Constructive receipt of lottery winnings.

It had been pretty well established a couple of different times that those of us who are correct say the lottery proceeds are taxable in the year cash is received from the lottery commission. The ones who are wrong on this issue maintain that the proceeds are taxable in the year the winning number was drawn.

In at least two Tax Court cases the IRS has successfully argued the proceeds are taxable in the year the cash is received. In both cases, the taxpayer wanted the proceeds taxable in the earlier year the numbers were drawn because tax rates were lower.

Since the determination of lump sum vs annual payout is not made until the ticket is presented to the lottery commission, my question for those who are honestly and sincerely mistaken on this issue it -- What amount is taxable in the year the winning numbers are drawn if the ticket is not presented until the next year?

Normal rules of constructive receipt indicate that taxable income would be considered received when the recipient could have reasonably received the income. If the lottery winner had his numbers drawn in November, had no real obstacle to cashing in the ticket at that point but voluntarily cashed it in the following year, I don't see how the year of actual receipt would be the year tax would be imposed. You are not normally allowed to select your tax year by voluntary actions.

I was unable to find those cases quickly. But as I recall at least one had to do with a lottery drawing later in December, when there really was no reasonable prospect for cashing in the ticket the same year.

That's a good question. And again, if whether the recipient takes a lump sum or annual payments is up to the recipient, I don't think the IRS would have a problem arguing that they could tax it either way they chose that they figured would be less likely to "distort" income for tax purposes.

On the other hand, if it qualified under the rules of an installment sale, then the year of actual receipt would be appropriate. But I haven't gone back to look at the nuances of that at this point.

___ Stu

How does this relate to the frequent advice given at year-end to choose whether to make your last mortgage payment before or after December 31, depending on which year the deduction is more advantageous for?

I recall a debate here about two years ago, and many said that constructive receipt occurred in the year of the drawing, but were unable to provide a cite, court case, statute, or IRS regulation.

Can anyone cite a case wherein the IRS took the position that constructive receipt occurred in the year of the drawing while the taxpayer argued that the proceeds were taxable in the year of payment?

In the facts presented above, how can the lottery commission issue a retroactive 1099? ================ Since for the jackpot prize (and any prize over $600) a claim must be filed, constructive receipt cannot attach purely on the drawing date. Constructive receipt requires an unrestricted right to receive -- which is not the same as a right to receive which must be validated.

An accrual basis individual would be entitled and required to include the winnings in the year in which he delivered or mailed his claim. A cash basis individual would have to wait until the claim was processed.

Stussy is exactly correct. For a large payout lottery, validation will take days so even presenting the ticket does not trigger constructive receipt.

Barry, it doesn't relate at all. Revenue recogniti> In article ,

Barry, it doesn't relate at all. Although revenue recognition and expense recognition start at the same place for a cash basis taxpayer, each has separate rules and exceptions that make it impossible to use rules for one to make a determination for the other.

In one of those cases (discussed here), the court found that the taxpayer did not have any reasonable way to receive the money in the earlier year. (The winning draw was at the very end of the year, the weather was awful and the taxpayer a long distance from the nearest place he could hand in the ticket.)

Many years ago, NY required that ticket buyers specify "lump sump" or "annuity" at the time of purchase, so apparently the state believed that there was some taxability of the full value at the time of winning (or starting to collect) unless the election to take an annuity had been made previously.

Seth

The reason states use to require an election at the time of purchase was the IRS took the position (or the states believed it was the IRS position) that if the election were available at the time of presenting the ticket, the upfront cash amount would be taxable whether the winner elected that upfront cash amount or the annuity. Later the IRS changed its position and the various states began allowing the election at the time the winning ticket is presented. There are at least two private letter rulings requested by state lottery boards in which the IRS stated allowing the election at presentation of the winning ticket did not trigger tax on the upfront amount unless the upfront amount were elected.

To me, that position change by the IRS suggests to me that constructive receipt not only has not occurred at the time the winning numbers are drawn but that constructive receipt has not yet occurred even when the ticket is presented. So, if the ticket is presented on Dec 30, 2012 for example, and the check is available on January 5,

Congress changed the law in 1998. That's when they added section 451(h). This says that as long as the lottery offers you an option (take it all or accept an annuity payable over at least 10 years) that "is exercisable not later than 60 days after such individual becomes entitled to the qualified prize", the option will be disregarded. The lottery commission will tell you when the 60 day period commences. It is the day that the commission certifies you as the person entitled to the winnings. You have constructive receipt of the winnings (whether an annuity or the whole enchilada) when the lottery makes the money available so that you may draw upon it at any time, or you could have drawn upon it during the taxable year if notice of intention to withdraw is given and there is no substantial limitation or restriction. See Treas.Reg. 1.451-2(a). Also see

The question that is on the table and needs an answer is whether a lottery winner can hold onto the winning ticket until his tax year has passed to avoid declaring the income in that tax year? E.g., you win a $50M lottery on 8/21/12. The lottery allows 6 months from the date of drawing to submit the winning ticket. You don't want the income in 2012, so you hold onto the ticket and don't submit it until 1/3/13. You have constructive receipt in 2012. There was plenty of time to submit the ticket and get it certified such that you could have drawn upon the winnings in 2012. Change the example by making the drawing on 12/30/12. You don't have constructive receipt in 2012. There is not enough time to submit the ticket with the applicable form and have the lottery certify you as the winner and make the funds available to you without restriction. You would have constructive receipt in 2012 for a 12/30 drawing if we were discussing a small prize that merely required that you submit the winning ticket to any lottery retailer who could immediately provide you the cash.

What I have always wondered about, was what happens when you don't discover you hold the winning ticket until the tax year has elapsed. I have the opinion that as long as you can provide enough evidence to substantiate that you did not discover you held a winning ticket until the year in question, constructive receipt or actual receipt would pass to that year.

I disagree.

Consider the case of a consultant with a client who pays all bills promptly. He delays billing for November 2012 until Dec. 30, and gets a check on 5 Jan 2013. That's 2013 income, even though he _could have_ billed on 5 Dec and received a check 12 Dec.

Since it's up to the lottery how long to take to certify a winner (though it happens to always take 2 days), I say there's no constructive receipt until that certification occurs.

Seth

As this has been discussed numerous times, you need to read court decisions on whether you as a cash basis taxpayer may delay constructive receipt of income that you are entitled to. The courts have continuously attributed income to taxpayers when they have made a conscious decision to "turn their back" on receipt. The courts have sided with taxpayers who were able to show that because no payment was expected any decision that made then unavailable to receive an unexpected payment would not lead to constructive receipt.

I suspect that it would come down to an issue of whether failure to discover was reasonable or not. In other words constructive receipt would be based on when you could reasonably, under the circumstances, have discovered you had a winning ticket.

___ Stu

To me, the issue of discovery is irrelevant unless the IRS is going to take the position that constructive receipt occurs when the winning ticket is drawn. I don't believe the IRS will take that position. Is anyone aware of any lottery winner being audited for having recognized his/her winnings in the tax year after the numbers were drawn? I am not.

Based on the additional authority you've referred to concerning the IRS position saying that validation of the claim is the triggering event rather than the drawing itself, I'd have to agree with you on that.

___ Stu

What's reasonable to one person is not reasonable to another. Show me a statute/regulation/court_case wherein the IRS's "reasonable" was the determining factor in the definition of Constructive Receipt.

Roy V. Thomas Thomas J. Paul Augustin P Jombo

In the Thomas case, the ticket was presented to the lottery commission on December 12th. I'd say that's "reasonable", by any definition, he should have been taxed that year. However, the lottery commission dragged its heels and didn't pay the man until the following year. While the taxpayer wanted the winnings taxes in the year of the drawing, the IRS argued for the year of payment.

Political statement: Personally, I think the state Ohio dragged it's heels so that its accounting showed a better bottom-line at year-end.

It is what the court finds reasonable. The IRS is not the last word.

This was not a tax court case. This was a case from the 6th circuit on appeal from the district court. A proper citation would not have wasted my time looking for it.

But more importantly, this case has nothing to do with the question we are discussing.

In that case the lottery ticket was submitted for payment on December 14. Due to the lottery commission procedures, it took about six weeks to process the claim, so no payment was made until the following year.

Since the taxpayer had no reasonable opportunity to get any money in the year of the drawing (in other words it was out of his hands) this case has nothing to do with the issue we have been discussing. Our issue is, when the taxpayer could be paid in the prior year but puts off submitting the winning ticket until it's too late, what year does he have constructive receipt.

I was unable to find this case or any reference to it. Do you have a more specific citation?

This case was appealed from the tax court to the DC circuit court. It also has nothing to do with the question at hand. In that case the taxpayer won a lottery in 1989, that was payable out over 20 years. A lump sum payment was not available. The taxpayer took his first payment in the year of the drawing and recognized it as taxable income.

In that case the taxpayer claimed constructive receipt of the entire lottery winnings occurred in 1989, and he brought the action in 1996 claiming the statute of limitations had expired and he didn't owe any more taxes on future lottery winnings.

On the issue of constructive receipt the court of appeals quoted IRS regulations:

"[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 it at any time, or so that he would 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."

The time of payment was out of the taxpayer's hands. That is the critical element.

Doesn't matter. They paid when they paid, and tax for a cash-basis taxpayer is generally recognized in the year of payment, unless the taxpayer, by his own actions, had delayed payment.

___ Stu

It depends on your State Lottery office. They issue you the 1099-G and they decide the year. You had constructive receipt in 2011. But if you present facts and circumstances showing you were unable to present the ticket to them, they may agree on 2012.

The above only applies to prizes requiring presentation at their office. If you cash out at a lottery retailer, it's the date of actual receipt.

The classic case is Hornung v. Commissioner, 47 T.C. 428 (1967). On December 31, 1961, Hornung was awarded a 1962 Corvette as the MVP of the NFL Championship game. He was in Wisconsin. The car was in New York. Hornung took possession a few days later, drove the car for a while, sold it, and declared the sale amount on his

A few year later the IRS was auditing his '62 return and wanted the FMV of the car. But Hornung's 1961 return was closed. Thus, the IRS argued constructive receipt did not occur in 1961.

IMRHO (In my rarely humble opinion): Had 1961 been open, the IRS would have argued for constructive receipt in '61. In saying this I am not casting aspersions on the IRS. It is just that they go after the earliest open year. Unless they can open a year due to gross understatement of income.

Answered above. If you were out of the country or in the hospital, they might issue it for 2012.

Dick

The whole point here is that there is *no entitlement* until the lottery has certified the winner.

E.g. when they intentionally avoid visiting their post office box to not have received a check, despite being in the same city.

E.g. they chose to go on vacation that week, and bought tickets a month earlier.

But the issue here, again, is the meaning of "entitlement". I'm entitled to money if I can reasonably act to receive it (without selling anything, etc.; the existence of an offer for some personal property does not create constructive receipt. Handing the property to the purchaser and declining the offered cash with "pay me next month" does.)

In the consultant and lottery cases, I can't just walk into an office and say "pay me". Well, I could, but I wouldn't get paid until _they_ felt like it (did their internal paperwork), hence no constructive receipt.

Seth