Retroactive Tax on Lottery Winnings Unfair

IMGCAP(1)]A New Jersey Tax Court judge has sided with a couple who won $46 million in the state lottery in 2000 and elected to have their winnings distributed in annual installments as a multiyear annuity payment, holding that the state did not have the right to retroactively tax their winnings after passing a new statute.

Plaintiffs Melvin Milligan and Kim Lawton-Milligan, who won the Big Game Lottery jackpot drawing in 2000, opted for 26 annual payouts of $1.77 million. They argued that the 2009 state law making prizes over $10,000 taxable for the first time should not be enforced against their payments in 2009 and subsequent years.

The court granted the Milligans’ motion for partial summary judgment. “The grant of partial summary judgment in favor of plaintiffs on their square corners doctrine is a sufficient basis for reversal of the final determinations of the Director, Division of Taxation denying plaintiffs’ request for a refund of New Jersey gross income tax for tax years 2009, 2010, 2011, 2012, and 2013,” the court stated.

The decision affirms a decision from a year ago denying a motion by the State Lottery to dismiss the complaint against it. If the motion had succeeded, the Division of Taxation would have brought a similar motion, according to Steven Klein, a member at Cole Schotz P.C., who represented the Milligans.

“The judge effectively ruled that under our factual circumstances, and companion cases with slightly different facts, taxpayers should not have to pay tax in spite of the 2009 legislation,” said Klein.  
“The chief reason is that the state was advertising the fact that lottery winnings were tax free,” he added. “It was basically saying ‘Play in New Jersey because we in New Jersey don’t impose income tax.’ That solicitation became part of the agreement between the state lottery and the players.”

The judge also looked at two different fact patterns, Klein noted. “In one case, the taxpayer won at the end of 2008 but didn’t turn the winning ticket in until 2009. New Jersey said that because the winner received the winnings in 2009 it was taxable. In this case it was a lump sum, but since the law wasn’t enacted until June 2009, it didn’t apply.”

“In a third case, the players were a group all from the same company,” Klein said. “They all chipped in and won in early 2009, when there was no law on the books. Since they played before the law was enacted, it didn’t apply to their winnings.”

“We have over 20 other lottery winners that we are representing whose cases have been on hold while we proceeded with these cases,” said Klein. “And there may be others who haven’t retained us yet. The ruling will apply in a host of other cases.”

The judge cited the “square corners” doctrine, according to Klein. “It says that government should turn square corners with its citizens,” he said. “In particular, taxing authorities should turn square corners with taxpayers. The judge felt that to impose this tax under these circumstances would be unfair to these taxpayers.”

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