Question

Phred Phortunate won his state lotto 2 years ago. His lotto ticket was worth $10 million, which was payable in 20 annual installments of $500,000 each. Phred paid $1 for the winning ticket. The lotto in Phred's state does not allow winners to receive their payout in a lump sum. Phred wanted all the money now, so he assigned his future lotto winnings to an Unscrupulous Finance Company (UFC) for a discounted price of $4.5 million. Assignment of lotto winnings is permitted Phred's state lotto. Phred filed his tax return and reported the assignment ot the lotto winnings as a capital gain ($4.5 million - $1 basis) taxable at a 15% rate.

a.) List as many possible tax research issues you can to determine whether Phred correctly reported his lotto winnings.

b.) After completing your list of tax research issues, list the keywords you might use to construct an online tax research query.

Answer 1

Part a:

Over the years number of cases have come in the fore front where the winners of lottery tickets have wanted to report such winnings as capital gain to minimize the tax liability on such winning prize moneys. However, US tax courts have ruled that winning prize moneys in lotto will be taxed at individual income tax rate that to at the highest bracket of 39.6%. US tax courts have cited extensive precedents while disallowing the petition of number of lottery winners who pleaded that such winning prize moneys should be taxed as capital gain. The petitioners in Florida claimed that lottery should be treated as property and accordingly shall be taxed as capital gain. However, US tax courts have rejected the claims of the petitioners by stating that such income is ordinary income and should be taxed at individual income tax rates.

Thus, in this case the $4.5 million received by Phred Phortunate shall be taxed at individual income tax rate as ordinary income and not as capital gain. Thus, the tax treatment by Phred to treat the lottery winning as capital gain to minimize the tax liability is not correct as per the US tax court rulings in number of such cases in the past. Thus, Phred must pay tax on the amount receive by him as ordinary income.

Part b:

Following key words might be used to construct an online tax research query:

1. Lottery.
2. Winnings.
3. Tax.
4. Implications.
5. US
6. Tax
7. Court
8. Ruling
9. Liability