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I won a car

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justalayman

Senior Member
s.

And the answer is the code says a person can not claim the prize not have it be income.
but by transferring the winnings to another party, OP took constructive possession of the prize, yes?

If they had simply refused the prize, they would have no control over it's disposal, and as such, no winnings reportable. The charity would then draw another winner (or whatever the rules allowed for)

I believe the issue becomes one of: was the winner known without presentation of the ticket. If so, the ticket had nothing to do with anything and held no value in itself. The prize was awarded to the winner as registered on the ticket.



If the ticket was not registered to a particular party, the validation of the ticket would be acceptance of who won the prize and if that were the case, the party picking up the vehicle would be considered to be the winner (although that could be arguable but I would believe generally accepted as such). I do not believe that was the situation here as the OP had even commented that their son (I believe) was actually to whom the ticket was registered and the OP convinced the charity to alter the name to the OP's.

gee, I wonder if that in itself is a problem. I would think it puts the son in the same position as the OP is currently. Hmm, altering the winner to reflect a different party so as to avoid tax liabilities for the original named party or reporting income to that party for what ever reason.

I think the OP's very first statement in the very first post actually provided the answer:

I won a car valued at 53,000.00. I sold the ticket to a person for 30,000.00.
I won a car.

then the OP gets the 1099 and only the value is what makes any difference. HW addressed that quite well.
 


I accept Justalayman's argument, and, tend to agree.

However, I don"t express an opinion as I don't know the answer more likely than not.
 

Hardman 2do w/o

Junior Member
I have to agree with the treatment that says:

1) Because OP has constructive receipt, OP has ordinary income to report in the amount of $53,000 (less the price paid for all tickets in that drawing).
-This gives OP basis in the Winning Ticket (WT) of $53,000.
-WT is a claim ticket for a car with a sticker price of $53,000 - like a gift certificate?
-It could also be viewed as an option to acquire the car for $0.

2) OP Sells WT for $30,000 to Buyer.
-OP has sales proceeds of $30,000 in an asset which had basis of $53,000.
-$23,000 ST capital loss results
*(not a great result unless OP has at least $20,000 of ST capital gains to offset)
-Buyer has basis in WT of $30,000
-Buyer uses WT to claim Car worth $53,000

Just thinking out loud here...Perhaps instead, OP could take the position that what they sold, WT, was the right to collect their ordinary income (the car they won). This would be analogous to selling interest coupons from a bond. That type of transaction would yield non-capital proceeds, so the loss generated would be ordinary, and therefore, deductible against current income. This treatment would result in the 1099 being issued to Buyer, who would report $23,000 ordinary income due to his $30,000 of basis in this income. Seems to me that the facts support this treatment -- the car dealer delivered the car to Buyer, whom they believed to be the winner of the car.

I also see in a secondary post from OP that OP paid for the ticket, but it had their son's name on it. There is a case to be made (supported by the documentation) that they made a gift to son of the purchase price of the ticket, and that this transaction is actually reportable on Son's tax return. (This would be helpful if Son is in a lower tax bracket than OP.)

I'll throw in one more wrinkle...

The idea of whether or not this was an arms-length sale has been discussed above with respect to the FMV. However, there's another issue here: Why would OP sell the ticket for less than the stated value of the prize? Is the buyer a related party? A "bargain sale" - one where the price is set below market value - is treated for gift tax purposes as a part-sale-part-gift transaction, with the bargain element treated as a gift to the buyer. If there was a deemed gift from OP to Buyer, then OP's $23,000 loss would not even be a ST cap. loss -- it would be a gift instead, and Buyer's basis in WT (and thereby in Car) would be the full $53,000. --Ouch!

Ok... I should really go do some work I'm going to get paid for now...
 

tranquility

Senior Member
Interesting theory. Before giving it you should probably distinguish the Supreme Court case, Tax Court rulings, regulations and revenue rulings already supplied, but, maybe, everyone else is wrong.

Arguendo, you are correct, let me disagree a bit on how things should work.

1. For the constructive receipt argument, please give a citation and argument. I don't disagree, but it is not entirely clear. (To me.)

2. Can a person take a capital loss on personal property? If they can (Can they?), for the sake of argument, since a person can only take $3k beyond gains and since the win is ordinary income, are you saying the first year the OP has income of $53K minus $3K and the ability to take $3k off his income per year for future years?
Just thinking out loud here...Perhaps instead, OP could take the position that what they sold, WT, was the right to collect their ordinary income (the car they won). This would be analogous to selling interest coupons from a bond. That type of transaction would yield non-capital proceeds, so the loss generated would be ordinary, and therefore, deductible against current income. This treatment would result in the 1099 being issued to Buyer, who would report $23,000 ordinary income due to his $30,000 of basis in this income. Seems to me that the facts support this treatment -- the car dealer delivered the car to Buyer, whom they believed to be the winner of the car.
Huh? Maybe it's lollipops and gingerbread too. While there are aspects here which are a bit unusual, the basics have shown up and have been decided before. We don't need to invent things. (See Supreme Court cite, revenue rulings, Tax Court memorandums and code and regulations.)

The idea of whether or not this was an arms-length sale has been discussed above with respect to the FMV. However, there's another issue here: Why would OP sell the ticket for less than the stated value of the prize? Is the buyer a related party? A "bargain sale" - one where the price is set below market value - is treated for gift tax purposes as a part-sale-part-gift transaction, with the bargain element treated as a gift to the buyer. If there was a deemed gift from OP to Buyer, then OP's $23,000 loss would not even be a ST cap. loss -- it would be a gift instead, and Buyer's basis in WT (and thereby in Car) would be the full $53,000. --Ouch!
If it is not an arm's length sale, things are different. Yet, the factors the IRS uses to determine if it is an arm's length sale have already been given:
The cost or selling price is a good indication
the property’s value if:
• The purchase or sale took place close to
the valuation date in an open market,
• The purchase or sale was at
“arm’s-length,”
• The buyer and seller knew all relevant
facts,
• The buyer and seller did not have to act,
and
• The market did not change between the
date of purchase or sale and the valuation
date.
Since nothing seems to apply except "arm's length", do you have a citation as to how this sale was not at arms length? Why is this a gift? Say the OP's best friend was the one who bought the car, would that be arm's length? (Careful.)
 

Hardman 2do w/o

Junior Member
Interesting theory. Before giving it you should probably distinguish the Supreme Court case, Tax Court rulings, regulations and revenue rulings already supplied, but, maybe, everyone else is wrong.
Kinda harsh for someone named "Tranquility"! I was simply interested in the discussion, and thought I would add my opinion to the mix. It is based on years of experience in tax practice, and my level of familiarity with this area of the law. I chose not to take the time to cite chapter and verse, since I was responding in the middle of my work day. However, if that's what it takes for my comments to be taken seriously...

1. For the constructive receipt argument, please give a citation and argument. I don't disagree, but it is not entirely clear. (To me.)
See two cases regarding income recognition from lottery/sweepstakes winnings:
If assignment of an interest in a lottery ticket is made before it is determined that the ticket is a winning ticket, the assigning taxpayer is not taxed on the portion of the winnings assigned. (See . Chelius v Commr, 17 TCM 121)

If the assignment is made after it is known that the ticket is a winning ticket, the assignor remains taxable on the winnings. (See H. Braunstein v Commr, 21 TCM 1132). It reaches this conclusion by reference to "anticipatory assignment of a fixed right to income", as discussed in Helvering v. Horst [40-2 USTC ¶9787], 311 US 112 (1940).

2. Can a person take a capital loss on personal property? If they can (Can they?), for the sake of argument, since a person can only take $3k beyond gains and since the win is ordinary income, are you saying the first year the OP has income of $53K minus $3K and the ability to take $3k off his income per year for future years?
That's what I was getting at. It's not a good result, but I think it's a moot point, since I did a bit more digging. The proceeds of the sale of an interest in a lottery ticket have been found in several court cases (e.g.: G. Laterra v Commr, CA-3, 2006-1 USTC ¶50,165; J.M. Maginnis v US, CA-9, 2004-1 USTC 50,149) to lead to ordinary income, rather than capital gains.


Since nothing seems to apply except "arm's length", do you have a citation as to how this sale was not at arms length? Why is this a gift? Say the OP's best friend was the one who bought the car, would that be arm's length? (Careful.)
IRC Section 2512(b) provides that if property is transferred for less than adequate and full consideration in money or money's worth, the excess of the value of the transferred property over the value of the consideration received is a gift for federal gift tax purposes.

Treasury Reg. Sec. 25.2512-8 provide that a gift includes "sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth for the consideration given therefor."

Under Treasury Reg. Sec. 25.2512-8, a transfer of property for less than adequate and full consideration is not considered a taxable gift if the transfer is made in the ordinary course of business. This exception is not limited to regularly recurring business transactions with customers, but business-related transfers qualify for this exception only if they are:
  • bona fide
  • at arm's length, AND
  • free from donative intent.

I have no doubt that this transaction meets the "bona fide" test, but assuming both parties meet all of the "arms length" tests you quote, I think the apparent disparity in values exchanged suggests that donative intent played some part in establishing the sale price. However, I cannot offer a judgement on this point since we don't have all the facts.

Finally, on the subject of the value of the car, Treasury Reg. Sec. 25.2512-1 reads as follows:
"Section 2512 provides that if a gift is made in property, its value at the date of the gift shall be considered the amount of the gift. The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. The value of a particular kind of property is not the price that a forced sale of the property would produce. Nor is the fair market value of an item of property the sale price in a market other than that in which such item is most commonly sold to the public, taking into account, the location of the item wherever appropriate. Thus, in the case of an item of property made the subject of a gift, which is generally obtained by the public in the retail market, the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail. For example, the value of an automobile (an article generally obtained by the public in the retail market) which is the subject of a gift, is the price for which an automobile of the same or approximately the same description, make, model, age, condition, etc., could be purchased by a member of the general public and not the price for which the particular automobile of the donor would be purchased by a dealer in used automobiles."​

So at least for purposes of determining whether or not there was a gift element here, the sticker price of the car (or local market data showing the actual price at which such vehicles with similar features usually sell) is going to set the "value" which has to be balanced with the consideration received by the transferor in order to avoid it being treated as a gift.

Since I am a tax professional, I should add the following Circular 230 disclosure: Any tax advice in this communication is not intended to be a "covered opinion" as described under IRS Circular 230. It is therefore not intended to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on a taxpayer.
 

tranquility

Senior Member
I like the argument on constructive receipt. Although I haven't read the citations, I'll go along with them.

The part about the capital gain or ordinary income (Maginnis) has also been upheld more recently if I recall. I agree we cannot change what is ordinary income to capital gain by "selling" our future rights. Those cases had to do with income streams from the future. Here, we're talking about selling a car.

Of course, the FMV is key. You provided ways of estimating it when it is a gift. If the OP kept the car or there wasn't a sale, we might go there. Here we have a sale. Absent evidence it was not at arm's length, we have to deal with the Supreme Court. Did the OP have a donative intent? Did he get a business deal, or some other bartering type value from the sale?

Or, did we have a guy who won a car he didn't need and looked to immediately sell it? If this is what happened, the IRS is not going to go after him for the difference.

(Circular 230? Really?)
 

tecate

Member
Stick around Hardman. I take your comments seriously. You've shown your mettle; welcome to the board.

Every so often a great debate happens, and as with all debates, it's rare for everyone to agree. Sometimes the fur flies too. But its still fun when it happens. And we all add to our knowledge.
 

tranquility

Senior Member
Just out of curiosity, if we talk of capital gain treatment, why would the basis be $53K?

Other alternatives:

1. Cost of winning ticket.
2. Cost of all gaming done in the year to offset ordinary income. (Not really "basis".)
3. Cost of winning ticket plus taxes paid.

That was just off the top of my head without research. I think the one I like is #3. Say we did use sticker price as income. Wouldn't our guy get the $53k in ordinary income (other gaming income offset?) plus some capital gain on the "profit" from the sale?

Obviously, the IRS is never upset if it gets more than it should. There is no professional risk there. But, the guy really has $30k in income (Less the cost of the ticket.), doesn't he? Again, absent other factors regarding the sale we know nothing about. Do we get to have a Miscellaneous deduction up to the amount of income for other gaming losses?
 
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Hardman 2do w/o

Junior Member
Basis is $53,000 because that's the combination of the cost of the ticket and the income that is taxed as gambling income. This basis applies whether this is a capital asset, or not.

Gain on disposition is calculated as the proceeds from the sale ($30,000) minus the basis in the asset sold ($53,000) -- a loss of $23,000.

The purchaser's basis is the price he paid for the asset ($30,000).

There is a misc. itemized deduction (not subject to the 2% AGI limitation) for all gambling losses up to the amount of the gambling income recognized for the year. The regulations require documentation of any gambling losses claimed as deductions.
 

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