Lotto fever recently spread throughout California when the Mega Millions lottery jackpot reached a high of $656 million – the world’s largest jackpot to date.  Unfortunately, no one in California won the big prize.  When we experience high lottery jackpots like this one, I sometimes wonder what happens to the lucky winners after they claim their winnings.  According to a recent U.S. Tax Court case, one lucky winner found herself in court.

The U.S.Tax Court, in the case Dickerson v. Commissioner of the Internal Revenue, T. C. Memo. 2012-60, gave us a glimpse at the life of lottery winner Tonda Dickerson, a former waitress of the Waffle House in Grand Bay, Alabama.  In March 1999, Tonda received a winning Florida state lotto ticket as a gift from a Waffle House customer.  Tonda and her family,  who had a self-reported history of sharing among family members, considered any lottery winnings of any one family member to be the winnings of all of the family members.  Accordingly, after Tonda’s family discovered that Tonda had a winning ticket, they created an S-corporation to receive the family’s lottery winnings.

The Internal Revenue Service (IRS) disagreed with Tonda’s characterization of the lottery winnings as “family winnings” and took the position that Tonda made taxable gifts of the lottery winnings to her family members when she authorized the lottery winnings to be contributed to the newly formed family S-corporation.  As such, the IRS claimed that Tonda owed $771,580 in gift taxes.  After considering the facts presented by Tonda and her family on the one hand and the IRS on the other, the U.S. Tax Court held that there was not sufficient evidence to prove that Tonda’s family had a “pre-existing oral partnership agreement” that the lottery winnings won by one family member would be shared among the entire family.  Tonda, after approximately 12 years in litigation, lost her case and had to pay $771,580 in gift taxes to the IRS.

Tonda’s family would have been wise to follow the winning example set by the Winkler family.  In the case Estate of Winkler v. Commissioner, T. C. Memo 1997-4, we learn about Mr. and Mrs. Winkler and their five children.  The Winklers were a close knit family who gathered together almost every Sunday.  In 1989,  Mr. Winkler was very sick.  Various family members would regularly drive him to a medical clinic for his treatments.  On these trips, the family member driving Mr. Winkler would stop for gas and purchase Lotto tickets.  The driver would give the tickets to Mr. Winkler.  Mr. Winkler would then give the tickets to Mrs. Winkler, who would store the tickets in a glass bowl in a china cabinet where they stored their important family documents and keepsakes.

The Winker family members would refer to the Lotto tickets kept in the glass bowl as the “family tickets.”  During family gatherings, the family members would discuss what they would do with the winnings if they won as a way to steer the topic away from Mr. Winkler’s illness.  One day, Mrs. Winkler purchased a winning Lotto ticket.  When she discovered that she had a winning ticket, she contacted all of the family members and asked them to come to her home to meet with the accountant and attorney to discuss their winnings.  The U.S. Tax Court held in favor of the Winkler family and found that the facts of their case supported the assertion that they had a pre-existing oral partnership agreement to share the lottery winnings.  Unlike Tonda Dickerson, the Winkler family did not have to pay any gift taxes.

What can you take from these cases?  Essentially, if you want the proceeds of your winning lottery ticket to be considered owned by your family members, you need to create sufficient facts to prove that your family entered into a pre-existing oral partnership agreement to share the lottery proceeds.  The Winklers purchased their Lotto tickets on a regular basis, deposited the family tickets in a central location and periodically talked about winning and sharing the proceeds.  After reading these cases and purchasing lottery tickets this past weekend, I deposited the tickets in a box with a “family tickets” label affixed to it and promptly sent emails to my parents and siblings letting them know that I had purchased tickets in accordance with our oral partnership agreement to share the proceeds.  When I win, I’ll let you know if this works!

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com