Avoiding Lottery Taxes

Taxes cannot be avoided by donating lottery winnings to a church.

Can a church member avoid being taxed on lottery winnings by assigning them to his church?

A recent IRS ruling clearly indicates that the answer is no. A husband and wife won a large lottery jackpot. They then decided to transfer a substantial portion of their winnings to three other individuals.

The arrangement was to be reflected in an irrevocable written agreement requiring the husband and wife to collect the lottery proceeds and then promptly pay the "gift" portion to the three other individuals. The IRS ruled that the husband and wife would be taxed on the full amount of the lottery winnings, even the portion that they attempted to give away.

The IRS noted that the income tax regulations require income to be taxed that is either actually or constructively received. The income tax regulations specify that "income, although not actually reduced to the taxpayer's possession, is constructively received in the taxable year during which it is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time, or so that the taxpayer could have drawn upon it during the taxable year if notice of intention to withdraw had been given."

According to this language, a taxpayer who receives a lottery prize is taxable on it even if he or she attempts to assign it or give it away to another person or to a charity. This is the conclusion reached by the IRS. Since lottery winners have the right to receive the full amount of the prize at their request, they cannot avoid taxes on the prize by an attempt to transfer some or all of their prize to another person or to a charity.

Private Letter Ruling 9022015.

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