State may not withhold on Australian Lotto winners.
The fund claimed it was exempt from federal withholding under the United States-Australia income tax treaty. It submitted a properly completed form 1001 (which allows a foreign entity to claim a treatybased exemption from withholding) to the lottery department.
Under Internal Revenue Code sections 881 and 1442, payers of certain U.S.-source income must withhold 30% of payments to non* resident alien individuals and foreign corporations. However, under section 894(a), withholding is not required if the payee is exempt under a treaty.
The lottery department continued to withhold despite the fund's exemption claim. The fund asked the federal district court for a preliminary injunction ordering the state lottery department not to withhold and to accept form 1001.
Result: For the fund. The court issued the preliminary injunction, since the fund proved it was entitled to injunctive relief. The fund will suffer "irreparable harm" in the form of lost business opportunities and damage to its reputation if withholding is allowed, while the IRS will still be able to collect the tax later if the exemption, on examination of all the facts, does not prove valid.
* International Lotto Fund v. Virginia State Lottery Department (DC E. Va., 1992).