Lottery Prize

[Unregistered]

If I win a lottery prize at the end of the year, and for whatever reason do not produce the claim ticket till Jan of 2006, in what year do the taxes come due?

[Bees Knees]

When to report lottery winnings

You claim the income in the year the award is received. If you hold off claiming the ticket until January of 2006, then you report the income in 2006.

This is supported by a Circuit Court of Appeals case [Thomas v. United States, KTC 2000-273 (6th Cir. 2000)]. The court documents say:

“Plaintiff Roy Thomas purchased ten Ohio Super Lotto tickets at $1 each and selected the Cash Option method of payment. The following evening, plaintiff won the Super Lotto Jackpot prize pool when the six numbers on one of the plaintiffs tickets were drawn, The prize pool for a cash option winner was worth $8,890,597. On December 14, 1992, plaintiff presented his ticket to a lottery employee and received a receipt for a winning 6/6 Super Lotto ticket.”

“While the Ohio state lottery commission issued a news release on December 14, 1992, declaring plaintiff as the winner of the Super Lotto, it took approximately six weeks to process his claim. On January 4, 1993, the lottery produced a pay ticket with respect to plaintiff's claim. Prior to issuing a warrant to the plaintiff, the claims department sent a pay-list and summary voucher to the Office of Budget Management ["OBM"] for approval. The OBM confirmed that sufficient monies were available in the state lottery fund to pay the claim and transferred the summary to the office of the Auditor to prepare a warrant for the payment of the funds owed to the plaintiff. Plaintiff presented this warrant for payment to the National City Bank on January 28, 1993.”

“Plaintiffs filed joint income tax returns for 1992 and 1993 using the cash receipts and disbursements method of accounting. They reported the gross winnings on their lottery ticket on their 1993 tax return. On December 27, 1994, they filed an administrative claim for a refund contending that the income should have been reported in 1992. They acknowledged that if their claim was allowed they would be obligated to pay the tax in 1992 and that the taxes and interest due on their 1992 tax liability would be offset against their 1993 tax refund resulting in a total refund of $778,496. The IRS denied their claim.”

To sum things up, they originally reported the lottery winnings in the year they received the money (1993) rather than the year they won the lottery (1992). But for some reason which is not addressed in the court documents, it would have been more advantages to report it on their 1992 return, probably because of other income or deductions that put them in a lower tax bracket in 1992 than 1993. So they file for an amendment to try and claim it should have been reported in 1992, which would then net them $778,496 in additional tax refunds over additional taxes, penalties, and interest due.

The court ruled that the correct year to report the income was the year they received the prize, not the year they won the prize. The court said the following in its ruling:

“Although the plaintiffs are correct in saying that the owner of the winning lottery ticket had an absolute right to the award once the individual filed his claim, the issue before the court is whether the taxpayer had an absolute right to the award. Because the plaintiff taxpayers were not considered to be the owners of the winning lottery ticket until the state completed its verification process they did not have an absolute right to the award in 1992. The plaintiffs received no present financial benefit from the lottery award until 1993; therefore, they are not entitled to a refund based on the economic benefit doctrine.”