Definition — The Fruit of the Slot Machine

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As you have heard repeatedly, gross income includes all income from whatever source derived. In fact, under the anticipatory assignment of income doctrine, you may realize income even though no amount is actually paid to you.

And yet…

What if you enroll in a Voluntary Exclusion Program? Are your gambling winnings considered income if the casino won’t pay you?

A Voluntary Exclusion Program (VEP) is a self-imposed treatment strategy for gambling addicts. Participants put themselves on a list with state gaming commissions and voluntarily agree to not enter casinos. Participants who violate the agreement can be arrested for trespass, and any winnings are forfeited. (The money is remitted to the state, which is generally required to use it to fight gambling addiction.)

The question in Office of Chief Counsel Memorandum Number 201433015 is whether the income falls under the anticipatory assignment of income doctrine or whether an exception applies.

The assignment of income doctrine holds that “income must be taxed to him who earns it” (Lucas v. Earl, 281 U.S. 111 (1930)), and effectively prevents the shifting of tax liability for income earned by your own efforts. (“…no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.”)

Exceptions to the doctrine include situations where you disclaim, waive, renounce or otherwise abandon any and all interests in the right to receive the income before you earn it. You also can’t direct, or retain the ability to direct, the disposition of the income after it is earned and payable.

So what do you think?

or

Make your selection, then hover your mouse over the link below to find out what the IRS Chief Counsel decided.

Download (PDF, 59KB)

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By participating in the state VEP the gambler is repudiating his or her right to any of the winnings before any of the winnings are earned or paid. The fact that the winnings are surrendered to the state commission is of no consequence because the participant is not directing the payment of the winnings to another person.
Rather, pursuant to state law and as reflected in the terms of the state VEP agreement entered into before the winnings are realized, the renounced winnings must be paid to the state commission.
Accordingly, a state VEP participant is not required to include a jackpot or winnings from a state casino in gross income, except to the extent that an amount is paid to the VEP participant.
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