Example: Hitting the Jackpot

In 1992, Bronx residents Edison and Salvadora Blanco won $10 million in the New York State Lotto. Under the lottery rules, Mr. Blanco was entitled to one initial payment of $476,100.00 and 20 subsequent annual payments of $476,195.00. To fund the installment payout obligation, the Lottery purchased an annuity for $4,724,421.26.

How much taxes should the Blancos pay? Should they be taxed on the full prize amount of $10 million (that is, the full amount of each installment being subject to income tax)? Or should they only be taxed on the present value of the stream of future payments (calculating the taxable portion of each installment payment by reducing it to its present 1992 value)?

The New York Tax Appeals Tribunal and the New York Supreme Court Appellate Division concluded that the Blanco’s should be taxed on the full face value of the prize, opining that:

We find unpersuasive petitioners' citation to regulations and cases involving intangible personal property or interest income. Petitioner clearly won $ 10,000,000 in income with fixed annual payments that will neither increase nor decrease in amount over the 20-year payout. Accordingly, there is no merit to petitioners' alternative arguments that the amount accrued should be determined based on the cost of the annuity purchased by the Division of Lottery to fund the future payments or that the amount accrued should be discounted to present value. Clearly, the Division of Lottery's obligation to pay the installments in sums certain is fixed--thus the method used by this agency to fund these payments and/or the present value of the future payments are irrelevant as to petitioners' tax obligation.

Blanco v. Comm'r of Taxation & Fin., 282 A.D.2d 896, 899 (2001). Not everyone agrees. See John Caber, “Lottery Winner Loses Tax Case,” New York Law Journal (April 21, 2000).