News Analysis: What Happens if a Powerball Winner Is a ...

1 news analysis : what Happens if a Powerball Winner Is aNonresident? By William Hoke Now that the suspense over whether anyone would win the Powerball lottery 's $ billionjackpot has been put to rest, questions remain as to whether the growing numbers ofnonresidents who try to walk away with such mega-prizes are subject to income tax if prize money in each Powerball continues to climb if no one matches all five numbers pickedat random, plus the Powerball number. It took 19 drawings, starting on November 4, to finallynet a Winner in the most recent game. There were actually three winners , with exact-matchtickets sold in California, Florida, and Tennessee.

2 Considering the large number of foreigntourists who take winter vacations in Florida and Mexico's proximity to Los Angeles, where oneof the tickets was bought, it's possible that one of the winners was not a resident. None ofthe names or addresses of the prize winners had been announced by press taxability of lottery prizes won by nonresidents normally turns on whether the Winner 'scountry of residence has a tax treaty with the United States. If an upstart, ersatz lottery servicebased in Gibraltar catches on, there will probably be nothing for the to tax if a nonresidentguesses the numbers picked in the Powerball or any other in the latest Powerball drawing, believed to be the richest payout in the history oflotteries worldwide, came from around the world.

3 "We've had emails from Iran, Morocco,Canada, and other countries in the last couple of days, asking how to buy a ticket," an officialwith the New Hampshire lottery Powerball game is offered by 44 states, the District of Columbia, Puerto Rico, and Virgin Islands. Tickets must normally be purchased from licensed lottery retailers in one ofthe participating jurisdictions. Only two states allow Internet purchases, which are restricted toresidents who are actually in the state at the time they acquire the Trap While nonresidents who are in the United States are allowed to purchase tickets from licensedretailers, they have to be alert to a potential nontax trap if they actually win the big prize.

4 Under18 section 1301, it is illegal to bring a lottery ticket into the physically or by mail,even if the ticket was purchased in the , said Roy A. Berg of Moodys Gartner Tax Law LLPin Calgary. "You can bring it into Canada, but to bring it back to the to redeem, that's acrime," Berg said. "I'm afraid not many individuals are aware of the criminal consequences ofbringing lottery tickets into the This will likely shock those living in Canada or Mexico whoDocument generated for Kim Moody Page 1 of 4 Doc 2016-908 (4 page(s))(C) Tax Analysts 2016. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party have purchased tickets while on a casual trip across the border.

5 "There are companies, such as The Lotter, that cater to nonresidents over the Internet. TheLotter operates through online partners such as lottery USA that take Internet orders, whilelocal representatives in the United States actually buy the official tickets. The tickets are held bythe local office, with scanned copies sent to the purchasers. "Should you win a large sum ofmoney, you may need to travel to collect your win in person," The Lotter says on its website, The company says it assists buyers with the required documentation and evenprovides a free The Lotter will pay for winners ' air fare, it won't pick up their tax tab, if there is one,when they go to the state lottery commission to collect.

6 Mary Neubauer of the Iowa lottery saidher state will withhold 30 percent from the winnings of a person who is not a resident, plusanother 5 percent for Iowa IRS says lottery winnings not effectively connected with a trade or business are considered"other income" under the fixed or determinable annual or periodic provisions of section871(a)(1)(A) and are taxed at a flat rate of 30 percent unless a tax treaty provides position is supported by the holdings in Barba v. , 52 2d 83-5272 (1983), and Park v. Commissioner, 136 569 (2011) , the IRS the current model tax treaty says lottery winnings are subject to tax, 27 treatiesdo not have similar provisions, Berg said.

7 The treaty clearly establishes that aCanadian resident who wins a lottery will owe tax, Berg said. "Since under Canadiandomestic law, lottery winnings are not taxable, you don't get a tax credit in Canada [for paid] because the income wasn't taxable in Canada," he said. Canada taxes lottery andgambling proceeds only if the winnings rise to the level of business Patel of Anaford AG said a Swiss resident who wins the Powerball would be subject withholding at 30 percent, regardless of whether the ticket was purchased outside the while the Winner was in the on 's Blanket Bet on Virginia lottery One of the more interesting tussles over the issue involved an Australian syndicate thatattempted to buy all 7 million possible combinations in a Virginia lottery in 1992.

8 The syndicatehad the support of the state lottery commission until the tide of public opinion turned and thestate stopped cooperating. "A newspaper got whiff of it, and the Virginia lottery panickedbecause it was worried the general public would lose faith in the lottery ," said George C. HowellIII of Hunton & Williams LLP, who represented the syndicate in a subsequent court case. "It'snot easy to go down to the 7-Eleven .. and buy up all 7 million tickets."Without the commission's help, the Australians were able to buy only about 5 million tickets, butthat proved enough to win the $27 million jackpot.

9 Howell said the commission first tried to denypayment on technical grounds but eventually decided to pay after the syndicate threatened legalaction. "But then they said, 'By the way, per federal regulations, we have to withhold federaltax,'" Howell 's firm subsequently received a letter from the IRS, saying that withholding was notrequired under the tax treaty if the syndicate could certify that it was exempt fromDocument generated for Kim Moody Page 2 of 4 Doc 2016-908 (4 page(s))(C) Tax Analysts 2016. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party (For the 1982 treaty, see Doc 93-30415 or 86 TNI 35-35 ; 2001treaty protocol.)

10 When the lottery commission still insisted that withholding was required,Howell persuaded a federal district court to issue an injunction that required the state tocontinue paying out 100 percent of the prize money, which was due in annual installments. Thelottery commission appealed to the Fourth Circuit, where it was joined by the JusticeDepartment. "The DOJ got nervous about the Anti-Injunction Act," Howell said. (InternationalLotto Fund v. Virginia State lottery Dep't, 20 589 (4th Cir. 1994) .)The Tax Injunction Act (28 1341) generally requires that a taxpayer pay a tax first andpetition for a refund through the state courts before filing suit in federal court.