ROANOKE TIMES 

                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: WEDNESDAY, February 26, 1992                   TAG: 9202260180
SECTION: VIRGINIA                    PAGE: B1   EDITION: STATE 
SOURCE: BEN BEAGLE STAFF WRITER
DATELINE:                                 LENGTH: Medium

LOTTO LAW WOULD MAKE IRS WAIT

The General Assembly has passed legislation that may save the heirs of big Lotto winners from bankruptcy.

Paula Otto, spokeswoman for the state Lottery Department, said the legislation would allow a change in the way lottery winners' annuities are handled.

Currently, after initial payment with taxes deducted, Lotto winnings are put into annuities in the name of the winner and paid off over 20 years.

The Internal Revenue Service has ruled that, should the winner die after the first payment, his beneficiaries would become immediately liable for all the estate taxes on the winnings.

Within nine months after death, the heirs would face federal estate taxes of 55 percent on winnings of $10 million, the Lottery Department said.

In addition, because Virginia's income tax conforms with the federal rules, the state also would have money coming.

With only a fraction of the total take paid out, the heirs could go broke paying off the tax on the entire amount, although they wouldn't get all of it for up to 20 years.

The new law would allow the Lottery Department to keep annuities in the name of the state until they are payable each year.

"We think it will help the winners," Otto said, but the new law wouldn't be tested until a lottery winner dies. So far, none of Virginia's Lotto winners has died.

And Otto said the department doesn't know "whether or not that will suit the IRS."

In Washington, Bill Bergman, director of a national lottery organization, said his group plans to talk to IRS officials soon.

He said the North American Association of State and Provincial Lotteries will tell the IRS about "an extraordinarily inequitable situation."

Bergman said the IRS rule has not been used consistently. "It's been applied in some instances, and in some instances it has not," he said.

If the talks don't work, Bergman said, his organization will try to get an amendment to tax legislation.

In Virginia and in other states, winners have taken out expensive life insurance policies to pay off the tax for their heirs.

But, accountants say proceeds from such a policy also could become subject to the estate tax.

Otto said Virginia legislators were stunned when lottery officials explained the reason for the legislation. 

Memo: shorter version ran in the Metro edition.
by Bhavesh Jinadra by CNB