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Luck runs out for N.Y. lottery winners

Sep 29, 2003, 3:37 am

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New York LotteryWhen members of the Lucky Lotto Lady Partnership won $23 million in 1994, they thought their money woes were over for good.

But nearly a decade later, the group is battling a formidable foe over its winnings: the Internal Revenue Service. This time, the Lucky Lotto Lady Partnership is going to need more than luck -- it'll need a change in federal law in order to win.

The dispute is over taxes. Not whether the group should pay them, but how much of its lottery winnings should go to the IRS. And Uncle Sam wants about $1.4 million more from the group.

"I think it's crazy," said Mayra Ramirez, 42, of West Palm Beach, who along with her mother and two brothers comprised the Lucky Lotto Lady Partnership and won the New York lottery. "I think we've paid our fair share (in taxes)."

Ramirez and her brothers, who moved from Jersey City, N.J., to Palm Beach County and Central Florida since they won, aren't alone in their plight. Some 40 lottery winners nationwide are protesting the IRS' claim that they should pay more in taxes, said Steven Kwartin, a Miami Beach attorney representing the 40 lottery winners.

Changing payment options

In today's world of lottery mania, winners are given two choices: receive annual payments over a period of years or take a lump-sum payment. Kwartin's clients opted to receive annual payments, but later sold their rights in exchange for a lump-sum payment from a private company.

Ramirez, her brothers, Jimmy and Raul, and her mother, Iris Araujo, did that in 1999. Until then, the group received annual payments of $1,095,200. The payments were considered income and thus taxed at the income-tax rate of nearly 40 percent each year. The group received $5,476,000, before taxes, over five years.

The family members decided to sell their rights to the yearly payments and instead received a lump sum of $7,001,500.

Ramirez said the family was assured by the company, whom she refused to identify, that there would be no tax problems with taking a lump-sum payment. Had they known the decision would thrust them into a costly IRS battle, they would have continued to receive their annual payments, she said.

"We had so many promises that this wouldn't happen to us. It was drilled and drilled into us," said Mayra Ramirez, referring to the investors who bought the balance of the group's lottery winnings.

Ramirez and her two brothers received $2,101,500 (or $700,500 each) for the sale of the remaining lottery winnings. Araujo received $4.9 million since she led the Lucky Lotto Lady Partnership.

The family members paid taxes on the lump sums received, but in the form of capital gains taxes, which takes out about 20 percent, instead of income tax, which takes nearly 40 percent.

So now the IRS, which says the family should have paid income taxes on the money, wants more:

Mayra Ramirez must pay an additional $130,030; Jimmy, of Lake Worth, $128,225 and Raul, of Longwood, $129,840. Iris Araujo, also of Longwood, was ordered to pay $972,988, according to federal income tax records.

Selling annual payments from lottery winnings is perfectly legal. In fact, there are a dozen or so companies around the country competing to buy the balance of lottery winners' annual payments.

All it takes is going to civil court and a having a judge approve the transaction, according to Kwartin and state lottery officials.

But winners have run into tax problems with the IRS when filing their tax returns the year after the sale. Kwartin's clients have claimed that the lump-sum payment, for tax purposes, is a capital gain. A capital gains tax is owed on profits from the sale of "wealth" assets, such as stocks, bonds or real estate. Capital gains taxes average about 20 percent. The lottery winners say the money is not considered ordinary income -- like employment wages, which would be taxed nearly 40 percent.

Not so, according to IRS officials. They expect lottery winners to pay income taxes on the lump sum, the same rate as they would on an annual payment.

Kwartin, who has engaged the IRS in U.S. tax court in Washington, charges his clients are victims of an IRS crackdown, where federal officials went state-by-state looking for lottery winners to target.

"The government has taken a hard-line position," he said. "It's an all-or-nothing issue for them."

Michael Dobzinski, an IRS spokesman, said he could not comment on any specific cases. But IRS receives information directly from the states regarding lottery winners, suggesting there is no need for the sort of shakedown referred to by Kwartin.

"There is an obvious paper trail that comes to the IRS," Dobzinski said.

Kwartin, a former IRS trial attorney, has to convince a U.S. tax court judge that his premise -- viewing the money as a capital gain -- is the way lottery winners should be taxed.

But prior legal rulings, even a U.S. Supreme Court decision, have favored the IRS position.

Another year to wait

However, Kwartin is optimistic.

"(Previous court cases) have not been presented with a full-scale, in-depth analysis of this issue," he said. "We're really testing 'How do you read the definition of a capital asset?' "

Meanwhile, Ramirez and her family must wait for the case to be decided, which Kwartin said could take at least a year.

For the Ramirezes, they're shocked by how much their financial situation has changed since they bought their winning ticket on a snow-filled day in Manhattan almost a decade ago. And they're worried what will happen in the end.

"We could lose houses, cars... everything," Mayra Ramirez said. "This was our dream come true. We could go from having it all to having nothing."

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