petitioner contends that the NYSL amounts that he received
in 1996 are not taxable in 1996 because he constructively
received all of his lottery winnings in 1989. Petitioner points
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out that he had the opportunity to sell his future winnings, but
he decided not to do so. He contends that he constructively
received payment of all of his lottery winnings in 1989 because
he had an unqualified vested right to sell his future lottery
payments in 1989. We disagree for reasons stated next.
1. Whether Petitioner Constructively Received All of His
Lottery Winnings in 1989
A cash method taxpayer generally recognizes an item of gross
income when it is actually or constructively received. Secs.
1.446-1(c)(1)(i), 1.451-2(a), Income Tax Regs. A cash method
taxpayer constructively receives funds if the taxpayer has an
unqualified, vested right to receive immediate payment. Childs
v. Commissioner, 103 T.C. 634, 654 (1994), affd. without
published opinion 89 F.3d 856 (11th Cir. 1996); Martin v.
Commissioner, 96 T.C. 814, 823 (1991); Jerome Castree Interiors,
Inc. v. Commissioner, 64 T.C. 564, 568 (1975), affd. without
published opinion 539 F.2d 714 (7th Cir. 1976).
The NYSL did not offer to pay petitioner all of his lottery
winnings in 1989. Thus, petitioner did not constructively
receive all of his NYSL lottery winnings from the NYSL in 1989.
2. Whether Petitioner Constructively Received Winnings
Because He Could Have Sold the Right To Receive Future
Lottery Payments in 1989
Petitioner contends that he constructively received all of
his lottery winnings in 1989 because he could have sold the right
to receive his future lottery payments at a 50-percent discount
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in 1989. We disagree. A taxpayer constructively receives income
when he has an unqualified, vested right to receive immediate
payment. Childs v. Commissioner, supra; Martin v. Commissioner,
supra. Petitioner did not accept an offer to buy the right to
receive his future lottery winnings. An unaccepted offer to buy
a future income stream gives a taxpayer no right to the proceeds
from a sale of that income stream. Accordingly, petitioner did
not constructively receive all of his lottery winnings in 1989.
Petitioner contends in his opening brief that Cowden v.
Commissioner, T.C. Memo. 1961-229, and Sainte Claire Corp. v.
Commissioner, T.C. Memo. 1997-171, affd. without published
opinion sub nom. Boccardo v. Commissioner, 164 F.3d 629 (9th Cir.
1998), support his contention that he constructively received all
of the lottery winnings in 1989 when he received offers to buy
the future lottery payments. We disagree. In Cowden, the Court
held that the contract right to deferred bonus payments under an
oil and gas lease was the equivalent of cash and thus taxable as
if cash had been received by the taxpayer because the obligation
of the payor was an unconditional and assignable promise to pay
by a solvent obligor, was of a kind that was frequently
transferred to lenders or investors at a discount not
substantially greater than the generally prevailing premium for
the use of money, and was readily convertible to cash. Cowden is
distinguishable because petitioner did not have the option to
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receive a lump-sum payment from the NYSL or an enforceable
promise to pay a lump sum.1
The taxpayer in Sainte Claire Corp. v. Commissioner, supra,
owned a promissory note that was due on November 1, 1988. On
November 1, 1988, the taxpayer corporation and the borrower
negotiated an extension of the note to April 1, 1990. We held
that the taxpayer corporation constructively received the
principal owed on the promissory note when it became due on
November 1, 1988, because, on that date, the taxpayer had an
unrestricted right to receive the income, the taxpayer was able
to collect it, and the failure to receive it was due to the
taxpayer’s own choice. Sainte Claire Corp. is distinguishable
from this case because petitioner never had the right to receive
the 1996 lottery installment in 1989.
We conclude that petitioner did not constructively receive
his 1996 payment from the NYSL in 1989 and that the 1996 NYSL
payment is taxable in 1996.
1
Petitioner conceded in his reply brief that Cowden v.
Commissioner, T.C. Memo. 1961-229, and the cash equivalency and
economic benefit doctrines do not support his contention that he
received all of the lottery winnings in 1989.
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D. Whether Petitioner May Exclude His NYSL Winnings Because He
Was an Employee of the Nigerian Consulate General
1. The Vienna Convention on Diplomatic Relations of 1961
and the Vienna Convention on Consular Relations of 1963
Petitioner contends that he may exclude $1,238,100 that he
received from the NYSL in 1996 under either the Vienna Convention
on Diplomatic Relations, April 18, 1961, 23 U.S.T. 3227,2 or the
Vienna Convention on Consular Relations, April 24, 1963, 21
U.S.T. 77.3 We disagree. Article 34 of the Vienna Convention on
Diplomatic Relations (article 34), supra, provides that
diplomatic agents are exempt from all dues and taxes, except:
(d) dues and taxes on private income having its
source in the receiving State and capital taxes on
investments made in commercial undertakings in the
receiving State;
Similarly, article 49(d) of the Vienna Convention on Consular
Relations (article 49), 21 U.S.T. at 108, provides that consular
officers and employees are exempt from all dues and taxes,
except:
2
This was ratified by the U.S. Senate, Sept. 14, 1965;
ratification deposited, Nov. 13, 1972; entered into force for the
United States, Dec. 13, 1972, adopted by the Diplomatic Relations
Act of 1978, Pub. L. 95-393, 92 Stat. 808, currently codified at
22 U.S.C. sec. 254a (2000).
3
This was ratified by the U.S. Senate, Oct. 22, 1969;
ratification deposited, Nov. 24, 1969; entered into force for the
United States, Dec. 24, 1969.
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(d) dues and taxes on private income, including
capital gains, having its source in the receiving State
and capital taxes relating to investments made in
commercial or financial undertakings in the receiving
State;
Petitioner’s lottery payment in 1996 was private income having
its source in the United States. Thus, that payment is not
exempt from tax under either article 34 or article 49.
Petitioner contends that the 1996 NYSL payment is tax exempt
under article 32 of the Vienna Convention on Consular Relations
(article 32), 21 U.S.T. at 98. Article 32 states:
Exemption From Taxation of Consular Premises
1. Consular premises and the residence of the career
head of consular post of which the sending State or any
person acting on its behalf is the owner or lessee
shall be exempt from all national, regional or
municipal dues and taxes whatsoever, other than such as
represent payment for specific services rendered.
2. The exemption from taxation referred to in
paragraph 1 of this Article shall not apply to such
dues and taxes if, under the law of the receiving
State, they are payable by the person who contracted
with the sending State or with the person acting on its
behalf.
We disagree. Article 32 applies only to taxes imposed on
consular premises and on the residence of the career head of the
consular post. Thus, the $1,238,100 that petitioner received
from the NYSL in 1996 is not excluded from income by the Vienna
Conventions.
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2. Section 893
Petitioner contends that the $1,238,100 that he received
from NYSL in 1996 is exempt from tax under section 893(a)4
because he was an employee of a foreign government. We disagree.
Salaries and wages received by an employee as compensation
for official services to a foreign government or international
organization are exempt from tax. Sec. 893(a). However, income
received by employees of a foreign government or international
organization from sources other than their salary, fees, or wages
is subject to Federal income tax. Sec. 1.893-1(a)(3), Income Tax
Regs. Thus, petitioner’s lottery winnings are not exempt from
tax under section 893(a).
4
Sec. 893(a) provides in part:
SEC. 893. COMPENSATION OF EMPLOYEES OF FOREIGN GOVERNMENTS OR
INTERNATIONAL ORGANIZATIONS.--
(a) Rule for Exclusion.--Wages, fees, or salary of any
employee of a foreign government or of an international
organization (including a consular or other officer, or a
nondiplomatic representative), received as compensation for
official services to such government or international
organization shall not be included in gross income and shall be
exempt from taxation under this subtitle if-- * * *
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E. Whether Petitioner’s 1996 NYSL Payment Is Excluded From
Gross Income as an Annuity Under Section 72(b)(1)
Petitioner contends that he may exclude the 1996 NYSL
payment from income as an annuity under section 72(b)(1).5
We disagree.
Gross income generally includes any amount received as an
annuity. Sec. 72(a). However, amounts attributable to the
taxpayer’s investment in the annuity contract are excludable.
Sec. 72(b)(1). Petitioner paid $1 for the winning lottery
ticket. Thus, petitioner may exclude at most $1. Id. We
conclude that petitioner may not exclude the 1996 NYSL payment
from income under section 72(b)(1).
F. Whether Petitioner Had a $4,237 Net Operating Loss Carryover
for 1996
Petitioner contends that he may carry over to 1996 a $4,237
net operating loss which resulted from investment losses from his
rental property in previous years. We disagree.
Petitioner reported in a statement attached to his 1996
return that he had a $4,237 net operating loss carryover.6 He
5
Sec. 72(b) provides in part:
(1) In general.--Gross income does not include that part of
any amount received as an annuity under an annuity, endowment, or
life insurance contract which bears the same ratio to such amount
as the investment in the contract (as of the annuity starting
date) bears to the expected return under the contract (as of such
date).
6
A tax return is not evidence of the truth of the facts
(continued...)
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did not identify on the return the year or years from which he
was carrying the loss to 1996. On brief, petitioner contends
that he carried forward rental property losses from 1991 and
1992. To carry forward or carry back net operating losses, the
taxpayer must prove the amount of the net operating loss
carryforward or carryback and that his or her gross income in
other years did not offset that loss. Sec. 172(c); Jones v.
Commissioner, 25 T.C. 1100, 1104 (1956), revd. and remanded on
other grounds 259 F.2d 300 (5th Cir. 1958). There is no evidence
in the record that petitioner had rental property losses or that
any losses exceeded his large amount of gross income from 1991
through 1996.
Petitioner testified that his net operating loss claim
related to a $2 million stock options loss in 2001. He did not
explain how he knew in 1998, when he filed his 1997 return, that
he would have a $2 million stock options loss in 2001. We
conclude that petitioner may not carry over any losses to 1996.
6
(...continued)
stated in it. Lawinger v. Commissioner, 103 T.C. 428, 438
(1994); Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979);
Roberts v. Commissioner, 62 T.C. 834, 837 (1974).
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G. Whether Petitioner Is Liable for the Accuracy-Related
Penalty Under Section 6662
1. Adequate Disclosure and Reasonable Basis
Petitioner contends that he is not liable for the accuracy-
related penalty under section 6662 for negligence and substantial
understatement of income tax because he adequately disclosed his
positions relating to the lottery winnings and net operating loss
on a statement attached to his return and had a reasonable basis
for those positions. Sec. 6662(d)(2)(B)(ii); sec. 1.6662-3(c),
Income Tax Regs. We agree to the extent described below.
Taxpayers are liable for a penalty under section 6662 equal
to 20 percent of the part of the underpayment attributable to
negligence or disregard of rules or regulations or to any
substantial understatement of income tax. Sec. 6662(a) and
(b)(1) and (2). However, a taxpayer is not liable for the
accuracy-related penalty under section 6662(a) and (b)(1) if
(1) the taxpayer adequately discloses the relevant facts
affecting the item on his or her return or in a statement
attached to the taxpayer’s return and has a reasonable basis for
that treatment, or (2) there was reasonable cause for the
underpayment and the taxpayer acted in good faith. Secs.
6662(d)(2)(B)(ii), 6664(c)(1); secs. 1.6662-3(c), 1.6664-4(a),
Income Tax Regs.
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We consider the facts and circumstances in deciding whether
the taxpayer acted with reasonable cause and in good faith. Sec.
6664(c)(1); sec. 1.6664-4(b)(1), Income Tax Regs. We
conclude that petitioner acted in good faith and was not
negligent in claiming that the 1996 lottery winnings were
nontaxable because, when he filed his 1996 return, petitioner
reasonably believed that the lottery winnings he received in 1996
were nontaxable.
The taxpayer must disclose an item or a position on a return
on a Form 8275, Disclosure Statement, or a Form 8275-R,
Regulation Disclosure Statement, attached to the return (or a
qualified amended return). Sec. 1.6662-3(c), Income Tax Regs.
Petitioner adequately disclosed on Form 8275 attached to his 1986
return the facts relevant to the lottery winnings, and he had a
reasonable basis for his position relating to those winnings. In
contrast, petitioner did not disclose facts relating to, or have
a reasonable basis for, his treatment of the net operating loss
carryover. We conclude that petitioner is not liable for the
accuracy-related penalty with respect to his lottery winnings but
is liable for that penalty with respect to his net operating loss
carryover.
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2. Reliance on Professionals
A taxpayer may be relieved of liability for the accuracy-
related penalty if he or she shows that there was reasonable
cause for the understatement and that the taxpayer acted in good
faith with respect to the understatement. Sec. 6664(c); sec.
1.6664-4(a), Income Tax Regs. Petitioner contends that he is not
liable for the accuracy-related penalty under section 6662
because he reasonably relied on the advice of tax professionals.
We disagree. Petitioner did not name any professionals or say
what information he provided to them. We conclude that
petitioner did not rely on the advice of tax professionals, and
that he is liable for the accuracy-related penalty under section
6662(a) for 1996.
To reflect the foregoing,
Decision will be
entered for respondent.