I. Introduction

The purpose of this Technical Information Release is to explain how assignees of lottery winnings should comply with the personal income tax withholding requirement established under G.L. c. 10, section 28(5), as amended by the Statutes of 2004, chapter 149, section 23. The statute requires that in "a voluntary assignment for consideration made under a judicial order pursuant to paragraph (4) the assignee shall withhold 5.3% of the purchase price and pay that withheld amount to the commonwealth as state income tax withholding to credit the account of the assignor, within 10 days of closing the assignment transaction." Paragraph (4) was amended by the same Act to allow a lottery winner to voluntarily assign to another party his or her right to the lottery prize pursuant to an appropriate judicial order. [1] Lottery assignment withholding involves two agencies: the Massachusetts Lottery Commission, which administers lottery assignments (G.L. c. 10, § 24), and the Department of Revenue, which administers the income tax and withholding laws of the Commonwealth (G.L. c. 62C, § 3).

II. Discussion

A. Definitions

For purposes of lottery assignment withholding, "lottery" refers to the Massachusetts State Lottery, established pursuant to M.G.L. c. 10, § 22 et seq. An "assignment" means a contract whereby the assignor grants to the assignee the right to receive the payments of a Massachusetts lottery prize that the assignor would otherwise be entitled to receive. The assignment subject to withholding under G.L. c. 10, § 28(5) is the assignment made by the lottery prize winner. "Assignor," as used here, means a Massachusetts lottery prize winner who makes an assignment of his or her lottery prize. An assignee is a person to whom an assignor makes an assignment. The person or entity obtaining the right to lottery payments from the winner, the initial assignee, is responsible to withhold, whether or not this initial assignee ultimately transfers the lottery payments to another purchaser. For purposes of lottery assignment withholding, "assignee" shall refer to the initial assignee of the prize. The "Commissioner" refers to the Commissioner of Revenue.

For withholding purposes under G.L. c. 10, § 28(5), "purchase price" shall be the amount the assignee pays for the transfer of all or part of the lottery winner's rights to the assignee. In determining the purchase price, no deduction shall be made for amounts that may be deducted to pay for delinquent child support obligations of the assignor, or for debts owed to a state agency by the assignor, which must be paid in full at closing. G.L. c. 10, § 28(4)(E). Any other debts or liens paid by the assignee on behalf of the lottery winner will also be included in the purchase price.

B. Requirements

The purpose of withholding state income taxes is to withhold an amount that is substantially equivalent to the tax amount reasonably anticipated to be due, and that principle will guide the Commissioner's administration of lottery assignment withholding. The statute requires the assignee to withhold 5.3% of the purchase price.

Massachusetts gross income means federal gross income as defined under the Internal Revenue Code (Code) of January 1, 2005 (G.L. c. 62, § 1(c),(d)) with certain modifications. G.L. c. 62, § 2(a). For Massachusetts income tax purposes, the recognition of income to the prize winner (that is, the "purchase price" resulting from the assignment of lottery winnings) shall follow the recognition of such income for federal income tax purposes, according to Massachusetts law. If the transaction between the prize winner and the assignee is treated as an installment sale for purposes of the Code, and the prize winner qualifies for installment sale treatment for Massachusetts income tax purposes, [2] it will be treated as an installment sale for Massachusetts personal income tax, and the recognition of income and required withholding will occur in the tax years in which the income is received. If, for Massachusetts purposes, the income is recognized in the year the initial assignment transaction occurs, withholding should take place in that year, for the entire purchase price.

If the prize winner recognizes, for Massachusetts income tax purposes, all of the proceeds of the assignment transaction in one year, "purchase price" shall mean the amount paid in consideration for the assignment, and the phrase "closing of the assignment transaction" shall mean the date on which the assignee makes payment of the agreed amount to the lottery prize winner. If the income from the assignment transaction is recognized in installments for Massachusetts income tax purposes, "purchase price" shall mean the amount of each installment payment. For installment sales, the date of "closing of the assignment transaction" means the date the assignee makes an installment payment to the winner. Within 10 days of the "closing of the assignment transaction," an assignee must withhold and pay Massachusetts personal income tax of 5.3% from the purchase price.

Massachusetts lottery winnings paid to an individual are subject to personal income tax regardless of the state of residence of the recipient. Massachusetts source income includes "items of gross income derived from or effectively connected with ... (2) the participation in any lottery or wagering transaction within the commonwealth." G.L. c. 62, § 5A. Accordingly, the assignee's obligation to withhold does not depend on the state in which the lottery prize winner resides.

In judicial orders authorizing assignment of a lottery prize to an initial assignee and also a subsequent assignee, the Commissioner may accept withholding payments made by the ultimate assignee on behalf of the initial assignee. Payment, however, must be made under the initial assignee's tax identification number and the initial assignee must give authorization under Webfile for Business to the second assignee to report and pay. The initial assignee remains liable for the tax until the withholding payment is made. The amount that must be withheld is determined by the purchase price paid by the initial assignee to the lottery winner, regardless of the amount the assignee may receive from a subsequent assignee if it resells its rights to future lottery prize payments.

C. Procedures

Registration, reporting, and payment of lottery assignment withholding are all accomplished electronically on DOR's website, using WebFile for Business. (WebFile for Business may be found at www.mass.gov/dor by clicking on the "WebFile for Business" quick link.) An assignee must register under Lottery Assignment Withholding at least five business days before the assignee uses WebFile for Business to report and pay withheld amounts. The assignee must withhold income tax at the rate of 5.3% from the purchase price, as explained above, and must electronically report and pay the proper amount. Payment must take the form of ACH Debit, and must be received within 10 days of the assignment closing. (To be received timely, payment must be authorized before 4:00 pm Eastern time on the business day before the due date.) As part of the reporting process that accompanies payment, the assignee must provide its own name and social security number or federal identification number, the lottery winner's social security number or federal identification number, the winning amount, the amount paid for the assignment, the amount withheld, and the date of closing.

An assignee making a payment subject to Massachusetts income tax withholding shall give to each lottery prize winner the completed state copy of the appropriate federal Form 1099, showing the amount of Massachusetts income tax that was withheld, on or before January 31 of the succeeding taxable year. In addition, the assignee shall retain copies of all 1099 forms it has issued, in accordance with DOR's record retention requirements, set forth in 830 CMR 62C.25.1(3).

 

/s/ Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue


AL:JXD:lab

January 4, 2006

TIR 05-24



[1] Paragraph 4 provides that "payment of any prize drawn may be made to a person under a voluntary assignment of the right to receive future prize payments, in whole or in part, if the assignment is made to a person or entity named as the assignee in an appropriate judicial order..." G.L. c. 10, § 28(4), amended by the Statutes of 2004, c. 149, § 23.

[2] See TIR 04-28 for information about Massachusetts installment sale elections. In brief, taxpayers who are treated as electing installment sale treatment federally will automatically follow Massachusetts installment sale treatment if the Massachusetts gain for the entire transaction is less than $1 million. Taxpayers who are treated as electing installment sale treatment federally will be required to file a separate Massachusetts installment sale election and to post security with the Commissioner if their Massachusetts gain for the entire transaction is equal to or greater than $1 million.