In Dickerson, the IRS prevailed when the Tax Court ruled that a waitress’s transfer of her winning lottery ticket to an S corporation with herself and family members as shareholders was a taxable gift.
In 1999, a regular customer at a Waffle House restaurant in Alabama
where Tonda Lynn Dickerson worked occasionally gave Florida lottery
tickets to her and four other employees as tips and gifts. The
employees allegedly had an oral agreement that if any of them received
a major winning ticket from the customer, they would all share the
proceeds. However, when Dickerson received a ticket that turned out to
be worth more than $10 million, all bets were
Dickerson did immediately decide to share her winnings with her parents and brother and sister and their spouses. Her father, Bobby Reece, learned from Florida lottery officials that the prize could be claimed only by a single entity. He engaged a lawyer to set up an S corporation, 9 Mill Inc., with Dickerson and her husband as 49% shareholders and Dickerson’s mother (Reece’s wife), her brother and sister-in-law jointly, and sister and brother-in-law jointly each as 17% shareholders. The Dickersons and Reeces signed a claim form for the winnings on behalf of 9 Mill, opting for 30 annual installments of $354,000 each.
Meanwhile, a competing claim for the winnings had been filed in Alabama state court by the four other members of the Waffle House wait staff, each seeking 20% of the winnings, and the Alabama trial court ordered that all parties to the action refrain from any attempt to obtain payment until the dispute was resolved. That court’s ruling in favor of the wait staff was soon overturned by the Alabama Supreme Court, which found that while Dickerson’s co-workers had presented sufficient evidence to support a finding that an oral agreement existed, the agreement was unenforceable on public policy grounds and was void under Alabama law because it was “founded … on a gambling consideration.”
The IRS became involved when Dickerson failed to file a 1999 gift tax return for the $2,412,388 it said reflected the 51% interest of the other family members in the discounted fair market value of the ticket transferred to 9 Mill that year. The amount, the IRS said, was a taxable indirect gift to her family members as shareholders. The IRS determined a gift tax deficiency of $771,570.
In the Tax Court, Dickerson argued that there was no gift because the transfer had been made pursuant to a contract among the family members to share the winnings. Like the wait staff, Dickerson’s family members had occasionally talked, without specifics, of sharing any such good fortune. The family had a history of sharing: They had once spent an $80 lottery win on a family dinner, and Reece had subdivided a small plot of land into home lots for the four couples. Reece also gave his children money he saved from a travel per diem.
Despite that evidence, and consistent with the state court ruling with respect to the Waffle House employees’ claim, the Tax Court determined that while the family may have had a long-time offhand understanding to share any “substantial winnings,” they had never discussed any terms, obligations, or percentages prior to the Dickerson win. They had no pattern of contributing to a pool equally or any other prearranged percentage; therefore, the court held, there was no contract. Even if there had been one, the Tax Court held—like the state court—the agreement to form a corporation was void under Alabama’s anti-gambling statute. Likewise, the court denied Dickerson’s alternate claim that the family’s understanding constituted a partnership that was the true owner of the winnings.
The court, did, however, allow a 67% discount in the value of the 80% of the lottery winnings that could be subject to further legal claims by Dickerson’s former co-workers.
- Dickerson, T.C. Memo. 2012-60
By Laura Jean Kreissl, Ph.D., Pickens Assistant Professor of Accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.