When are Lottery Winnings taxable.

You must make your irrevocable choice for installments before the drawing. If you make your choice after the drawing, the lump-sum is deemed to be constructive received when you receive the first check.

Whether you make the choice for tax considerations is not relevant.

Reply to
NadCixelsyd
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Actually, that is not correct. In a private letter ruling, requested by a state, on this issue the IRS ruled that the election can be made at the time the ticket is surrendered by the presumed winner with no adverse tax impact. In other words, if the annuity is elected, the taxpayer/winner has taxable income spread over the 20 to 25 year payout period.

That private letter ruling is consistant with the notion that a lottery winner has taxable income in the year he/she actually has a check payable to him/her to pick up at the lottery office.

Reply to
Bill Brown

Define "reasonably". Again, you are failing to understand the basic concept: taxpayers and the IRS can get very nit-picky. Is "reasonably" defined on a case-by-case basis? My gawd, the courts would be clogged and you'd have lots of court decisions to show me. But you don't.

Take two $650 winners on a 29-DEC-10 drawing. Adam has OCD. Adam spends $280 to fly from El Paso to Austin to get his check on December

30th. Is that reasonable? I don't think so. Bill uses first class mail but the lottery commission doesn't receive his letter January 2nd. Should Bill's actions be deemed unreasonable? After all, if Adam collected his winnings in 2010, Bill could have done so as well. Conversely, if Bill's actions are deemed reasonable, could Adam delay paying the tax until 2011 because that's when a "person could reasonably have actually received the money"?

Tax bracket creep happens every year. Winnings taxed in 2009 pay slightly less tax than 2008 winnings. This was especially true between 2002 and 2003 when rates changed. Here in Massachusetts, there is a drawing every day, including Christmas. Hundreds of winners every December fail to collect until the next year. If winnings are taxable on the day of the drawing, there should be a plethora of court cases for you to cite. To rephrase Cuba Gooding, Jr.: SHOW ME THE COURT DECISIONS.

All the cases that I've found (including the one you cite here), the IRS taxed the winner in the year in which they collected their winnings, not the year of the drawing.

Another point that I raised earlier, but nobody answered: If I wait until June to redeem last year's ticket, is Massachusetts going to issue me a W-2G retroactively? Do I then file an amended return?

Reply to
NadCixelsyd

Yes it does conflict with the IRS quote. The funds must be "set apart FOR THAT PERSON". The funds can not be set apart for Steve Rainey until the lottery commission knows that Steve Rainey is a winner. In order for that to happen, Steve Rainey must submit his ticket to the lottery commission, which may happen in a different calendar year than the drawing.

Reply to
NadCixelsyd

Of course the IRS can get nit-picky. But they will often argue things different ways in different cases depending on the outcome they want. That doesn't mean they're right.

And yes, "reasonably" is determined on a case by case basis. It's generally pretty clear to most lawyers where a line is to be drawn, based on the cases that have come before, so it's not going to be burdensome to the system.

Much of law is based on what is reasonable. Nearly all of tort law is based on what a reasonable person would do. But most cases are resolved without having to go to trial.

I don't think even the IRS would think so either. You're not required to go to extraordinary lengths - just what an ordinary, reasonable person in the same situation would do.

No, that's what a normal person would do.

Adam could delay receipt by not going to get his money until 2011. You use either actual receipt or constructive receipt, whichever is earlier.

Send me $7500 and I'll be happy to do the research for you.

That doesn't mean it's the rule to do so.

I don't know, but probably not. But the date of the 1099 is irrelevant in a case like that.

Reply to
Stuart A. Bronstein

Setting funds aside for a person doesn't mean they have to know his name. All they have to know is that he has a lottery ticket with certain numbers picked.

Again, you can't shift income to a later year just by hiding your identity in this kind of case. The IRS doesn't like manipulation of income, and the law gives them the power to reallocate income to reflect what actually happened.

Reply to
Stuart A. Bronstein

How could actual receipt not imply constructive receipt? If you received the money, it was clearly available to you to receive.

Seth

Reply to
Seth

Actual receipt and constructive receipt are antithetical terms. Constructive receipt occurs when you could have received income but did not get it in fact. Actual receipt is when you, in fact, did.

As the tax court noted in Ames, 112 T.C. 304 (1999),

"The courts have regularly looked to section 1.451-2(a), Income Tax Regs., for the following definition of the term "constructive receipt":

"'(a) General rule. 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.'"

Reply to
Stuart A. Bronstein

My Bad. You don't even need a private letter ruling. 26-USC-451(h) allows for the tax to be imposed as the funds are received as long as the irrevocable option is made within 60 days AND the payout is 10 years or longer.

Reply to
NadCixelsyd

"Minnesota Administrative Rules State Lottery

7857.4030 TIME OF PAYMENT. Payment of prizes will be awarded only after a claim has been filed, verified, fully validated and checks made as required by law. The claimant must further provide identification to the satisfaction of the director."

The arguments for constructive receipt in the year before a large claim was submitted appear to depend on the "otherwise made available so that he may draw upon it at any time" clause of the definition. Personally, I find it hard to see constructive receipt at a time when the claim has not been filed, the claim has not been verified, the claim has not been validated, the checks mandated by state law (unpaid taxes? unpaid child support?, outstanding warrants?, other?) have not been made, and the identity of the claimant has not been verified. It sure looks to me that the "taxpayer's control of its receipt is subject to substantial limitations or restrictions." But then again, I'm not a judge or an IRS agent.

As a practical matter, shifting taxability of a lottery prize into the tax year after the drawing by not submitting the claim until the new year seems likely to be successful. Is anyone aware of a court case that addresses these particular circumstances?

Paul

Reply to
BignTall

No, if the taxpayer reasonably COULD HAVE submitted his claim, and received his money, there is constructive receipt, whether the taxpayer actually did so or not.

If you try it and you're caught, you will lose, unless you can show you could not reasonably have actually received the money in the earlier year.

Reply to
Stuart A. Bronstein

My primary point is that until the lottery makes the determination that they are required to pay, there are enough "substantial limitations or restrictions" to prevent constructive receipt. Submitting a claim may start the process towards an eventual payment, but it doesn't cause constructive receipt. All I'm doing is sending them a bill. They have to decide whether it is legitimate and when to pay. Under your interpretation, does every cash basis person or business who delays sending a bill to a typically prompt paying customer end up having constructive receipt "unless you can show you could not reasonably have actually received the money in the earlier year."?

Paul

Reply to
BignTall

Yeah, like if the Bush tax cut was not extended two years, they wouldn't mind deferring large income into 2011.

Disagree. It's burdensome to the taxpayer, who is part of the system. Case in point:

Reply to
removeps-groups

If the drawing was on 20/December and it takes them two weeks to process, then even if you did submit your ticket on 20/December, you wouldn't get your money in 2010 anyway. So if you wait till next year May to submit your ticket it shouldn't matter anyway. Ask them how long it takes process the receipt.

Actually, waiting till May next year might make a difference. If the income is received in Q1 (Jan/1 to March/31) then it will be included in the Q1 estimated payment. If income is received in Q2 (Apr/1 to May/31) then it is included in Q2 estimated payment. If you could have received the income in Q1 but chose to receive in Q2, then Stu's definition of constructive receipt, the income is part of Q1.

Reply to
removeps-groups

I can show you three cases where (A) The taxpayer WANTED constructive receipt in the year of the drawing, but (B) the court held that constructive receipt happened in the year of payment.

Roy V. Thomas Augustin B. Jombo Thomas J. Paul

Just because something is pretty clear to most lawyers, doesn't mean that it's pretty clear to those of us who are not lawyers. There must be "cases that have come before" to support your position. Feel free to cite some.

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What difference does that make? Actual receipt never occurs before "constructive receipt" anyway, so you might as well stick with "constructive receipt". If Adam's goal is cash, "constructive receipt" happens when Adam gets the check. "Actual receipt" doesn't happen until Adam cashes the check and has legal tender in his hands, which may even occur in a different year. But that doesn't matter. It's the year of constructive receipt (the check) that determines taxability.

However, you sidestepped the issue. Adam could have delayed receipt, but he chose not to. If a "reasonable" person would not have gone to such extreme measures to collect his money the next day, does that give Adam the right to postpone his tax liability a few days into the next year as a "reasonable" person would have? Of course not.

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Making arrogant, assertive comments like that do not make you any less incorrect.

Do you take off-the-wall, provoking positions in an attempt to drum up business for a three-martini lunch at Tarantino's? You're the one who made the claim. Defend your claim yourself. Are you going to pay me $7500 if my research proves otherwise?

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True, but since you contradict these cases, you should readily be able to back your claim with a statute or court decision.

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Nit Pick: Lottery winners get a W-2G. Lottery sales agents get a

1099.

"Probably"??? You seem to make a lot of vague statements. Like "crying in Baseball", there's no room for "probably" in tax law.

If the state does not issue a retroactive W-2G, how would the IRS ascertain in which year I should pay tax?

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Stewart, TCS "The lottery is a tax on the mathematically challenged"

Reply to
NadCixelsyd

(1) - Funds must be set aside for a specific person. The text is "for THAT person" not "for A person". (2) - The funds must not have "any substatnial limitation". The requirement for submitting a winning ticket is a substantial limitation. Therefore, there is no possible way constructive receipt could occur before the winning ticket is redeemed. (3) - There is no evidence that the funds are set aside at all. Winning tickets that require submission to the lottery commission are an unfunded liability (or, at best, a contingent liability). In the case of Roy V. Thomas, it took Ohio forty-three days to fund his winnings. (My personal hunch is that Ohio was waiting for January estimated income tax payments.). Despite Mr. Thomas' best efforts, no constructive receipt in the year of the drawing.

Of the thousands of people who win lotteries every December 12th, 90% probably have their money by the end of the year. Does that mean that EVERYBODY should pay tax in the year of the drawing? Roy V. Thomas wanted to. Roy V. Thomas took only two days to submit the ticket to the lottery commission. If you were a judge, would you consider that "reasonable"? Who decides what is a reasonable amount of time to attempt to collect winnings? Why should Roy V. Thomas be penalized just because the state of Ohio dragged its heels?

Since you keep harping on "reasonable" and since "reasonable" is subject to interpretation (even by your own admission), there should be several court cases wherein (A) The lottery ticket was paid in a year after than the drawing, and (B) the courts definition of "reasonable" was to tax the winner in the year of the drawing.

The only logical answer is: Constructive receipt is when one has unfettered access to the funds, which can't happen until the ticket is presented for payment.

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Why not? People shift income (and deductions) all the time. I can't believe you've never heard of "year-end tax planning".

Certain specific income shifting is prohibited by a specific law (e.g. selling short against the box to postpone a capital gain was prohibited by Public Law 105-34). There are statutes (e.g. 26- USC-1259) to cover those specific situations. There is no broad statute that gives the IRS the authority to shift tax years based on anyone's interpretation of "reasonable". If there was any statute with respect to constructive receipt of lottery winnings, you would have flaunted it in my face by now.

I can't explain it, but for some reason, the name Willard Duncan Vandiver keeps poping into my mind.

Stewart, TCS "The lottery is a tax on the mathematically challenged"

Reply to
NadCixelsyd

"The person holding lottery ticket serial number 123456789abc" is a specific person.

For a $50 winning ticket, cashable at any of 5 places within 3 blocks of my home? I wouldn't consider that a substantial limitation.

For a $5 million winning ticket, which must be presented at the lottery office 20 miles away, and have much paperwork done, identification papers provided, etc., I would consider that a substantial limitation.

Yes; but he isn't being charged with being unreasonable, is he?

The judge/jury, as usual.

Suppose that rather than a lottery winner, he'd been a contractor who provided services to the state. If it dragged its feet on paying, his income would be in the later year (assuming he's a cash-basis taxpayer).

I don't consider being able to turn in a $50 winning ticket for $50 cash at any news stand "fettered"; it's less fettered than cashing a $50 check, yet getting the latter does constitute constructive receipt.

Seth

Reply to
Seth

Take a look at the back of a lottery ticket. It likely says something about the ticket having no value until verified. I take that to mean the ticket is worthless until the lottery commission has determined that the ticket is valid.

Some lotteries require groups over a certain size form a partnership so the lottery doesn't have to issue 25 checks. Because the ticket is usually bought by only one person, I would take that to mean the ticket has no value when the group's designated person contributes the ticket to the partnership.

Gary

Reply to
Gary Goodman

If you take that position, the IRS will disagree with you. If you, by voluntarily delaying making your claim, try to shift income from one year to another, they will unwind the situation and make you claim income in the year you could have received it rather than the year you did. That's what the whole concept of constructive receipt is all about.

That has nothing to do with anything. If the partnership is formed for the purpose of purchasing a lottery ticket, even though only one person actually does, it's the partnership as a whole that has taxable income. And again, it is taxable when the partnership could reasonably have collected it, if that is a different time than when they actually do.

Reply to
Stuart A. Bronstein

I really think this thread has gone on too long. However, that being said let me address two things:

  1. The 3 cases you cite and 2. What the IRS said in a PLR when they summed up what the courts said must be required to have constructive receipt:
  2. Thomas is not relevant to the discussion as Thomas argued the economic benefit doctrine, not constructive receipt. Jombo is not relevant to the discussion as Jombo wanted the court to agree that he had constructive receipt of M rather than the .2M annuity payment. In 1989, the State of NY paid all winners over 20 years. Mr. Jombo did not have unfettered access to M. That leaves us with Mr. Paul (a case I mentioned awhile ago in this and another thread). The court said that Mr. Paul presented no evidence that he had unfettered access before the end of year (remember he won the amount on 12/29 and could not request payment from a retailer as the amount was above the retailer's limit on payments) and that the court's own research showed he could not have had unfettered access to the funds before year-end. Mr. Paul was required to file his claim at the state capitol where his claim would have to be verified and the funds set apart or made available to him. The 68 mile trip to Trenton being a substantial limitation was just an additional argument tossed in by the court.
  3. In PLR 110663-99 the IRS summed up this issue as follows:

==========Start Quotation==========Section 1.451-2(a) of the regulations provides that income, which is not actually reduced to a taxpayer's possession is constructively received by the taxpayer in the taxable year during which it is credited to the taxpayer's account set apart for the taxpayer, or otherwise made available so that the taxpayer may draw on it at any time, or so that the taxpayer could have drawn on 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 courts have determined that the following conditions are necessary to tax an amount under the doctrine of constructive receipt: (1) the amount must be due; (2) the amount must be appropriated on the books of the obligor; (3) the obligor must be willing to pay; (4) the obligor must be solvent and able to pay; and (5) the obligee must have knowledge of the foregoing facts. In essence, the obligee's demand for payment must be the only thing that would be necessary for payment. ========End Quotation============= Looking at my State Lottery rules, it says that a prize of $100,000 or more must be claimed in person at Lottery HQ. A prize between $601 and $99,999 must be either claimed in person at Lottery HQ or mailed with a claim form to Lottery HQ. Prizes of $600 or less may be claimed at any Lottery retailer or mailed to Lottery HQ. Therefore, anyone who wins $600 or less has unfettered access to the money by merely requesting payment at the retailer. This person would be in constructive receipt if he won this amount on 12/31. Everyone else who wins a larger prize, would not be in constructive receipt until some reasonable time passed such that the money is set apart or made available. Any Lottery HQ can tell you how longs it takes to validate a claim and make the funds available.

Reply to
Alan

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