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Uncle Sam Wins Your Lottery

Insider BuzzInsider Buzz: Uncle Sam Wins Your Lottery

Attention, lottery players: If you win a nice big prize, opt to take it as a stream of payments and then change your mind and wish you had taken it as a lump sum, don't expect any special tax benefits if you sell your annuity for immediate cash.

Over and over in the past few years — and especially since capital gains tax rates were lowered in 2001 — lottery winners have sold their rights to future payments and tried to treat what they got in exchange as capital gains.

Since capital gains are now taxed at a maximum of 15 percent and ordinary income rates run into the mid-30 percent range (and higher a few years ago), that strategy would have a clear tax advantage if it worked.

But it doesn't.

The U.S. Tax Court has rejected this idea so many times it all but ran out of breath citing precedents as it threw out yet another effort earlier this month.

The essential principle involved here, the court said, is that if you sell the right to receive ordinary income, what you get in exchange is ordinary income.

In the most recent case, a Rochester, N.Y., woman back in 1997 won the right to receive a total of $17.5 million over 26 years. She took the payments for 1997 through 1999, but then sold the right to the remaining payments to a Georgia company for a lump sum of $7.1 million. The Georgia firm sent the woman a Form 1099-B, listing the amount as proceeds from the sale of "stocks, bonds, etc."

The woman reported the $7.1 million as a long-term capital gain. The Internal Revenue Service said it was ordinary income and as a result she owed the government another $1.3 million.

In the Tax Court the Rochester woman argued that her lottery winnings were a capital asset because, as the court put it, "her purchase of a lottery ticket was an underlying investment in capital," and that there had been "an increase in value above the cost of the asset."

But the Tax Court, pointing to a decision by the 9th U.S. Circuit Court of Appeals last year as well as a line of cases dating further back, found nothing to distinguish the Rochester woman's situation from other unsuccessful attempts "to transform ordinary income into capital gain."

A lottery winner cannot argue that buying a lottery ticket is a capital investment. Thus, there is no "cost" to the winner for the right to receive future payments and "therefore, the money received for the sale of the right could not be seen as reflecting an increase of value above the cost of any underlying asset," the Tax Court said, summing up the appellate court's reasoning and its own.

Pointing to a half-dozen or so similar decisions, the Tax Court concluded, "We see no reason to depart from consistent treatment of identical cases," and upheld the IRS.

In addition to the tax issues, the cases highlight an important question for lottery players: Assuming I win, should I take the annual payments, or the lump sum, which most games now offer?

The annual payments sound like more, and in a nominal sense they are. But that ignores the time value of money, which, simply put, means that a dollar in the hand today is worth more than a dollar in the hand tomorrow.

Typically, the lump sum is the "present value" of the stream of income represented by the annual payments, and if done properly should be the accountants' best approximation of an amount that is equal in real terms to the value of the total of the annual payments.

So lottery players, especially when buying a chance on a big pot, should think about whether they'd prefer the security of a stream of payments, or opportunities that a big lump sum might bring.

Of course, the odds of winning in the first place are vanishingly small, so as a purely economic proposition, playing the lottery makes little sense. On the other hand, if you think of it as entertainment — instead of, say, going to the movies — then the tax questions, the scheming, the dreaming, are all part of the fun.

Washington Post

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13 comments. Last comment 11 years ago by libra926.
Page 1 of 1

United States
Member #379
June 5, 2002
11296 Posts
Offline
Posted: November 28, 2005, 9:43 am - IP Logged

Another reason why LUMP SUM (when you play, or win) is better!

    Avatar
    Coastal Georgia
    United States
    Member #2653
    October 30, 2003
    1866 Posts
    Offline
    Posted: November 28, 2005, 11:48 am - IP Logged

    Either way, the real winner is always the Government.

    They hit the jackpot every time someone wins.... 

     

                                   

                  

     

     


      United States
      Member #379
      June 5, 2002
      11296 Posts
      Offline
      Posted: November 28, 2005, 1:20 pm - IP Logged

      Either way, the real winner is always the Government.

      They hit the jackpot every time someone wins.... 

      Good thing Canadian (and other countries') winners don't have this problem.

        Avatar

        United States
        Member #6676
        September 3, 2004
        95 Posts
        Offline
        Posted: November 28, 2005, 11:03 pm - IP Logged

        "Good thing Canadian (and other countries') winners don't have this problem."

         

        BUT, our US Jackpots on average are much higer than what those countries have (El Gordo is an exception that comes to mind)

         

        Viva La USA BABY lol Dance

        --winner2b

          Avatar

          United States
          Member #972
          December 30, 2002
          465 Posts
          Offline
          Posted: November 29, 2005, 1:30 pm - IP Logged

          Selling your annuity for a reduced sum (reduced from what you would have got if you'd taken a lump sum to start with, otherwise how could these companies make money) to one of these sleazy hack operations strikes me a fiscal irresponsibilty compounded by knuckleheaded tax and legal advice (if she got any advice at all). This is one case when I side with the government. Whatever you choose live with it, pay your taxes, live within your means, save your money, and be thankful you have your days free and are able to buy nice things and aren't grinding out another day in the office.

          Now, what did she need $7.1 million all at once for anyway? To spend it all on lawyers?  Having an annuity and no stress or legal problems probably looks pretty good to her these days.

           

           


            United States
            Member #379
            June 5, 2002
            11296 Posts
            Offline
            Posted: November 30, 2005, 12:42 pm - IP Logged

            Selling your annuity for a reduced sum (reduced from what you would have got if you'd taken a lump sum to start with, otherwise how could these companies make money) to one of these sleazy hack operations strikes me a fiscal irresponsibilty compounded by knuckleheaded tax and legal advice (if she got any advice at all). This is one case when I side with the government. Whatever you choose live with it, pay your taxes, live within your means, save your money, and be thankful you have your days free and are able to buy nice things and aren't grinding out another day in the office.

            Now, what did she need $7.1 million all at once for anyway? To spend it all on lawyers?  Having an annuity and no stress or legal problems probably looks pretty good to her these days.

             

             

            She was wrong to choose annuity. Back in 1997 the games with cash options required players to make the choice when they bought their ticket. The 60-day rule (adopted by all US lotteries except NY, TX, and MA Megabucks) was signed into law by President Clinton in 1998.

              Avatar
              Bethesda, Maryland
              United States
              Member #16901
              June 6, 2005
              446 Posts
              Offline
              Posted: November 30, 2005, 4:44 pm - IP Logged

              Selling your annuity for a reduced sum (reduced from what you would have got if you'd taken a lump sum to start with, otherwise how could these companies make money) to one of these sleazy hack operations strikes me a fiscal irresponsibilty compounded by knuckleheaded tax and legal advice (if she got any advice at all). This is one case when I side with the government. Whatever you choose live with it, pay your taxes, live within your means, save your money, and be thankful you have your days free and are able to buy nice things and aren't grinding out another day in the office.

              Now, what did she need $7.1 million all at once for anyway? To spend it all on lawyers?  Having an annuity and no stress or legal problems probably looks pretty good to her these days.

               

               

              She was wrong to choose annuity. Back in 1997 the games with cash options required players to make the choice when they bought their ticket. The 60-day rule (adopted by all US lotteries except NY, TX, and MA Megabucks) was signed into law by President Clinton in 1998.

              Patriot

              VERY TRUE.....CASH N'CARRY....LOLOLOLOL...

              I knew this subject/story would get you reved up........it simply added fuel to your argument that we should always, when offered the option, ask for the "LUMP SUM"........case closed........


                United States
                Member #379
                June 5, 2002
                11296 Posts
                Offline
                Posted: December 2, 2005, 4:08 pm - IP Logged

                Selling your annuity for a reduced sum (reduced from what you would have got if you'd taken a lump sum to start with, otherwise how could these companies make money) to one of these sleazy hack operations strikes me a fiscal irresponsibilty compounded by knuckleheaded tax and legal advice (if she got any advice at all). This is one case when I side with the government. Whatever you choose live with it, pay your taxes, live within your means, save your money, and be thankful you have your days free and are able to buy nice things and aren't grinding out another day in the office.

                Now, what did she need $7.1 million all at once for anyway? To spend it all on lawyers?  Having an annuity and no stress or legal problems probably looks pretty good to her these days.

                 

                 

                She was wrong to choose annuity. Back in 1997 the games with cash options required players to make the choice when they bought their ticket. The 60-day rule (adopted by all US lotteries except NY, TX, and MA Megabucks) was signed into law by President Clinton in 1998.

                Patriot

                VERY TRUE.....CASH N'CARRY....LOLOLOLOL...

                I knew this subject/story would get you reved up........it simply added fuel to your argument that we should always, when offered the option, ask for the "LUMP SUM"........case closed........

                libra:

                At least you (in MD & DC) can win first and then decide. In my NY, the current home of the Clintons, you must choose cash or annuity when you PLAY Mega Millions, and cannot change your mind if you win. Of course, you can win a lump sum and purchase an annuity with it, but not versa vice.

                  Avatar
                  Bethesda, Maryland
                  United States
                  Member #16901
                  June 6, 2005
                  446 Posts
                  Offline
                  Posted: December 3, 2005, 12:23 pm - IP Logged

                  Selling your annuity for a reduced sum (reduced from what you would have got if you'd taken a lump sum to start with, otherwise how could these companies make money) to one of these sleazy hack operations strikes me a fiscal irresponsibilty compounded by knuckleheaded tax and legal advice (if she got any advice at all). This is one case when I side with the government. Whatever you choose live with it, pay your taxes, live within your means, save your money, and be thankful you have your days free and are able to buy nice things and aren't grinding out another day in the office.

                  Now, what did she need $7.1 million all at once for anyway? To spend it all on lawyers?  Having an annuity and no stress or legal problems probably looks pretty good to her these days.

                   

                   

                  She was wrong to choose annuity. Back in 1997 the games with cash options required players to make the choice when they bought their ticket. The 60-day rule (adopted by all US lotteries except NY, TX, and MA Megabucks) was signed into law by President Clinton in 1998.

                  Patriot

                  VERY TRUE.....CASH N'CARRY....LOLOLOLOL...

                  I knew this subject/story would get you reved up........it simply added fuel to your argument that we should always, when offered the option, ask for the "LUMP SUM"........case closed........

                  libra:

                  At least you (in MD & DC) can win first and then decide. In my NY, the current home of the Clintons, you must choose cash or annuity when you PLAY Mega Millions, and cannot change your mind if you win. Of course, you can win a lump sum and purchase an annuity with it, but not versa vice.

                  LurkingHAPPY SATURDAY......CASH N'CARRY.......12/03

                  You hit the bullseye in that one.........another benefit is that winners of M&M or Powerball from the District and Maryland, can choose total annonymity if we desire or do the Press Conference....We can assign an Attorney to collect and deposit our winnings in Trust Funds, without publicizing our identities, and spend as care free as we like.....only "GREEDY UNCLE SAM" is the wizer.........


                    United States
                    Member #379
                    June 5, 2002
                    11296 Posts
                    Offline
                    Posted: December 4, 2005, 1:25 pm - IP Logged

                    Selling your annuity for a reduced sum (reduced from what you would have got if you'd taken a lump sum to start with, otherwise how could these companies make money) to one of these sleazy hack operations strikes me a fiscal irresponsibilty compounded by knuckleheaded tax and legal advice (if she got any advice at all). This is one case when I side with the government. Whatever you choose live with it, pay your taxes, live within your means, save your money, and be thankful you have your days free and are able to buy nice things and aren't grinding out another day in the office.

                    Now, what did she need $7.1 million all at once for anyway? To spend it all on lawyers?  Having an annuity and no stress or legal problems probably looks pretty good to her these days.

                     

                     

                    She was wrong to choose annuity. Back in 1997 the games with cash options required players to make the choice when they bought their ticket. The 60-day rule (adopted by all US lotteries except NY, TX, and MA Megabucks) was signed into law by President Clinton in 1998.

                    Patriot

                    VERY TRUE.....CASH N'CARRY....LOLOLOLOL...

                    I knew this subject/story would get you reved up........it simply added fuel to your argument that we should always, when offered the option, ask for the "LUMP SUM"........case closed........

                    libra:

                    At least you (in MD & DC) can win first and then decide. In my NY, the current home of the Clintons, you must choose cash or annuity when you PLAY Mega Millions, and cannot change your mind if you win. Of course, you can win a lump sum and purchase an annuity with it, but not versa vice.

                    LurkingHAPPY SATURDAY......CASH N'CARRY.......12/03

                    You hit the bullseye in that one.........another benefit is that winners of M&M or Powerball from the District and Maryland, can choose total annonymity if we desire or do the Press Conference....We can assign an Attorney to collect and deposit our winnings in Trust Funds, without publicizing our identities, and spend as care free as we like.....only "GREEDY UNCLE SAM" is the wizer.........

                    I don't think you can be anonymous in NY. I am part of a trust however.

                      Avatar
                      Bethesda, Maryland
                      United States
                      Member #16901
                      June 6, 2005
                      446 Posts
                      Offline
                      Posted: December 5, 2005, 1:54 pm - IP Logged

                      DECEMBER 5TH

                      HI CASH N'CARRY......Is the "TRUST" a very large group of people, do you all pool your money to buy the tickets?????Patriot

                        bellyache's avatar - 64x64a9wg

                        United States
                        Member #12618
                        March 18, 2005
                        2060 Posts
                        Offline
                        Posted: December 5, 2005, 2:19 pm - IP Logged

                        Either way, the real winner is always the Government.

                        They hit the jackpot every time someone wins.... 

                        Good thing Canadian (and other countries') winners don't have this problem.

                        I wish the US didn't tax the lottery.

                        Dance like no one is watching.

                          Avatar
                          Bethesda, Maryland
                          United States
                          Member #16901
                          June 6, 2005
                          446 Posts
                          Offline
                          Posted: December 5, 2005, 2:35 pm - IP Logged

                          Either way, the real winner is always the Government.

                          They hit the jackpot every time someone wins.... 

                          Good thing Canadian (and other countries') winners don't have this problem.

                          I wish the US didn't tax the lottery.

                          HI "BELLYACHE".......12/5

                          You know as many of us have previously posted, "UNCLE SAM" is greedy, and discovered a Gold Mine in the Lottery games accross the US......He can't lose, because whoever wins, makes him win as well.  It's too lucrative a gamble to not Tax.......