When are Lottery Winnings taxable.

It's taxed when you could have collected it (2010) rather than when you actually do (2011).

I thought that individual taxpayers operated on a cash basis.

What if the drawing took place at 11:00 PM on 12/31/2010? I have some small winners from that MegaMillions drawing.

The doctrine that applies here is constructive receipt.

The original answer is correct.

You may be right, but that doesn't sound logical. Do you have a cite?

If I won Megabucks on November 15th, but never checked my lottery ticket until January 10th and I wasn't paid until January 15th, how could I be taxed in 2010 even if I were an accrual-basis taxpayer?

Let's take it a step further. Suppose I don't discover the winning ticket until July? By then my return has already been filed. Getting a 1099 from the lottery commission for 2010 is out of the question.

And to go even further ... Suppose I win Megabucks on December 15th. Suppose that has a payout of $100k per year for 20 years. Further suppose that the present value of this annuity is $1.2 million and the IRS doesn't dispute that value. Even though I won a $1.2 million annuity in 2010, I only pay taxes when constructively received.

Don't I?

Stewart (the other spelling)

========================================= MODERATOR'S COMMENT: Constructive receipt applies here.

Given the set of facts (11PM draw ..income 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 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.

There is no way that the taxpayer could ever meet that criteria given the time and date of the drawing.

The winnings are taxable in the year you complete all the steps necessary to collect the winnings and the check is made available to you. If you haven't presented the winning ticket to the lottery office, the money is not yet available to you and you do not yet have taxable income.

The IRS has won at least two court cases that support the above point of view but I don't have the citations at hand.

See Roy V. Thomas, et al., Plaintiffs v. United States, Defendant [99-1 USTC ¶50,451], and Thomas J. Paul, Jr. v. Commissioner[ T.C. Memo. 1992-582, 64 TCM 955].

There are lots. The IRS doesn't want you to be able to reduce your taxes by dividing income between different years unless there is a very good reason for doing so.

Because technically you could have received it in 2010. As a practical matter if you have it all taxed in the same year there may not be a problem in a case like that. But the rule is, in that situation, 2010.

If you have a good reason for not getting the money in 2010 - and I mean a really good reason, you might be able to convince them to allow you to recognize the income in one year rather than two. What they really are trying to avoid is your taking some in 2010 and the rest in 2011, and trying to recognize part in each year.

You pay tax when the money is actually received because that's how the pay-out is set up. If you could get it all at once but elect to take it over 20 years to reduce the tax impact, then they'd want to push it all into one year.

Some lotteries give the winners a choice of a lump sum, or a larger sum taken in installments. In a case like that I believe you can pay the taxes as you receive the payments, because your selection of the 20 year pay-out is not primarily based on tax considerations, but because of other reasons, supposedly.

No. An accrual-basis taxpayer includes it when all facts establishing the right to income are satisfied. Having won the drawing establishes the right. However, that right could be delayed if it is necessary to file claim paperwork for the prize (which may or may not be necessary depending on the exact rules - or prize amount).

For grand prizes, additional paperwork is often necessary. For the small prizes (less than $100), they are claimable immediately after the drawing without paperwork beyond the ticket itself, so in that case, your delay does NOT shift the income to a later year.

On Mon, 3 Jan 2011 18:58:52 EST, "Stuart A. Bronstein" wrote Re Re: When are Lottery Winnings taxable.:

My guess is that if the OP *could* have collected it he would have collected it. The wording "assume that I do eventually collect" leads me to believe that there is some question about it.

If the drawing were held on 15-Dec-10, but I did not notice the winning lottery ticket until January 15th, the lottery ticket's winning value doesn't accrue until I notice it (January 15th). How can you recognize a gain before you find it? For a cash basis taxpayer, his constructive receipt happens when payment is made, which would be later. Unless there is a contradicting statute, I contend that the winnings are taxable upon constructive receipt.

Constructive receipt for a cash basis taxpayer occurs when the money is paid, regardless of when the winning ticket is discovered. This is all subject, of course, to a contradicting statute which has yet to surface during this thread.

The law implies a reasonable person standard here. If a generic reasonable person would have noticed it in time to collect it by the end of the year, then it's deemed received in that year.

You mean actual receipt. Constructive receipt is when you could have gotten it if you wanted to. And that's when it's taxed.

Sorry, but the IRS takes steps to avoid what it calls "distortion of income." And allowing someone to postpone income for tax purposes just because of something easy to fake would be, in their eyes, allowing the distortion of income.

The only reason I didn't collect in 2010 was laziness [the amount in question was less than $10]. As I understand procedures, winnings of that magnitude are payable on the spot, and there was ample time to collect between the drawing date and the end of the year. Both the tax court decisions cited up thread involve winnings that were too large for on the spot payment, so they may not be germane.

Bill.

As $10 winnings are made available to the winner at any establishment that sells the tickets, then you would be subject to constructive receipt and have 2010 winnings of $10.

Let's change this to the case where the amount was higher such that a lottery retailer could not make the payoff, i.e., the money was not made available until you claimed it a lottery headquarters. There was a Tax Court case in 1992 that specifically addressed this. The winning ticket of $1087.50 (NJ Lottery) was drawn on Dec. 29th. On 12/30 the t/p obtained a validation stub and claim form from the retailer and mailed it to lottery headquarters in Trenton, NJ on 12/30. NJ requires winnings in excess of $599 to be claimed at lottery headquarters. Payment was received in January 1988. The t/p failed to report the winnings in 1987 and 1988 claiming that lottery winnings were not taxable and in the alternative (i.e., it was taxable) should been taxed in 2007 under the doctrine of constructive receipt. The IRS was assessing him for 1988, the year of actual receipt.

Suffice to say, the t/p lost the "gambling winnings are not taxable argument" and also lost the constructive receipt argument. The t/p argued that instead of mailing his claim to lottery HQ, he could have driven 68 miles to Trenton on 12/30 or 12/31, filed his claim and obtained payment.

Here is what the Tax Court said about that:

There is no reliable evidence in the record supporting this contention, and we are unconvinced that petitioner had such unfettered control over the date of actual receipt of the lottery funds.

The only way for petitioner to support his position in this case is to demonstrate conclusively that he could have claimed his prize within 2 days under New Jersey law. Petitioner cites no New Jersey law supporting his position, and our own research has uncovered none. Petitioner's only evidence supporting unfettered control of the lottery winnings is his own naked opinion that he could have been paid "on the spot" had he driven to Trenton by the year's end. This self-serving testimony is insufficient to overcome petitioner's burden of proof. See Tokarski v. Commissioner [Dec. 43,168], 87 T.C. 74, 77 (1986).

In any event, even assuming arguendo that under New Jersey law petitioner actually could have obtained a check for the lottery winnings by appearing in person at the Lottery Commission and claiming them, we conclude that such action would be considered a substantial limitation or restriction on petitioner's control of the lottery funds. Trenton, New Jersey, is located 68 miles from petitioner's legal address. We will not confront taxpayers with the choice of traveling long distances to claim funds or face application of the doctrine of constructive receipt.

The fact that petitioner would like the doctrine to apply to this case and that traveling 68 miles would not have been a burden to him is irrelevant; if such travel is necessary in order to prove entitlement to and obtain funds in a current taxable year, we consider the requirement a substantial limitation affecting unfettered control. Accordingly, we conclude that petitioner should have reported the lottery winnings in taxable year 1988.

Paul vs Comm'r, TC Memo 1992-582.

I'm not saying you're wrong. What I am asking you to do is to cite statute.

If Bill Gates makes an offer to buy all of my shares of XYZ corporation on 15-OCT-10 for a bazillion dollars as long as I tender them within one year, I have the choice of selling them in 2010 or waiting until 2011. I pay the taxes when tendered, not when the offer is made. I even have the luxury of waiting until I have held them for a full year so that I pay cap-gain rates.

I contend the constructive receipt of a non-capital asset (e.g. lottery ticket) is the same as the constructive receipt of a capital asset (e.g. stock). It's when you complete ALL the steps to collect your winnings. The drawing is only one of many steps to collect.

As for being a "reasonable person", many people don't check their lottery tickets right away. That's why most lottery commissions give you a full year to claim your winnings.

(sarcastic political comment coming) ... People who purchase lottery tickets are not reasonable anyway. Lotteries are a tax on people that are mathematically challenged.

On Jan 4, 1:15 pm, "Stuart A. Bronstein" wrote:>

The IRS position is that income is taxable in the year the proceeds are actually received by the taxpayer. See my two posts of January 3rd in this thread.

I believe the IRS believes its postion is the same for all amounts.

I believe you have grossly overstated the IRS position in the two cases you cite.

1. Thomas argued the economic benefit doctrine, not the doctrine of constructive receipt.
2. Paul did argue constructive receipt and lost because the court determined that having to drive 68 miles to Lottery HQ with only two days left in the year left the taxpayer's control of its receipt subject to substantial limitations or restrictions. As such there could not have been constructive receipt.

Neither of these cases say that the IRS position is that lottery winnings are taxed in the year of receipt. In fact, one could argue, that the Paul case (I make that argument) clearly shows that the doctrine is alive and well. In the specific case of this thread, the taxpayer had an immediate claim on the $10 of winnings by merely presenting it to any lottery retailer for instance payment. As such, the t/p was in constructive receipt and had income in 2010, not 2011 when he cashed it.

OK, then, if I win the big one I'll report the earnings in the same year as the state issues my 1099.