A tax on people who are bad at math.
That’s the only situation where I bought into a lottery. The only other time I “bought” a ticket was when I lived in MA and the lottery was new. They sent out coupons for a free lottery ticket and I used it.
I believe that if you die before the annuity payments end, the estate taxes will be due immediately (i.e., not as the payments are made annually) on the present value of the remaining amount, so that the estate or heir may need to scramble to get the money together to pay that bill.
Wouldn’t the $26M paid for the tickets count as a business expense? They should only have to pay taxes on the net profits, not the entirety of the win.
And if they split the winnings and end up with a loss, they should be able to claim a capital loss and apply that against other taxable gains–which softens the blow a bit.
I doubt the tickets would be a capital expense as opposed to an ordinary expense. Now would the win be a capital gain. It’d be ordinary income.
But net of that quibble you’re surely correct that under business accounting rules the expense of buying all the tickets would be a reduction of the taxable profit of the whole enterprise.
Even if we try to do the tax accounting under the rules for individual people and gambling winnings / losings, the same point applies. The price of the tickets is a legit deduction from the winnings.
When they file the return they will only pay tax on the net profit but 24% is going to be withheld
Maybe if multiple people were involved and they incorporated as a business - but an individual can only deduct gambling losses up to the amount of winnings on their Federal taxes. (and only if they itemize ,and I’m sure someone who won millions would although that screwed me one year*) So if I gambled $10K this year, and won $2500, I can deduct only the $2500 that I lost. Gambling winnings are ordinary income, so I doubt that losses would be a capital loss.
* My husband and I won around 20K but even our losses didn’t bring our itemized deduction high enough to be worth not taking the standard deduction. So we paid taxes on all the winnings
From the OP, it’s clear that they are–it’s a business named Colossus Bets that specializes in bet pooling.
But why? Obviously in the case of an individual, almost the entirety of the win is a gain, and so essentially the whole amount is subject to withholding. But a business can certainly argue that they should only have to pay taxes on the gains, and can easily demonstrate that their expenses were substantial.
You and LSLGuy are probably right that this isn’t a capital loss, though.
How can you prove how much money you gambled?
Say I won $5,000 last year gambling (I don’t gamble, just an example). How does the government know if I spent $500 or $50,000 to win that?
Like they know anything else about a personal income tax return. You must keep receipts (or a contemporaneous detailed journal) to document all your deductible expenses. If you don’t do that, or don’t do that to the IRS’s satisfaction, your deductions will be disallowed upon audit.
Of course if you aren’t audited, then you can claim whatever cockamamie numbers you want to make up and you’ll get away with it.
See, it’s gambles all the way down. 
Variety of ways - I saved my losing lottery tickets, I kept detailed records of playing cards/slots at the casino which matches up with the win/loss records casinos keep. I keep tickets from the track or I bet using an app that keeps records etc. Remember, you don’t have to actually prove anything until/unless you get audited - it’s not like you send the proof in with the return. I’m not suggesting that anyone cheat - just that you aren’t likely to have any trouble if you are off a few hundred dollars. Maybe you might have to pay taxes/interest on those few hundred dollars.
Whether it’s a business or an individual, there’s no way for the entity withholding taxes to know how much of the winnings are a gain at the point where taxes are withheld. Sure, if I buy one individual ticket or even one hundred tickets and win millions nearly all of that will probably be profit. But an individual can use the same strategy as Colosseus Bets if they have $26 million dollars to spend on tickets for a very good chance of winning 95 million and an even better chance of making a profit.
The business can just tell them. I’m just a salaried schlub and I can tell my company how much tax to withhold if I think the defaults are inaccurate for my particular situation. There must be some mechanism for doing the same here.
There’s no way to characterize buying a $1 ticket and winning $95M as anything but gambling. But spending $26M on a guaranteed win looks much more like a normal business expense, albeit with some risk. Especially if it’s been organized from the beginning as a business that specializes in this kind of thing. I’m sure they put together slick prospectuses for prospective investors with all the details, just like any other investment opportunity.
Florida got people to okay their lottery by claiming the proceeds would go to education. The state legislature then cut the amount they spent on education by the same amount as the lottery was bringing in. So no real gain. The lottery money, for all practical purposes, was being spent elsewhere.
Georgia knew that people wouldn’t go along with that plan so they started new programs, such as the HOPE scholarship (subsidizing college tuition for Georgia HS grads).
One thing that can cause a problem for such outfits like the Texas ticket buying combine, is what happens if there’s a 2nd outfit also doing the same? Raising significantly the chance of a split jackpot.
Agree with your point writ large.
The lottery is set up for ordinary individuals to be ticket buyers and hence winners. The IRS has regulations about how gambling houses must withhold taxes from winners. With various exceptions for special circumstances, such as non-US visitors to US casinos. Which exceptions any given gambling house may or may not bother to abide by. Safer and simpler for them to tell customers “Take it up w the IRS” as they chop 24% off the top & send it off to Washington.
Meanwhile, businesses do not generally experience tax withholding. Customers (IOW their revenue sources) pay the full amount, not withholding anything. The business is assumed to be making the required quarterly estimated tax payments on their own.
How exactly all this comes together for the Texas state lottery and Colossus Bets is a matter of detailed policy and regulation none of us are privy to.
This, I am almost certain did not happen. I’m no expert but the groups I’ve heard of doing this were relatively small (50 people or so) and consisted of people with some connections to each other - friend , relatives , people with some connection to a college, owners of stores where the tickets were bought. There are some problems with the slick prospectus idea - you don’t need that to get people you know to invest, so obviously you would be looking to get strangers to invest. But you don’t want too many people so you might have to turn some down - and any sort of advertising might lead to the wrong people finding out about it and so might turning down people who saw the advertising but weren’t allowed to invest. Would a London based bookie advertise this opportunity regarding a Texas lottery? Maybe. Would a group of MIT students advertise an investment regarding the Massachusetts lottery? Not a chance - if lottery officials found out , they might shut the game down or change something about the rules and regulations.
As this thread demonstrates, it can be a tax on poor people with the money collected going to multi-millionaires.
I, for one, would find it hilarious if several combines tried to buy out the same jackpot, with the result that they all ended up receiving a smaller amount than what they had paid in and the only winners being the schools that received a hundred million extra dollars in their budgets.
This was the Australian model some 30-40 years ago. they put up a slick prospectus, invested the money in an American Lottery, and won.
After that, it gets murky, and I don’t know what happened. The company did not distribute the winnings, perhaps they wanted to make an ongoing business, the lottery they beat (and many others) changed the rules so that massive jackpots never happened (instead, when the jackpot reaches a certain size, part of it rolls over to next drawing), the promotors moved to Israel (no extradition), the money dissappeared. I don’t know if the money appeared again later.
It looks like Texes has also changed their minds about how to run the lottery (the post above that says they no longer permit proxy buyers). I agree with the suggestion that this example was particularly outrageous. In the Aus/US example I was aware of, they weren’t given special access: they got access to an existing supermarket agency, and issued all the tickets overnight.
The only lottery I play is a Queen of Hearts lottery run by a local sports bar. It begins with a full deck of cards (54). Each card is assigned a number (placed in a sealed envelope for instance) and everything is displayed in a large glass case. Tickets are a buck apiece and you write your name and phone number on each ticket. Every other Wednesday they draw a ticket out of a huge wire mesh hopper. They reveal whichever card the purchaser has chosen. If it is the queen of hearts they win the pool. The pool is all the money collected minus 10% to start the next game. If the chosen card is not the queen of hearts there are smaller amounts awarded each drawing - $4000, $3000, $2000 and $1000.
Right now the pool is just below million bucks. Only about 30,000 tickets are purchased each week. For this game there are 23 numbers left out of the original 54. At this point in the game I buy a ticket for each number. So my odds of having a ticket drawn are 30,000/23 = 1 in 1304. If one of my tickets is chosen I have a 1 in 23 chance of winning.the jackpot. so a 1 in 30,000 chance for winning $1,000,000. Way better then a big lottery where your odds are in the millions or billions.
I forgot to mention that there was a real life example of competing outfits.
The people who were the basis for the movie Jerry and Marge Go Large figured out when to buy a lot of tickets for a Michigan rollover game. They got some friends to invest in the project. After Michigan shut down the game they found out Mass. had a similar game and they continued with that.
Two other groups also started working on the system with a group from MIT (for some reason Harvard in the movie) really gaming it. When the jackpot was close to the certain profit point they would buy enough tickets to go past that, win the jackpot while the others weren’t playing since the jackpot wasn’t large enough. Mass. shut down their game when it became widely known.
One thing I think you’re overlooking is:
IT’S MY MONEY AND I WANT IT NOW!
The people who can’t be trusted take care of their lump sum are the same ones who sell the annuity for pennies on the dollar.