Winning the lottery can be a huge once in a life time event. Unfortunately many have little to no plan on how to properly deal this event. Here there was some planning but not nearly enough.
In a recent court case a lotto winner who generously gave part of her prize to her family isn’t so lucky from a tax perspective. The transfer is subject to gift tax, according to the Tax Court.
A waitress received a winning lottery ticket from a customer. Her fellow employees expected that the jackpot would be split among all the servers, but she didn’t share with them.
She formed an S corporation (wrong entity) to accept the $10-million prize and kept a 49% stake, dividing up the rest among her parents and siblings. Meanwhile, her coworkers sued, claiming they were entitled to a portion of the proceeds.
On audit, the Service argued that she made a gift to her family of 51% of the prize. The Tax Court agreed with IRS, but approved a discount to reflect the coworkers’ claims.
Dickerson, TC Memo. 2012-60