Dickerson v. Comm'r of Internal Revenue, Docket No. 20029-08.

CourtUnited States Tax Court
Writing for the CourtWHERRY, 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
Docket NumberDocket No. 20029-08.
Decision Date06 March 2012


Docket No. 20029-08.


Filed: March 6, 2012

T.C. Memo. 2012-60

P, a waitress, received from a customer a winning lottery ticket from the prior night's Florida lottery drawing although the ticket's winning status was at the time apparently unknown to the customer. P and members of her family formed a corporation to claim the proceeds. P held 49% of the stock. Members of her family held the remaining stock. R alleges P's family members, because they owned 51% of the stock, received a gift when P signed the winning ticket as president of the corporation and submitted it to the Florida lottery as the corporation's property. P claims it was not a gift because a long-standing enforceable agreement existed among her family that mandated she share the winning proceeds with them, or because P and her family members were members of an existing partnership that was the true owner of the ticket.

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Former coworkers of P filed suit against P claiming that they had a preexisting agreement with P to share the proceeds of any winning lottery ticket received as a gift or tip from a customer. An Alabama trial court sided with the coworkers, but that decision was ultimately overturned by the Alabama Supreme Court. P argues in the alternative that if a gift did occur, then the value of the gift should be discounted.

Held: P made a 1999 gift of a 51% share of her interest in the winning lottery ticket. The discounted taxable value of the gift was $1,119,347.90.

David M. Wooldridge, Donald Eugene Johnson, Gregory P. Rhodes, and Ronald A. Levitt, for petitioner.

Horace Cump and Edwin B. Cleverdon, for respondent.


WHERRY, 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?

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Some 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.

On March 7, 1999, Mr. Seward went to the Waffle House and, while there, handed petitioner an envelope containing a lottery ticket. Unbeknownst to Mr. Seward at that time, the ticket he gave petitioner was one of two winning tickets that had been drawn for the Saturday evening, March 6, 1999, drawing of the Florida Lotto Jackpot. The ticket was, if paid out over 30 years, valued at $10,015,000, with a cash payout amount of $5,075,961.71.1 Petitioner was not Mr.

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Seward's waitress on March 7, 1999, and the parties agree the winning ticket was a gift, not a tip to petitioner.2

Petitioner did not open the envelope until shortly after she left work. At that time, she realized the numbers on her ticket matched the ones a coworker told her had been drawn the day before. Thinking someone was playing a joke on her, she called her father, Bobby Reece, and asked him to confirm whether she was indeed holding a winning ticket. He did and she was.

According to petitioner, when she realized she held a winning ticket, because of her family's prior existing agreements, "immediately I knew that I was sharing with my family." Which brings us to an integral aspect of this case--the alleged "Reece Family Agreement".

II. Family Values

According to petitioner, "it was well-known that we were in to lotteries." The Court will take judicial notice that the Florida lottery began on January 18, 1988. Shortly thereafter, Mr. Reece began a tradition of buying lottery tickets using petitioner's, her sister's, and her brother's birthdays as the number sequence. Petitioner obtained her first lottery ticket in high school, when she and her brother,

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Johnny Reece, started giving their father money so that he could purchase tickets on their behalf (one must be 18 to legally purchase a ticket).

At trial petitioner stated: "our family had always talked about if anyone had won any big amount of money in a lottery, that we would take care of each other or share in the family". Similarly, Mr. Reece and Johnny also testified extensively about the sharing attitude of the Reece Family and the alleged lottery proceeds sharing agreement.

While the Court concludes there was a general vague lottery proceeds sharing agreement, this sharing agreement was never written down and there is no documentation to support its existence or its terms. There was never an understanding that each family member had to buy a certain number of tickets (or even buy tickets at all). Johnny, for example, stated he does not "regularly participate or even think of it * * *. Just whenever I think about it, at a convenience store, I might pick up five bucks here and there, nothing standard or any kind of pattern." In fact, from the record, it appears that the only family member who frequently bought lottery tickets was Mr. Reece.

Before the winning ticket at issue here, there were never any discussions or consistent course of dealing about specific percentages each family member would get of any winning ticket. When questioned at trial, petitioner stated there were no

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specifics and that they "just said that we would share, we would take care of each other."

There is no doubt that the Reece family was a very close and sharing family. Mr. Reece prepares all of the family members' tax returns. The family gathers at Mr. and Mrs. Reece's house almost daily. When petitioner first married and moved to Mississippi for a short time, she would still return to her parents' house, which she characterized as "the hub of our family", almost every day.

Mr. Reece once won $80 and took the Reece family to dinner. And there are more examples of the family's sharing attitude. In 1996 Mr. and Mrs. Reece bought approximately 6-1/2 acres of land. Mr. Reece took the acreage and plotted it out into four equal lots so that he and Mrs. Reece as well as each child would have a plot on which to build a house or place a mobile home. Then there is the per diem. Mr. Reece traveled for work, receiving a per diem for food while away. He would do his own cooking in order to save money; and the per diem he did not use he divided among his children.

True to these sharing beliefs, after petitioner realized she held the winning ticket, she wanted to share it. And conversations immediately started taking place among certain members of the Reece family about how they were going to "split

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the money". But just how could this be accomplished? She turned to her father for advice.

III. "Inc."-ing the Deal

On Monday, March 8 (after learning on the previous day that his daughter had won the lottery), Mr. Reece contacted Louisa Warren, the general counsel for the Florida Lottery Commission. Ms. Warren told Mr. Reece: "Don't sign that ticket, period. Don't sign the ticket", and she further stated that a single entity would have to be formed to claim the prize for the family. Because of Ms. Warren's express instructions not to sign the ticket, petitioner put the ticket away while her father decided what to do.

Immediately after talking to Ms. Warren, Mr. Reece called Dwight Reid, a lawyer he had consulted before. That same day, Mr. Reid prepared incorporation papers for an S corporation to be named 9 Mill, Inc. (9 Mill). Also on March 8, a meeting of the prospective family stockholders of 9 Mill was held and shares of stock in the proposed corporation issued in the following percentages:

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                ¦Shareholder ¦Percentage Owned¦
                ¦Tonda and James Dickerson (jointly) ¦49 ¦
                ¦Cynthia Reece 1 ¦17 ¦
                ¦John A. & Lorie A. Reece (jointly) 2 ¦17 ¦
                ¦Larry L. & Jennifer D. Pierce (jointly) 3 ¦17 ¦

1Cynthia Reece is petitioner's mother.
2John A & Lorie A. Reece are petitioner's brother and sister-in-law.

3Larry L. and Jennifer D. Pierce were petitioner's sister and brother-in-law.

From the record it is evident that it was Mr. Reece who determined these percentages, not petitioner and not the Reece family as a group. Mr. Reece himself stated that he was the one who worked out the percentages and that he did it at his kitchen table alone while petitioner and her then...

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