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DICKERSON v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2012-60
TONDA LYNN DICKERSON, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 20029-08.
United States Tax Court.
Filed March 6, 2012.
MEMORANDUM FINDINGS OF FACT AND OPINIONWHERRY, Judge. This case is before the Court on a petition for redetermination of a $771,570 gift tax deficiency for the tax year 1999. There are two issues. First, did petitioner make a taxable gift when she contributed a winning lottery ticket to a newly formed corporation in which she owned only 49% of the stock and other family members owned the rest? Second, if petitioner did make a gift, what was the value of the gift? FINDINGS OF FACTSome of the facts have been stipulated. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. Petitioner resided in Alabama at the time she filed her petition. I. She's Got a Ticket To Ride Petitioner is a former waitress of the Waffle House in Grand Bay, Alabama. Edward Seward was a regular customer, coming to the Waffle House almost daily. Mr. Seward had a reputation of giving away lottery tickets, frequently giving tickets to individuals including petitioner and her coworkers. As Alabama did not have a lottery, Mr. Seward would travel to neighboring Florida to procure the tickets.
1. The record does not reveal how the lottery ticket's value was determined. We note that the prize awarded was $354,000 payable per year for 30 years or $10,620,000 (i.e., $354,000 x 30).
2. Apparently, respondent did not assert Mr. Seward owed income tax on the winning lottery ticket or gift tax for giving the winning lottery ticket to petitioner.
3. Petitioner and Mr. Dickerson's marriage had been dissolved by the time of trial.
4. Respondent initially objected to the introduction of the Waffle House Complaint on the grounds of materiality, relevance, and hearsay. At trial petitioner orally stipulated that the Waffle House complaint was not being offered for the truth of the allegations made by Mr. Clements but was "simply being offered for the fact that those assertions and those statements were made in the Circuit Court of Mobile County on or about the 18th of March, 1999." Thereafter, respondent withdrew his objection.
In addition to objecting to the introduction of the Waffle House complaint, respondent also objected to numerous other stipulated facts regarding the lawsuit on the grounds of materiality and relevance. Fed. R. Evid. 401 defines "Relevant evidence" as "evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." These stipulated facts will be admitted and respondent's objections are overruled. These facts are both relevant and material in determining the value of the lottery ticket on the date petitioner gave it to 9 Mill and have proven to be helpful to the Court.
5. Respondent apparently determined the amount of the gift was $2,412,388 on the basis that the full present value of the installments due to be paid to the undisputed owner of the lottery ticket was $4,730,172 (51% of which is $2,412,388). On brief, the parties agree that without taking into consideration the dispute over ownership, the full present value of the lottery ticket was $4,730,172. We accept this but note that the record does not reveal how $4,730,172 was calculated.
6. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986 (Code), as amended and in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
7. Petitioner's retention of 49% of 9 Mill with her then husband resulted in no taxable gift. Sec. 2523 provides: "Where a donor transfers during the calendar year by gift an interest in property to a donee who at the time of the gift is the donor's spouse, there shall be allowed as a deduction in computing taxable gifts for the calendar year an amount with respect to such interest equal to its value."
8. Petitioner contends there are "four distinct and alternative arguments" as to why no taxable gift occurred:
1) There was a pre-existing, binding and enforceable agreement among the Reece Family to share in any lottery tickets acquired by any of them * * *
2) There was a pre-existing agreement among the Reece Family sufficient to form a partnership for federal tax purposes, * * *
3) There was a pre-existing, binding agreement among the Reece Family that provided sufficient terms and specificity to be enforced under state law, but the agreement may not have been enforceable under Alabama's anti-gambling statute. In this situation, Tax Court precedent is clear that such an agreement — even though enforcement is barred for some reason — is sufficient to avoid there being a taxable gift under federal tax law. * * *
(4) There was a pre-existing agreement or understanding among the Reece Family members although some terms of that agreement might not be sufficiently clear to allow enforcement under state law. Nevertheless, Tax Court precedent supports a finding under federal tax law that no taxable transfer occurred, if there was an intention to share the proceeds and that intention was implemented
While petitioner characterizes these arguments as distinct, we believe they can be condensed into two arguments: (1) the alleged agreement was enforceable under State law and therefore resulted in no taxable gift and (2) even if not enforceable under State law, the alleged agreement resulted in no taxable gift pursuant to Federal tax law.
9. Petitioner does not attempt to explain why if their intent was to share equally, they did not share the proceeds of the winning ticket equally. Nor does she address the issue of whether, if an enforceable agreement to share equally did in fact exist, her family made a gift to her by allowing her to hold 49% of the stock instead of an equally divided percentage.
10. At most, the family had an "agreement to agree". It is established that these are not enforceable. See Clanton v. Bains Oil Co., 417 So.2d 149, 151 (Ala. 1982); see also Capmark Bank v. RGR, LLC, ___ So. 3d ___, 2011 WL 4507555, at *11 (Ala. Sept. 30, 2011) (stating that "a contract that `leav[es] material portions open for future agreement is nugatory and void for indefiniteness'". (internal cites omitted)).
11. In contrast, an enforceable agreement to share was found to exist pursuant to the contract law of the District of Columbia in Pearsall v. Alexander, 572 A.2d 113 (D.C. 1990). In that case, unlike this case, evidence existed establishing an agreement between two men to share equally in the proceeds of a "jointly-purchased * * * [winning] lottery ticket." The two men had been friends for over 25 years and approximately twice a week would get together after work. Id. at 115. Together, they would go to a liquor store and purchase a "package" which consisted of vodka, orange juice, two cups, and two lottery tickets. Id. at 114. If a ticket ever won, the two would use the proceeds to purchase additional tickets. Id. On the night in question, two packages were purchased. Id. After the first package had been purchased, one man asked the other "are you in on it?" to which the other replied "yes". Id. The second package, which included a $20,000 winning lottery ticket, was then purchased a little later that day. Id. The court, looking at the longstanding pattern of conduct between the two and the exchanging of promises to share in the proceeds, held that there was an enforceable agreement to share 50-50. Id. at 117-118.
12. Sec. 704(e), entitled "Family Partnerships", was enacted in 1951 "to harmonize the rules governing interests in the so-called family partnership with those generally applicable to other forms of property or business". S. Rept. No. 82-781 (1951), 1951-2 C.B. 458, 485. Sec. 704(e)(1) provides: "A person shall be recognized as a partner * * * if he owns a capital interest in a partnership in which capital is a material income-producing factor". Our conclusion that no partnership exists among the Reece family is the same regardless of the applicability of sec. 704(e)(1) because we conclude there has been no showing that capital is a material income-producing factor. For one court's discussion of the issues see Pflugradt v. United States, 310 F.2d 412 (7th Cir. 1962); see also Evans v. Commissioner, 447 F.2d 547, 550 (1971), aff'g 54 T.C. 40, 51 (1970).
13. We faced a second factual question in Estate of Winkler—whether Mrs. Winkler was acting on behalf of the partnership when she purchased the ticket. Courts typically focus on the facts and circumstances surrounding the purchase of a lottery ticket, including the intent and understanding of the parties at the time of purchase, to determine ownership of the proceeds of the ticket for income tax purposes. See, e.g., Tavares v. Commissioner, 275 F.2d 369, 371 (1st Cir. 1960), aff'g 32 T.C. 591 (1959).
The rule regularly applied in such circumstances is that where a ticket on a lottery is purchased in the name of one or two persons and they agree prior to the drawing to share any winnings, each person is taxable only upon his agreed share provided that the nominal owner in fact divides the proceeds in accordance with their agreement, even though the agreement be void and unenforceable. * * *
Estate of Winkler v. Commissioner, T.C. Memo. 1997-4 (citing Dowling v. Commissioner, T.C. Memo. 1959-169). We concluded Mrs. Winkler was acting on behalf of the partnership when she purchased the lottery ticket, stating:
The facts in this case are that Mrs. Winkler did not normally play games of chance, and she never purchased Lotto tickets other than the family tickets purchased in the presence of other family members. She purchased the winning Lotto ticket as one of three "family tickets" on March 4, 1989, while she was with her daughter, Charlotte. She took the tickets home and placed them in a glass bowl in the china cupboard, as was customary for family tickets.
Even if we concluded there was a partnership among the Reece family involving the purchase of lottery tickets, petitioner (unlike Mrs. Winkler) was not acting on behalf of the partnership when she was given a lottery ticket.
14. The unified credit available to a transferor in 1999 was $211,300, or an applicable gift tax exclusion of $650,000 of taxable gifts. See sec. 2010(c), before enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38, on June 7, 2001. The annual exclusion for gifts in 1999 to any one person was $10,000 pursuant to sec. 2503(b).
15. We do note our conclusion that the gift occurred on March 12, 1999. The rules of the Florida Lottery 53 ER 98-16(8) state: "Until such time as a name is imprinted or placed upon the back of the lottery ticket in the designated area, a lottery ticket shall be owned by the physical possessor of such ticket." Mr. Reece credibly testified that pursuant to his conversation with Ms. Warren on Monday, March 8, 1999, petitioner placed the lottery ticket, unsigned, into a zip-lock bag. She then placed the zip-lock bag on her person and kept it there for the next few days. From the evidence in this case, the Court concludes she then took the lottery ticket out and signed it on March 12, 1999, when she claimed the winning proceeds in the name of 9 Mill. On the basis of this, we hold petitioner, by being in physical possession of the lottery ticket with no name imprinted on the back, owned it up until the moment on March 12, 1999, when she placed the name of 9 Mill on the ticket and signed it as president. At that time, 9 Mill owned the ticket, and petitioner had made a gift.
We recognize that in her petition, petitioner stated: "This was a transfer of a $5.00 lottery ticket to a legally formed family Sub-S corporation (Before it was claimed) under the direction of the legal department of the Florida Lottery, our corporate attorney, and the IRS". Petitioner, at the time she filed her petition, was proceeding pro se, and this statement is not necessarily inconsistent with a March 12, 1999, transfer date. The witnesses in this case were very forthright, credible, and honest. Petitioner is unsophisticated in matters concerning Federal tax laws, relying on others for advice. When Ms. Warren instructed Mr. Reece that no one should sign the back of the lottery ticket, we have no doubt petitioner followed those instructions and did not sign the ticket until March 12, 1999, immediately before it was formally presented to the Florida lottery officials.
Respondent asserts that "The use of the erroneous March 12, 1999, date would allow a whole new set of facts to be used and tend to send us down a slippery slope that would render the mandated date pursuant to IRS [sic] § 2512 meaningless." This might have been true if no evidence of a disagreement over who was entitled to the proceeds of the winning ticket existed before March 12. Respondent goes on to state that "The new facts as of March 12, 1999, was that some unknown claimants', possible hairdressers, attorney notified the Florida Lottery Commission that they had an interest in petitioner's lottery ticket." Mr. Clements called the Lottery Commission earlier on or before March 12, 1999, and it was known by a number of parties that there was a dispute as early as March 9, 1999. No knowledgeable reasonable buyer would have considered paying over $4 million for a lottery ticket without investigating the facts and receiving a warranty of good title after learning there was some dispute over ownership of 80% of the ticket proceeds.
16. We acknowledge that as of March 11 and March12, suit had not yet been formally filed.
17. We note this value differs from the trial record's indicated lump-sum cash prize payout value of $5,075,961.71. The record does not explain the difference. Nevertheless, we will accept the parties' stipulated value as we lack a clean evidentiary basis for a substitution of our own value since we do not know what else is involved in the lump-sum cash payout election.
1. Cynthia Reece is petitioner's mother.
2. John A & Lorie A. Reece are petitioner's brother and sister-in-law.
3. Larry L. and Jennifer D. Pierce were petitioner's sister and brother-in-law.
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