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Uncle Sam Wins Your Lottery

Topic closed. 5 replies. Last post 11 years ago by sirbrad.

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United States
Member #14047
April 20, 2005
579 Posts
Posted: November 27, 2005, 4:14 pm - IP Logged

This topic is of interest to all Lottery Post members, whether you are for cash (lump sum) or Annuity.  Todays Washington Post (go to www.washingtonpost.com) in the business section under the Cash Flow Subject/title.  Several issues come up in this article, one is the number of winners who opt for annuity and then in a year or two sell their annual payments to a rip off but legal entity who gets a big chunk of their winnings.  The woman example won $17.5 in 26 payments.  She sold her annuity payments for $7.1 in 1997.  Her tax/legal people advised her to file for long term capital gains and the IRS denied this and required another cut of $1.3 from her.  She lost her court case. 

These issues bother me. 


1. The number of people who opt for annuity and then a year or two later they sell and lose money.  They then have to endure another cut of tax money.  This is so unwise.  Its giving money to these companies and more to uncle sam.

2. There have been as quoted in the article more than 6 or better cases like this in recent years. 

I am for lump sum, but I offer this topic and article because after all the humor of "I'm for lump, or I'm for annuity," the real issue is many winners are losing out the back door.  To be paying Uncle Sam another lump sum payment after winning a jackpot is a bad business decision.  Giving millions to a company that is on the sidelines waiting to profit off of the Annuity Winners is an even worst decision.  Wake up and smell the coffee and take the lump sum payment.  

    United States
    Member #14047
    April 20, 2005
    579 Posts
    Posted: November 27, 2005, 4:27 pm - IP Logged

    Below is the article I reference. 

    Uncle Sam Wins Your Lottery
    By Albert B. Crenshaw

    Sunday, November 27, 2005; Page F02
    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.

      bellyache's avatar - 64x64a9wg

      United States
      Member #12618
      March 18, 2005
      2060 Posts
      Posted: November 27, 2005, 4:29 pm - IP Logged

      Well if someone chooses annuity and then they change their mind and decide that they want the money in a lump sum and they go to one of those companies to get it, then I don't feel a bit sorry for them. They had the choice to get the lump sum to begin with and wouldn't have lost so much money doing so at a later time. People really need to do their research when choosing lump or cash.

      Dance like no one is watching.

        United States
        Member #5565
        July 11, 2004
        260 Posts
        Posted: November 27, 2005, 4:36 pm - IP Logged

        She could've reported it as short-term capital gain with a basis of 0, which will be taxed the same as ordinary income.  She had already received 3 or 4 annual payments, and then she received a financial settlement from this firm for the present value of the remaining payments less some fee to the firm.  It sounds like a fair deal with the funding firm..she received $ 7.1M when the remaining annuity was probably around $ 15 M to $ 16 M.

          Badger's avatar - adu50016 NorthAmericanBadger.jpg
          United States
          Member #1303
          March 27, 2003
          1508 Posts
          Posted: November 27, 2005, 5:57 pm - IP Logged

          What gripes me is that the money used to buy the tickets has already been taxed by all levels of govt before it was spent on the ticket.  Then, no matter who wins, the govt has done zero work for any share of it. Yet they take half of it away again for their coffers, simply because they can get away with it. Then they spend it on crap....never ask if they can take it, never ask if you agree that spending it on such things as the "reproduction cycle of the tse-tse fly" is a good way to burn up a couple hundred grand. But since it is "pork" for some elected official, then it is considered "worthwhile" by the elected officials.

          But the people who  have it taken away from them after they have won it are never even considered. Most of those people who do win would do more good for the economy by spending it, investing it than what the elected officials end up spending it on....


          How can you tell if a politician is lying?

          Answer: His lips are moving.

            sirbrad's avatar - Lottery-062.jpg
            United States
            Member #22983
            October 6, 2005
            2226 Posts
            Posted: November 27, 2005, 7:42 pm - IP Logged

            Uncle Sam has always been the worst crook known to man.