Academic journal article Journal of Accountancy

Waitress's Lottery Win Shared with Family Ruled Taxable Gift

Academic journal article Journal of Accountancy

Waitress's Lottery Win Shared with Family Ruled Taxable Gift

Article excerpt

In Dickerson, the IRS prevailed when the Tax Court ruled that a waitress's transfer of her winning lottery ticket to an S corporation with herself and family members as shareholders was a taxable gift.

In 1999, a regular customer at a Waffle House restaurant in Alabama where Tonda Lynn Dickerson worked occasionally gave Florida lottery tickets to her and four other employees as tips and gifts. The employees allegedly had an oral agreement that if any of them received a major winning ticket from the customer, they would all share the proceeds. However, when Dickerson received a ticket that turned out to be worth more than $10 million, all bets were off.

Dickerson did immediately decide to share her winnings with her parents and brother and sister and their spouses. Her father, Bobby Reece, learned from Florida lottery officials that the prize could be claimed only by a single entity He engaged a lawyer to set up an S corporation, 9 Mill Inc., with Dickerson and her husband as 49% shareholders and Dickerson's mother (Reece's wife), her brother and sister-in-law jointly, and sister and brother-in-law jointly each as 17% shareholders. The Dickersons and Reeces signed a claim form for the winnings on behalf of 9 Mill, opting for 30 annual installments of $354,000 each.

Meanwhile, a competing claim for the winnings had been filed in Alabama state court by the four other members of the Waffle House wait staff, each seeking 20% of the winnings, and the Alabama trial court ordered that all parties to the action refrain from any attempt to obtain payment until the dispute was resolved. That court's ruling in favor of the wait staff was soon overturned by the Alabama Supreme Court, which found that while Dickerson's co-workers had presented sufficient evidence to support a finding that an oral agreement existed, the agreement was unenforceable on public policy grounds and was void under Alabama law because it was "founded ... on a gambling consideration." The IRS became involved when

Dickerson failed to file a 1999 gift tax return for the $2,412,388 it said reflected the 51% interest of the other family members in the discounted fair market value of the ticket transferred to 9 Mill that year. The amount, the IRS said, was a taxable indirect gift to her family members as shareholders. …

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