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.