If a charity or tax exempt ministry buys a lottery ticket, or a lottery ticket is donated before the drawing or after ( it is a winning ticket ), what are the tax implications to the organization and to the donating party under the differing circumstances.
And from the above, the general question is there a way to get all the money tax free from lottery winnings?
My guess is that a lottery ticket is a bearer instrument, so the gov’t has no way of identifying the purchaser, so if it is donated any time prior to redemption, then the purchaser is totally off the hook.
On the other hand, if it looks like the tax-exempt organization spent their money gambling, would they lose their tax-exempt status?
Now go ask someone who knows that the laws are.
Why not just have the purchaser claim his prize, and then donate all the winnings to charity?
Because he would still owe tax on his winnings. There are limitations on the amount of charitable contributions one may make. Cash contributions deductions are limited to 50% of your adjusted gross income. So if you won $10 million (had no other income) and your tax rate is 35%, and you donate the entire $10 million to charity, you taxable income would still be $5 million and you would owe $1.75 million in taxes, even though you gave all of your winnings to charity.
^ This. The charity would have to pay tax on its “unrelated business income” http://www.irs.gov/charities/article/0,,id=96104,00.html
No
Thanks!
Lottery tickets are not UBI - for one thing, it’s not a trade or business, so it fails on the very first test you cite. It would also probably fail on the second test (that it be conducted regularly).
My first inclination would be to treat it like an in-kind (i.e. non-cash) contribution of the ticket with FMV $1, and then a “sale” of that item for the winnings amount. This would provide tax-free winnings on the ticket. Charities do that all the time with items donated and sold at auction - again, it would have to be done as a trade or business and with regularity to be considered UBI.
However, it might still screw with charities who need to meet public support requirements.
A charity buying lottery tickets would be an unrelated business. No charity would qualify as a non-profit if their business was buying lottery tickets.
Receiving a winning ticket as a contribution from an individual would be non taxed to the charity, but the donor would be taxed.
Is the donor taxed on it even if he has not yet claimed his winnings? It’s just a piece of paper with some printing on it. He hasn’t really realized any income yet.
If he drops it on the sidewalk and loses it, there’s absolutely no way he can claim the prize, and the guy who finds it will have no problem cashing it. (Unless surveillance cameras or something gets involved.)
Not as their business, but as part of the OP I mentioned ministries specifically, who can do things ‘as lead (by God)’. Perhaps the ministry was ‘lead’ to buy a single ticket for some upcoming expansion program and that ticket was a winner.
Even if the ticket is uncashed? What if the ticket was donated before it was a winner?
If the donor was “anonymous” there is no way he cold be taxed.
If the charity receives a contribution of a ticket worth big bucks it would be like any other contribution… not like the charity was playing the lottery.
The trick would be for the “anonyous” person to get at the money…there are all kinds of rules that stop that.
Just be thankfl that the tax isn’t 90% like some Dopes would like.
That’s an easy question:
The donor is not liable for income tax on the portion transferred before it became a winner. See Chelius v. Commissioner, 17 TCM (CCH) 121 - 1958: the taxpayer transferred a 50% interest in a lottery ticket to other members of her family before the drawing. The Court found she was not liable for income taxes on 50% of the winnings.
If the ticket was transferred by an individual to a charity before it became a winner, and then the lottery ticket won, I would expect that the charity would still have to pay tax on unrelated business income. Call the IRS or a tax professional for a clearer opinion.
Ministries, ‘lead by God’, are still subject to the local laws. Render unto Ceasar what is Ceasar’s.
Why bother? I think it was John Lennon who said that he had hordes of accountants just to tell them that the more money the Beatles made before taxes, the more they took home after taxes. That’s usually how taxes work.
It makes sense - if a ticket is gifted before the draw, it’s worth is the retail price. If it is gifted after the draw, it’s value is the prize it has earned. If you tried to sell it to some schlub on the street, that’s how they would value it.
I guess one question is, can you move house to a state with lower taxes before cashing in, or is it the day of the draw that determines your state of taxation? Or else “honest, I sold my mother in the low-tax state 50% of the ticket before the draw…”
(What is the relative tax rate per state? Here in Canada, gambling winnings are exempt from tax. You win $10,000,000 you take home $10,000,000. Otherwise, tax accountants suggest, then you should be able to deduct the money invested to earn that - i.e. your gambling losses.)
Yeah, but what about where the drawing was held, the ticket became a winner, and THEN it was donated to the charity, prior to being redeemed?
Why would a lottery ticket be treated differently than stocks?
If I donate stock to the local public radio, I can claim the current value of the stock as a charitable donation, and I don’t have to pay capital gains taxes, and the radio station gets to sell the stock, keep the value and not pay taxes on it.
Why are you introducing facts that don’t exist in the OP?
The OP says “a” lottery ticket. There’s no plural.
Generally, the rule is “fair market value”. What would some schmuck on the street pay for it? Before the draw, $1. Aft the draw, $0 or $10,000,000. Whether it’s been cashed or not is irrelevant.
If you argue that "it’s only worth $5M not $10M because there’s $5M in taxes to be paid - well, then you have to pay taxes first, plus sell the ticket… Not sure the bizzarre legal ramifications of selling a winning lottery ticket, but I assume whoever walks up to the window and cashes it pays taxes; so unless you sell it to a Canadian, who then cashes it out and walks away with all $10M, someone pays the tax.
(Thanks to cross-border tax treaty, Canadians pay no US taxes on US winnings. )