The Lottery and State Taxes

Setting aside the near zero chances of winning a lottery like the Powerball, would you pay state income tax on the winnings if your numbers get drawn?

Most states specifically say that lottery winnings are subject to their state tax (i.e., the income is sourced to that state where the ticket is purchased). So if a Massachusetts resident buys a Connecticut lottery ticket, Connecticut would expect that resident to pay income tax on the winnings. Similarly, as a resident of Massachusetts the income would be included on the resident’s state income tax return, but the resident may get a credit for taxes paid to Connecticut.

States like New Hampshire represent an interesting lottery opportunity in that New Hampshire does not subject lottery winnings to a state income tax. In theory, someone could buy a New Hampshire ticket, win, and then move to New Hampshire before claiming the prize, thereby increasing the winnings by the state tax they would have otherwise paid. Surely Connecticut (or whatever state the winner leaves when moving to New Hampshire) would challenge such a change of residency, but with millions of dollars in state taxes on the table, it seems like a fight worth having.

So should New England residents make the trek to New Hampshire to buy their tickets? With the low odds of winning and the cost of gas, probably not, but if you are driving through New Hampshire anyway maybe you should spend that extra $2 while you are at the gas station.


Finally, Relief for some taxpayers with old tax liabilities, Connecticut has a statute of limitations

Last year Conn. Gen. Stat. Sec. 12-35 was modified pursuant to Public Act 22-117 such that the Commissioner of the Connecticut Department of Revenue Services cannot collect tax ten years after the date the tax was reported on a return or ten years after the commissioner made a valid final assessment of tax (e.g., pursuant to an audit).. Any taxes that remain unpaid on the first day of the eleventh year succeeding the date of the return filing or assessment shall be deemed abated. This statute of limitation does not apply when a taxpayer has entered into agreement with the Department pursuant to Conn. Gen. Stat. Sec. 12-2d or 12-2e, or to taxes secured by a lien on real or personal property of the taxpayer.

For those taxpayers that filed a return or had an assessment finalized in 2012, it may truly be a happy new year, because, subject to the exceptions noted above, that tax assessment is now abated.


Connecticut Controlling Interest Transfer Tax

The Connecticut Controlling Interest Transfer Tax (“CITT”), which was established by Conn. Gen. Stat. § 12-638b, imposes a tax on the sale (or other transfer, though I will generally say sale or seller for the remainder of this post, the terms are interchangeable for CITT purposes) of a controlling interest in any entity which possesses, directly or indirectly, an interest in real property in Connecticut when the value of the interest in real property equals or exceeds two thousand dollars. The tax is payable by the person or entity transferring the controlling interest. The tax rate is 1.11% of the value of the interest possessed by the entity.

For these purposes a controlling interest is more than fifty per cent of the total combined voting power of all classes of stock of a corporation, or more than fifty per cent of the capital, profits or beneficial interest in a partnership, association, trust or other entity.

A taxable sale of a controlling interest may occur in one transaction or in a series of transactions. Transactions which occur within six months of each other are presumed to be a series of transactions unless shown to be otherwise.

A taxable sale of a controlling interest may be made by one seller or may be made by a group of sellers acting in concert. Sellers who are related to each other by blood or marriage are presumed to be acting in concert, unless shown to the contrary.

The CITT does not apply to otherwise taxable transfers (1) made to effectuate a mere change of identity or form of ownership or organization where there is no change in beneficial ownership and (2) upon that portion of real property which is located in an enterprise zone as established in Conn. Gen. Stat. § 32-70. Though not stated in the statute, the directions to the CITT return say that a return must be filed to claim either of the aforementioned exemptions.

Readers familiar with the Connecticut Real Estate Conveyance Tax (see Conn. Gen. Stat. § 12-494) may have realized that the CITT was established, at least in part, to prevent sellers of real estate from placing the real estate in a legal entity and then selling the entity itself to avoid the Real Estate Conveyance Tax. Due to rate difference between the two taxes there may still be situations in which it is beneficial to transfer an interest in a legal entity instead of real property directly but I caution people considering such a strategy to be aware of any liabilities that might also transfer with said legal entity.