Taxing Lessons From Court Decisions

Winning the Lottery

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Perhaps you’ve thought about the steps you would take if you received a large sum of cash. Spend some, save some, do what you could about reducing the tax impact.

In T.C. Memo. 2012-60, the taxpayer did all those things. After receiving a $10 million payout from a winning lottery ticket, she established an S corporation, with family members as stockholders. The idea was that the family could share the wealth.

Problem: The IRS said that by transferring the ticket to the corporation, the taxpayer had made a gift and owed gift tax.
The taxpayer disagreed, saying the transfer was not a gift because a long-standing agreement existed among her family that mandated she share the winning proceeds with them.

At stake: $771,570 of gift taxes.

The court determined there was no family agreement because the “terms” of such agreement was based on offhand remarks and a sense of moral obligation. Those factors were too indefinite, uncertain, and incomplete for enforcement. In addition, even if there had been an agreement, state law prohibited gambling, which would make such an agreement illegal, rendering it void.

Taxing Lesson: Verbal promises are only worth the paper they are written on.

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