When are Lottery Winnings taxable.

You even have the ability to make a reasonable decision that if Bill Gates is offering a bazillion dollars, the stock must be worth at least two bazillion dollars so you aren't going to tender it at all.

There is no possible reasonable belief that the lottery ticket will be worth twice as much if you don't collect on it.

Also, it isn't the receipt of the asset that matters, it's (constructive) receipt of the cash for the asset.

And as we've seen, the court has ruled that it depends on just how difficult the other steps are. Driving 68 miles (each way) was determined to be enough of a barrier to prevent constructive receipt. Walking a block to a newsstand isn't.

I often hold checks for a month before depositing them, too, but the money is still constructively received when I get the check.

Seth

I'm sure there are circumstances where that wouldn't apply.

E.g. a single-state lottery, $10 winning ticket, which was mailed to the taxpayer as a gift. The taxpayer lives 1,000 miles from the state where the ticket can be cashed, and visits it only twice a year, so the ticket doesn't get collected until the year after the drawing.

Seth

The difference is the requirements to collect.

For small amounts, a local store pays out: minimal effort, constructive receipt upon winning.

For large amounts, the winner has to go to the lottery office, do paperwork, perhaps show identification papers, etc.: no constructive receipt until that's done.

Seth

Internal Revenue Code - around Section 446.

The IRS has the authority to [propose a] change to a taxpayer's accounting method if it believes that the taxpayer's selected method does not accurately yield net income.

This is not inconsistent. There is a substantial limitation or restriction on the funds. As such until the limitation or restriction gets removed, there is no constructive receipt. If the lottery allows for filing a claim by mail, then the limitation is dependent on the time of mailing, verification and making of funds available. That may or may not get you to the next tax year.

I don't think intention would be a huge determining factor. In the case you posit the taxpayer might reasonably have been able to claim is ticket within 30 days. So he should be taxed in the year those 30 days expire.

If your employer gives you a Christmas bonus on December 24, and you "forget" to deposit it for two weeks, can you postpone taxable receipt until the next year? I doubt it.

In cases like this it is too easy to know exactly what you are doing, and just claim to forget, and there is little or no evidence either way other than your own testimony. If you allow one to do it, everybody will.

On the corrolary question of an accrual-basis taxpayer, one has income when one has FILED the claim with the lottery office.

I don't accept that argument. As long as there was sufficient time for a reasonable person to complete the steps in the earlier year, that will be year of inclusion. "Forgetting" was an act of delay under the taxpayer's control, and is thus ignored.

A $100 check has a value of $1

You're comparing apples and oranges. A $500 check has a face value of $500 when received. A $1 lottery ticket has a face value of $1 when received.

A cash basis taxpayer declares the lottery income when the cash is received.

An accrual basis taxpayer declares the income when the ticket is properly submitted to the lottery commission even if that submission is not in the same year as the drawing.

Only a mark-to-market basis taxpayer would declare the income when the drawing is held. But the IRS doesn't recognize mark-to-market accounting for the purposes of paying tax.

That's a perfectly sensible thing to do. Oranges have thicker skins and a juicier texture. Apples are crisper.

True.

False. Lottery tickets have no such thing as "face value". It has a market value of $1 when purchased. It has a market value of $500 when some of its numbers are picked.

False. Look up "constructive receipt".

Seth

Constructive receipt happens when the lottery commission hands the winner A CHECK, not when the ticket becomes a winner. Banks do not accept winning lottery tickets for deposit, ergo, no constructive receipt at the time of the drawing.

In cases cited elsewhere in this thread, taxpayers argued that constructive receipt occurred BEFORE the new year, but since the funds were received after the new year, constructive receipt was deemed AFTER the new year. (In both of these cases, the net tax effect was less if constructive receipt had been in the year of the drawing.

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].

The "correct" answer is "it depends" on the year for which you receive a 1099 from the Lottery Commission.

No 1099? Then you owe taxes in the year actually received. For prizes paid out by a store, there will probably not be a 1099 issued.

The last time I looked into this, I asked the CFO of the Maryland Lottery and, not surpringly, since she had been a student of mine, she said "It depends on the facts and circumstances"!

If you were to win a large prize before December 15th and you put your clain in after January 1st, you will almost certainly get a 1099 for the prior year.

Dick

Elsenet, it has been discussed that banks won't accept large quantities of US dollar coins for deposit; does that mean if I get paid in them there's no constructive receipt?

In a case where the taxpayer had one business day left in the year, would have had to drive 60+ miles in the snow (unknown road conditions) to get to the State Lottery office, offered no evidence that the State Lottery office was open or would have handed him a check on the spot, yes, there was no constructive receipt.

I specified $500 because that can be collected from a retailer who sells lottery tickets. Walking two or three blocks to a choice of 6 different stores is much less likely to be considered a significant barrier to receipt of cash money.

Seth

You're talking about actual receipt, not constructive receipt. If you have actual receipt there is no constructive receipt.

And constructive receipt isn't when you get a check. It's the earliest you could reasonably have gotten a check.

You misunderstand both the concept of constructive receipt and the discussion that went before.

The issue in Roy V. Thomas was that the taxpayer submitted the lottery ticket on December 14, 1992, two days after the lottery drawing. It took the lottery commission six months to get money to him, but he wanted it taxed in '92 rather than '93. Because there were administrative hurdles to getting him the money in '92, constructive receipt did not occur in that year.

In the Paul case, the lottery drawing was on December 29, 1987, and he submitted it for payment on the 30th. The check was received in January 1988.

The taxpayer argued that, if instead of submitting the stub for payment, he could have driven to the state capitol and gotten paid immediately. However he introduced no evidence that he could have done so. If he had, he might well have convinced the court that recognition of tax in 1987 was proper.

Since one business day was not enough for constructive receipt, how long does it take? Two business days? Five? Twelve? Since the IRS and taxpayers can be pretty nit-picky, you must have a definitive answer. The only logical definition of "constructive receipt" is the day on which the winner receives the check.

constructively paid when they are credited to, or set apart for, that person without any substantial limitation or restriction on the time, manner, or condition of payment." Money can not be set apart for the winner until the name of the winner is known. That can not occur before the winning lotto ticket is presented for payment, even if that event occurs six months after the drawing.

First of all, what I and others have said about constructive receipt do not conflict with your quote.

But that has nothing to do with what we've been talking about. The issue is, after a person is notified that he is a winner, when are the winnings constructively received?

And the answer, using what you have quoted above, is the soonest time that a person could reasonably be able to collect his winnings, meaning the soonest time that actual receipt is "without any substantial limitation or restriction on the time, manner, or condition of payment."

Again, you are failing to understand the basic concept. It's not a matter of one day, two or any other number. It's a matter of when the person could reasonably have actually received the money.

In the case referred to above, the taxpayer did not introduce any evidence showing that he could, in fact, have driven to lottery headquarters in the snow, that the headquarters was actually open, and that he could have collected his winnings on the same day. If he had proven all that, then he would have established constructive receipt. He didn't.

I still disagree.

A lottery ticket worth $50 (cashable at any newsstand that sells lottery tickets including one across the street from the winner's house) has constructive receipt when the numbers are drawn (or perhaps the next morning), even though the winning individual is not named until he collects.

Money set aside for a winner who is not yet _determined_ does not cause constructive receipt (e.g. a tournament starts in December and ends in January).

Seth