It’s fun to think about
winning the lottery
There is a (former) waitress
in Grand Bay, Alabama who did. She worked at a Waffle House. Enter Edward Seward,
a regular at the restaurant. Seward liked the lottery. As Alabama did not have
a lottery, he would travel to Florida to buy tickets. He also liked giving away
the lottery tickets to the waitresses at the Waffle House. Our protagonist –
Tonda Lynn Dickerson – had an agreement with four other waitresses that – if
they ever won – they would share the winnings equally.
Would you know that the lottery ship docked, and Tonda Lynn had the winning ticket? The winnings were more than $9 million if paid out over 30 years, and over $5 million if paid in lump sum. First thing Tonda did was quit her job.
Tonda Lynn took the matter to
her dad – Bobby Reece. Turns out her family was quite close and had talked
about sharing lottery winnings if ever anyone won. Bobby seemed the most
invested in the lottery discussion. Johnny Reece - the brother - was not so
much into it.
Bobby contacted Louisa
Warren, the general counsel for the Florida Lottery Commission. Bobby explained
the family understanding about the lottery. She told Bobby:
Don’t
sign that ticket, period.”
She recommended that they form an entity to
claim the winnings.
Enter an attorney and an S
Corporation named 9 Mill, Inc.
NOTE:
Get it?
Bobby sat down at the table
and decided the ownership percentages while Tonda Lynn and her husband went car
shopping. Turns out that Tonda and James (the husband) owned 49% of 9 Mill,
Inc.
OBSERVATION:
Bobby seems to have an intuitive grasp of tax issues.
Bobby and Mrs. Reece and
James went to Florida to claim the ticket. They decided to take a 30-year payout
of $354,000 per year.
... and they were notified of
a competing claim against the winnings.
Remember the other waitresses
at the Waffle House? They lawyered up. Their attorney filed suit in the Circuit
Court of Mobile County, claiming that his clients were entitled to 80% of the
winnings. The waitresses had an agreement. They also had a witness – Mr.
Seward – who started the whole thing by giving Tonda Lynn the lottery ticket.
Tonda seemed to have
forgotten any agreement, any Waffle House, any other waitresses. She had bought
the ticket herself, it seems. There was a small problem with that, however. The
tickets were sequentially numbered at the bottom, and her ticket – number 18 –
was missing
The Circuit Court entered an
order saying that the other four waitresses were right and that Tonda Lynn had
to part with 80%.
Well, 9 Mill, Inc was not
going to stand for that. They countersued, and the case went to the Alabama
Supreme Court. The Supreme Court overturned the Circuit Court.
Tonda Lynn was back in the
money, but not for the reason that you may think. The Court agreed that there
was an agreement between the five waitresses, but the Court also pointed out
that it could not enforce that agreement on public policy grounds. Alabama
could not enforce a contract based on gambling. Gambling was not allowed in
Alabama.
I suspect that Tonda Lynn can
never go back to that Waffle House.
Not too long after, the IRS
contacted Tonda Lynn. The IRS wanted its gift tax – approximately $770,000.
Tonda Lynn had a lottery
ticket. The winnings went into an entity
of which she and her husband owned 49%. What happened to the other 51%?
According to the IRS, Tonda Lynn must have gifted it.
You have to admit, they have
a point.
Now Tonda Lynn and the IRS go
to Court. She presents two arguments:
(1)
No gift occurred
because at the time of transfer there existed an enforceable contract under
Alabama law.
(2)
Alternatively,
she and her family were all members of an existing partnership that was the
true owner of the lottery ticket.
Let’s address this in reverse
order.
The Court noted that the
partnership, if one existed, was an odd partnership because it did not observe
the formalities of a business activity. Ownership had never been spelled out,
for example. The members were not required to contribute to the partnership or to
buy lottery tickets regularly. A family member did not even know if another
member bought a lottery ticket. There may have been an understanding, but that
understanding did not rise to the level of an”activity” which could be housed in
an entity.
Additionally, Tonda did not
buy the ticket. It was given to Tonda, who would still have to explain how the
ticket got into the entity.
On the first argument the
Court reminded Tonda that there could have been no enforceable contract. Alabama did not recognize gambling.
NOTE: Odd that Tonda Lynn would forget this, as this
is the same reason Tonda won her case against the other waitresses. Short
memory, I suppose.
Tonda Lynn owed gift tax.
The story is not done,
though. There was one more issue before the court.
It turns out that the delay
in cashing the winning ticket was a tax boon to Tonda, as it allowed time for
the other waitresses to submit their claim. Had they not, then Tonda would have
owed gift tax of approximately $770,000. The claim introduced uncertainty about
the value of the gift. What would an independent party pay for that ticket at
that moment, knowing there was a cloud, the resolution of which could mean forfeiture
of 80% of the winnings?
The Court discounted the gift
by more than two-thirds.
It was Tonda Lynn’s only
victory with the IRS.
How did it turn out for Tonda
Lynn? Her husband divorced her. He then supposedly kidnapped her. She later declared Chapter 13 bankruptcy.
Do you still want to win the
lottery?
