TO: Carter Bishop, Senior Revenue Agent
FROM: Sojeong Lee
DATE: April 21, 2014 RE: Joseph Lucky/Timing of Lottery Winnings
Joseph Lucky, who lives and works in Minneapolis, bought a lottery ticket on December 12, 2013. After knowing that he won $10,000 on that day, he went back to the store to receive the money on December 16, 2013. However, as the lottery rule saying that, since his winnings is over $1,000, he had to submit the ticket to lottery headquarters in St. Paul in person or mail it for the verification and payment. Mr. Lucky tried to visit the lottery headquarters to get his money which was 24 miles round trip from his home, but couldn’t make it because his work hours conflicted. Eventually, he sent mail to the lottery headquarters on December 26, 2013 with the proper paperwork. Then, he received his $10,000 check on January 6, 2014 and deposited in on that day.
ISSUE In which year would Joseph Lucky recognize $10,000 of gross income from legal lottery winnings?
The IRS has authority to not allow recognizing gross income from legal lottery winnings due to insufficient conditions of substantial limitation. The IRS states, if there are substantial limitations or restrictions on time or manner of payment, there is no constructive receipt until they are removed.
The rationale for the “constructive receipt” doctrine is that if the income is available, the taxpayer should not be allowed to postpone the income recognition. However, if there are “substantial limitations” or restrictions on time or manner of payment, there is no constructive receipt until they are removed. Since Mr. Lucky received his cash check on January 6, 2014, if the check applies to constructive receipt, he should include his earnings in year 2014. Unfortunately, the constructive receipt doctrine does not reach income the taxpayer is not yet entitled to receive even though the taxpayer could have contracted to receive the income at an earlier date. Mr. Lucky recognized that he won the lottery on December 12, 2013, and he had plenty of time to process his verification and payment. Mr. Lucky states that he had reasonable reasons of delaying the process which applies to “substantial limitations”, he actually could have done earlier, not delaying till the end of the year. Therefore, this case does not apply to the constructive receipt which would lead him to include his $10,000 of gross income earnings from lottery in year 2013.
Under the cash receipts method, earnings received are included in the taxpayer’s gross income in the year of actual or constructive receipt by the taxpayer, regardless of whether the income was earned in that year. Since Mr. Lucky received his check on January 6, 2014, he should include his lottery earnings in year 2014. However, there are exceptions applicable to cash basis taxpayers according to the “constructive receipt” doctrine. Under Regulation 1.451-2(a), it states that income that has not actually been received by the taxpayer is taxed as though it had been received under the following conditions; if the amount is made readily available to the taxpayer and the taxpayer’s actual receipt is not subject to substantial limitations or restrictions. Again, if the income is available, the taxpayer should not be allowed to postpone the income recognition. However, Mr.Lucky’s situation will not apply to the constructive receipt doctrine. The main reason is that his situation cannot be applied to substation limitations or restrictions. The same regulation applies differently to the timing of constructive receipt. In Baxter, Albert Nathanial v. Commissioner., (1987, CA9) 7645 Fed 756 (2251) held that under this regulation the substantial limitations or restrictions for constructive receipts were acceptable and reasonable. He would have made an 80 mile round trip to get the check but his circumstances