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Friday, March 16, 2012

Tax Exam Question: The 'Lottery Louse'

New York Times, Worker Who Hid Lottery Win Must Share $38.5 Million Prize:

There were some dark twists in the plot line, inevitable, perhaps, when friends fight over $38.5 million in lottery winnings.

The friends, construction workers from New Jersey, said they had pooled their money for lottery tickets for years. Five of them relied on a member of their little group, Americo Lopes, to buy the tickets. In November 2009, he collected their money and bought a Mega Millions ticket that won, but he told no one except lottery officials. He cashed in the ticket as if it were his alone. The lottery deducted taxes and sent Mr. Lopes a check for $17,433,966. ...

On Wednesday, a jury in Union County ordered Mr. Lopes to share the winnings with the five former co-workers. ...

Eric Kahn, a lawyer for Mr. Lopes’s former colleagues, said some details had to be worked out, like how much each man would receive and how much each might owe in taxes. “The lottery paid him,” Mr. Kahn said, referring to Mr. Lopes, “and the lottery withheld a chunk of taxes. We’ve got to work on the taxes,” he said.

Exam question: Explain the 2009 and 2012 tax consequences of these events to Mr. Lopes. (Hat Tip: Les Book.)

Update:  David Elkins (SMU) passed along the remarkably similar article by Dave Barry, The Lavender Hill Mob Takes On The IRS

http://taxprof.typepad.com/taxprof_blog/2012/03/tax-exam-.html

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Comments

Most likely answer -- the entire lottery prize is taxable to Lopes for 2009, but he may claim a deduction for restitution when he gives his coworkers their due share in 2012, and they must pay tax for 2012 on their shares. The 2012 deduction will be small comfort to Lopes, as he probably gets no relief under IRC 1341 or an NOL carryback to 2009 (only 2 years back nowadays). And the coworkers who get their belated shares of the prize from Lopes in 2012 may have an uphill fight persuading the IRS to credit against their 2012 tax a part of the tax withheld in 2009 from the payment to Lopes. It's a procedural mess. That's not to say Lopes and his erstwhile coworkers could not resolve the tax implications without great cost and effort, but they would have to act in concert and find someone at the IRS who is more open to the equities than the strict letter of the tax law.

Maybe an enterprising tax LLM student could figure out whether Lopes and his co-venturers could attain a better result by filing a delinquent partnership return for 2009 and seeing where those chips fall.


Posted by: Jake | Mar 16, 2012 8:29:54 PM