Most people fantasize about what they would do if they won a multimillion dollar lottery. Hopefully part of that fantasy is to give back to parents or close relatives who have been there for them. What most people don’t realize is that they can get slapped by the IRS with a considerable gift tax as a result of this generous gesture. In a Tax Court case this is precisely what played out.
Tonda Dickerson won a lottery prize of over $10 million at the Waffle House in Grand Bay, Alabama where she worked as a waitress. She immediately decided to share her winnings with her family. Her father learned from lottery officials that the prize could only be claimed by a single entity. He engaged a lawyer to set up an S corporation with all the family members as shareholders. The IRS became involved when Dickerson failed to file a gift tax return in 1999, as it deemed the money distributed to her family members a taxable indirect gift. In the Tax Court, Dickerson argued that there was no gift, as there had been an implied contract. She explained that the family had occasionally talked, without specifics, of sharing any such good fortune. The family had a history of sharing, she alleged, as they had once used a winning $80 lottery ticket on a family dinner.
The Court ruled against Dickerson because there had been no contract in place, as the family had not discussed any terms, obligations, or percentages prior to Dickerson’s win. Therein lies the key to avoiding this gift tax headache – put your lottery winning plans in writing beforehand. Then all you have left to do is win the lottery. Good luck!