Academic journal article Journal of Accountancy

Court May Not Stop Withholding on Australian Lottery Winners

Academic journal article Journal of Accountancy

Court May Not Stop Withholding on Australian Lottery Winners

Article excerpt

The International Lotto Fund of Australia participates in lottery games worldwide on a large scale. The fund won a lottery jackpot prize of more than $27 million from the Virginia state lottery. The state lottery department said it would withhold 30% of each prize payment as federal income tax and 4% of each payment as Virginia state income tax.

The fund claimed it was exempt from federal withholding under the U.S.-Australia income tax treaty. It submitted a properly completed form 1001--which allows foreign entities to claim a treaty-based exemption from withholding--to the lottery department.

Under IRC sections 881 and 1442, payers of certain U.S.- sourced income must withhold 30% of payments to nonresident alien individuals and foreign corporations. The fund's claim for exemption was supported by IRC section 894(a), under which withholding is not required if the payee is exempt under a treaty.

The lottery department continued to withhold despite the fund's exemption claim, and the fund asked the federal district court for an injunction ordering the state not to withhold. …

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