You are here

Deduction for giving lottery prize back to charity?

Your Legal Questions Answered

Deduction for giving lottery prize back to charity?

If a person buys $100 worth of raffle tickets and wins a $500 television set at a charity lottery, the person can’t claim a charitable contribution deduction for the $100 in tickets, right? But may the person give the TV back to the charity and claim a $500 deduction for the gift?

You are correct that the person may not claim a charitable contribution deduction for purchasing lottery tickets from a charity.  The IRS has ruled that there is no charitable deduction because of the quid pro quo value of the chance to win a prize.  But in this case, because the person must declare the $500 gambling winnings as income, the person may offset the $100 the purchase price of the tickets so that the net taxable income will be only $400.  (The charity has to report the gambling winnings to the IRS on Form W-2G if the winnings are $600 or more)

The general rule for claiming deductions on gifts of personal property to a charity when the property has not been held for more than a year is that the donor may deduct the lesser of the tax cost of the property or its fair market value.  (To get a full fair market value deduction, the property would have to be held for more than a year and used in the charity’s charitable program.)  In this case, if the transaction is properly analogized to a sale or exchange, unlike a $100 purchase of a $500 television where the purchaser would have a basis of $100, the tax rules provide that property received in a transaction generating income to the recipient will be deemed to have a tax basis equal to the gross amount of income received that is applicable to the property.  Since the purchaser of the tickets received gross income of $500 in winning the TV, the tax basis would be $500, equal to the value of the set. The donor could deduct the $500 value as a charitable contribution.

If the ticket purchaser won a 50-50 lottery and received $500 in cash, the deduction for giving the $500 back to the charity would also be $500, but for a much simpler reason.  Cash gifts are deductible based on the amount of the cash contributed, without regard to rules about tax basis.

Tuesday, January 29, 2013


Thank you

Add new comment

Sign-up for our weekly Q&A; get a free report on electioneering