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How To Double Casinos Jackpots For Free

20 January 2000

By I. Nelson Rose

A minor change in the federal tax laws should allow casinos to double the size of their advertised jackpots without having to pay an additional cent.

State lotteries have known, and used, this marketing tool for decades. But only a few of the very biggest casino jackpots have been advertised this way.

The trick? Advertise that you are offering a prize of, say, $1 million -- but pay it out at the rate of $50,000 a year for 20 years.

Twenty payments of $50,000 equals $1 million, right?

Anyone with a mortgage understands there is something wrong with this picture. Imagine borrowing the million dollars from a bank to buy a house, and being able to pay it back in exactly 20 yearly payments of $50,000 each.

The problem is that a payment of $50,000 in the year 2019 is not worth $50,000 today. You can call it "present value of future money," or, just plain "nobody lends you that kind of money without charging interest."

Interest rates (also called the discount rate) vary. But it is safe to say that in today's market, a prize paid out over 20 years is only worth about half the total. You can buy an annuity from an insurance company that will pay out $1 million over the next 20 years for about $500,000.

State lotteries have been accused of misleading advertising for promoting these large, annuity-like jackpots, but they have won every challenge. Lottery ads always clearly indicate that prizes over a certain amount will be paid out over time.

Most players do not want their jackpots paid out like an annuity. They want a lump-sum, which they can spend today.

State lotteries and legislatures were reluctant to let players get their winnings all at once. Lottery officials knew that many players would quickly blow everything, leaving them without enough money to pay their large tax bills the following April 15th.

Under federal tax law, as it existed up until October 1998, lotteries had to be extremely careful about offering winners any choice in how the prize was paid.

Tax law had developed the "constructive receipt" rule: You have to pay income tax this year on money that has been put aside for you, money that you can collect whenever you want, even if you put off being paid until next year.

Winners given the option of receiving a lump-sum or an annuity had to pay taxes on the lump-sum, even if they chose payments over time.

Congress changed the tax law as part of the appropriations bill for 1999. Their motive was not to help players, but to raise money for Medicare.

During one of the last budget crises, Congress and the President worked out a deal: No new spending program would be approved unless funding could be found for it without raising taxes. So, when Congress wanted to increase Medicare benefits, it had to find "revenue offsets."

Someone came up with the idea of allowing lottery winners who collect over time to pay their taxes in the years they actually receive their payments, even if they had had the option of receiving a lump-sum.

I cannot quite figure out how this is supposed to increase tax revenue. Maybe some winners who chose annuities, but who were then taxed as if they had received a lump-sum, were unable to pay their large tax bills. Under the new law, the I.R.S. will be able to collect in full for the entire life of the annuity.

For casinos, the new tax law opens a golden opportunity. The statute has only a few requirements, which are easy to meet:

  1. The winner must be given the option of receiving a lump-sum or a "qualified prize;"
  2. The winner has to decide within 60 days of becoming entitled to the prize;
  3. A "qualified prize" is a jackpot that is payable over a period of at least ten years.

If all requirements are met, the winner who chooses the "qualified prize" only pays income taxes as the payments are actually received.

Casinos would now be justified in advertising all of their large jackpots paid out over ten years as the total amount of all payments, not the much smaller present-day cash value.

Only after a player has won will he or she be told that they have the option of taking the present-day cash value in one lump-sum. The overwhelming majority will undoubtedly want the lump-sum. But, the game is still technically an annuity game and can be advertised with the much larger payout.

Naturally, players must also be told that these large prizes will be paid over ten or twenty years. The law also requires payers to disclose how they computed the value of the single cash payment. Players must be told that they are under no obligation to accept the lump-sum.

Casinos should have their lawyers check out local state laws to ensure that annuity jackpots are legal. There should be little trouble having gaming regulations changed to match the federal tax laws. But care must also be taken that the state income tax laws also are updated to get rid of the constructive receipt rule for these prizes.

Of course, Nevada casinos do not have to worry about whether their state income tax laws coincide with the new federal tax law. It is just one more advantage of being in a state without a state income tax.

I. Nelson Rose
Professor I. Nelson Rose is an internationally known scholar, public speaker and writer and is recognized as one of the world's leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.

Professor Rose is the author of more than 300 books, articles, book chapters columns. He is best known for his internationally syndicated column, "Gambling and the Law ®," and his landmark 1986 book by the same name. His most recent book is a collection of columns and analysis, co-authored with Bob Loeb, on Blackjack and the Law.

A consultant to governments and industry, Professor Rose has testified as an expert witness in administrative, civil and criminal cases in the U.S., Australia and New Zealand, and has acted as a consultant to major law firms, international corporations, licensed casinos, players, Indian tribes, and local, state and national governments, including Arizona, California, Florida, Illinois, Michigan, New Jersey, Texas and the federal governments of Canada and the United States.

With the rising interest in gambling throughout the world, Professor Rose has spoken before such diverse groups as the F.B.I., National Conference of State Legislatures, Congress of State Lotteries of Europe, United States Conference of Mayors, and the National Academy of Sciences. He has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic.

He is the author of Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials.

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