Grace Lang was employed as a waitress at the Pancake House in Grand Bay, Alabama

1) Grace Lang was employed as
a waitress at the Pancake House in Grand Bay, Alabama. While working the
morning shift on March 7, 1999, one of Grace’s customers left her a Florida
lottery ticket as a tip. When Grace discovered that she had won part of the Florida
Lotto jackpot, the following steps were taken.
·
Upon advice of her father and legal counsel, the Lang
Corporation was formed and immediately made an S election.
·
Grace received 49% of the stock in Lang, and the 51% balance
was distributed to family members.
·
Grace had the Florida gaming authorities designate the Lang
Corporation as the recipient of the prize money-approximately $10 million
payable over 30 years.
·
Grace’s coworkers at the Pancake House filed suit against
Grace based on an agreement they had to share any lottery winnings equally. The
Alabama courts eventually decided that such an agreement did exist but that it
was not enforceable. (Alabama law does not permit enforcement of contracts
involving illegal activities-gambling is illegal in Alabama.)
In 2007, the IRS determined that
Grace had made taxable gifts in 1999 when she shifted some of the lottery
winnings to family members. She made the gifts by having 51% of the Lang
Corporation stock issued to them. (As Lang is an S corporation, the lottery
income passes through to the shareholders.)
Grace disputed the gift tax
assessment by contending that her actions were required by the Lang family
agreement. Under this agreement, it was understood that each member would take
care of the others in the event he or she came into a “substantial amount” of
money. Because Grace was bound by the Lang family agreement, she was compelled
to relinquish any right to 51% of the Lang stock. Thus, the satisfaction of an
obligation is not a gift. As no gift occurred, the imposition of the gift tax
is not appropriate.
Who should prevail?