Greece woman wants sale of rights to be taxed as capital gain.
New York Lottery winner Shirley B. Prebola of Greece could end up a $1.3 million loser if the Internal Revenue Service has its way.
Prebola, also known as Shirley D. Begy, filed a petition asking the U.S. Tax Court here to overturn the IRS ruling that her 2000 sale of the remaining rights to her annual lottery payments was taxable as ordinary income instead of a long-term capital gain.
Prebola won $17.5 million playing Lotto on May 31, 1997, and opted for cash payments over 26 years. Investment companies often contact lottery winners and ask to purchase the rights to their future payments, giving the winner more cash upfront. If the winners sign away their rights, they receive a negotiated lump sum from the company, and the company receives the annual payments from the state.
Despite tax court findings in similar cases upholding IRS findings that such sales were taxable as income, Gerald W. Dibble, her Rochester tax attorney, held onto a glimmer of hope that the U.S. Court of Appeals for the Second Circuit would see it differently.
I personally feel they should be treated as capital gains, not ordinary income, Dibble said. What were doing is keeping her rights alive so if there is a ruling that it is capital gains, her rights are protected.
He said there is a possibility that the U.S. Supreme Court may dventually take the case, especially if two different appellate court circuits issue conflicting opinions, raising the possibility such tax cases would be treated differently in two different regions of the country.
The issue is a significant issue, he added. If theres a split in the circuits, the Supreme Court may take it. We filed the paperwork to keep it alive. At the time we filed, there was not a Second Circuit case.
Dibble said Prebola was advised by a New York law firm, which he declined to name, that the sale of her remaining rights to the lottery payments would qualify to be taxed at the lower long-term capital gains rate.
While her petition did not disclose the amount she received from the sale of her lottery rights, the IRS notice of deficiency noted that she reported a $7.1 million capital gain for 2000 on which a $1.46 million tax payment was made. The IRS ruled $2.77 million in ordinary income taxes were due, leaving a $1.3 million balance.
They (lottery winners who sell) are getting hit unnecessarily hard, Dibble said. If they spent the money, as some do, they could be in rougher shape than before they won. They might well be in a situation where they dont have the money.
Law bars the IRS from commenting on pending tax cases, a spokesman said.
The IRS notice was issued Dec. 4, and the agency has 60 days to file an answer to Prebolas March 8 petition. If the IRS and Prebola fail to negotiate a settlement, the case could go to trial before a tax court judge.