This interview with Martin S. Granoff of Granoff Enterprises, a firm founded in 1992 that invested only in lottery prizes, dates from the late 1990s. Congress had just amended Section 451 of the Internal Revenue Code to settle how lump-sum lottery options are taxed. Granoff explains what the change meant for states, winners and the investors who buy lottery payments.
What the tax law changed
Q: What is the new law that affects the lottery investment business?
A lot of states did not allow lottery winners to assign their future payments to third parties like us. One reason was a concern that the IRS could tell winners that if a lump-sum option was available to them, then whether they took the lump sum or the installments, it would all be taxable income up front. That’s called constructive receipt.
Many states handled this by offering a lump-sum option but requiring winners to choose when they bought the ticket, rather than after they had won and were redeeming it.
This uncertainty over taxes is why Section 451 of the Internal Revenue Code was amended. There is no longer any question: if a winner takes the lump sum, he pays taxes on the lump sum, and if he takes installments, he pays taxes on the installments.
So states can now more confidently offer the choice of a lump sum or installments when the ticket is redeemed, not when it is bought. I think more states will do that.
Who can take the lump sum, and when
Q: Does this mean that any time a lottery winner decides he’d rather have the lump sum, he can get it?
No. In states that offer the choice, new winners must make the election within 60 days of the drawing. Existing winners will get an 18-month window, starting in July 1999, to elect a lump sum by having the state buy back their remaining payments.
What it means for the secondary market
Q: What impact will this have on the secondary market in lottery prizes?
Obviously it will affect our business, but it certainly won’t eliminate it. More new winners will choose the state’s lump-sum option, which means our pool of potential clients down the road will get smaller.
But many existing winners want to turn only some of their remaining payments into a lump sum, not all of them. The states that start offering a lump-sum buyout will offer all or nothing; as far as we understand it, there will be no partials. And most of our business is buying partials.
Q: Won’t you also have business from new winners who don’t choose the lump sum within 60 days of their drawing? And once the 18-month window has passed, won’t existing winners who didn’t opt for the buyout be potential business for lottery brokers and investors too?
Yes, absolutely. Most people don’t realize that 99.9% of our business is not new winners. It comes from people who won three or more years ago, and I don’t believe many of that group will opt for a lump sum during the 18-month window either.
We still have a fully viable business, and it will remain so for many years to come.
