Herbert is in charge of purchasing lottery tickets for his office, which consists of sales representatives for a large car dealership. Typically, $10$ to $15$ sales representatives contribute funds each week to purchase community tickets. As the prize amount steadily increased, more and more employees of the dealership joined in contributing funds. This week, the prize nears $$1$ billion and $17$ other employees $($including Herbert$)$ contributed $$10$ for the purchase of $$170$ in tickets. While in line to purchase the tickets, Herbert decides, $$Hey$...$all you need is a dollar and a dream$$ and purchases $$200$ in tickets, not the $$170$ representing the $$10$ per person pool with Herbert and colleagues. Herbert tells his three favorite cousins that he purchased $$30$ of

lottery tickets and will share winnings with them.

That night, Herbert watches TV and learns that he has the winning ticket within his possession. When the tickets were purchased, Herbert simply held all originals and did not segregate out which ones were purchased as part of the pool, and which ones were purchased with the extra $$30$ added for his family.

Herbert comes to you, his CPA who has been his trusted advisor for several years and your advice before coming forward with the winning ticket. You are requested to answer the below

questions:

$1.$ Is he required to share the winnings with his co$-$workers, his family...or can he keep it all

for himself and go to Iceland? Based on partnership rules, what is his liability to both his family members and co$-$workers? Herbert is very nervous, as he has made many promises and may now have liability of the winnings to unrelated parties, which he did not expect to come to fruition.

$2.$ Herbert has had luck over the years, this is his $5$th time winning the lottery. In the past, he has had pools of community tickets and always shared winnings with those in the pool without question. Herbert plans to keep playing the lottery, using pools with different groups of friends and insists he will hit another big jackpot in his life. Herbert wonders if he should form an S$-$Corporation and make members of the pool shareholders?

What are the tax and income sharing considerations that would need to be discussed if he were to use an S$-$Corporation as a passthrough for future lottery activities?

You need to answer Herbert$$s questions, and the time allotment is very tight. Provide a professional answer to Herbert via E mail to him, as well as a memo for your files to justify your answer in the event of future litigation. As the situation here is rather unique, it is doubtful that the Internal Revenue Code alone will provide the full answer to the question. More than

likely, case law will be needed to show the existence of legal precedence of similar events that may have been decided by the courts. Case law can be located using RIA Checkpoint as well as Google Scholar. Assume that Herbert lives in a state that has no prohibition on relationships for gaming transactions.