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One of the $564 million Powerball lottery winners might actually be a lot luckier than the others

(Source: The Washington Post)

The only thing better than winning the lottery might be winning the lottery in Puerto Rico.

One of the three winners of the recent $564 million Powerball jackpot purchased their prize ticket at a gas station in Ponce, a municipality in southern Puerto Rico, marking the first time anyone outside the continental United States has shared in the lottery's winnings. The victory is something of a miracle for the island, where Powerball has only been operating since October. It also raises a question that could be worth more than $30 million for the lucky ticket holder: Will the winner have to pay federal taxes on the prize money, or will the cash come free of federal taxes like all other lottery prizes that are doled out on the island?

The answer hinges on an interpretation of Puerto Rico's tax code, which functions a bit differently than it does in the rest of the United States. Residents of the island don't have to pay federal taxes for income earned in Puerto Rico, a quirk which has allowed previous lottery winners to collect their millions tax free, at least until now. But those lotteries were all locally sponsored; Powerball is different in that it operates not just in Puerto Rico, but also in more than 40 states around the country.

"It's a very peculiar situation. It's unlike any other lottery here," said Roberto Montalvo, a tax attorney at local law firm Goldman Antonetti & Córdova. "My guess is that it all comes down to what is considered the source of the income. If it's Puerto Rico, then it will be federal tax free. If it's the mainland, then it won't."

Puerto Rico has used the absence of a federal tax for income earned locally as a selling point for rich Americans interested in holding on to much more of their earnings. If an individual purchases a home on the island and spends more than half of the year there, that person no longer has to fork over any U.S. federal income taxes on money earned in Puerto Rico saving at least 30 percent. Major U.S. corporations also famously use Puerto Rico to lower their tax obligations. The Senate Permanent Subcommittee on Investigations found that from 2009 to 2011, Microsoft was able to shift offshore almost half its net revenue from U.S. retail sales, or roughly $21 billion, by transferring intellectual-property rights to a Puerto Rican subsidiary.

It's possible that no one has thought through this Powerball tax issue since few expected anyone to win Powerball in Puerto Rico so quickly.

At the moment, there doesn't appear to be a public or official stance by Powerball or the IRS on how to treat the prize. The association that runs the Powerball game directed all questions regarding this story to the group that runs the lottery in Puerto Rico. That group did not respond to repeated requests for comment. The IRS also did not immediately reply.

Powerball's website, which details how state and federal taxes affect winnings, doesn't say anything about the tax implications for winners in Puerto Rico. Even the association that runs the lottery in Puerto Rico is in the dark about whether the winnings will be federal tax exempt.

"We asked the IRS that same question in October, but we haven’t received an answer yet," Antonio Perez Lopez, assistant secretary of the lottery on the island, told Fox News Latino on Thursday. "We are still waiting, so we don’t know."

The winnings, which amount to more than $103 million if taken as a lump sum, won't come tax free, even if they do end up coming without any federal taxes attached. A law passed in 1989 requires that all lottery winners pay a local state tax, which varies depending on the size of the winnings. In this case, the tax would amount to roughly 20 percent of the prize, or more than $25 million for Puerto Rico's government, Lopez told local newspaper El Nuevo Día. The inclusion of a federal tax would tack on at least another 25 percent, but likely closer to 30 percent.

The person who purchased the winning ticket in Puerto Rico has yet to step forward. When they do they'll join two others—one in Texas, and another in North Carolina—who also drew the prize numbers but who might, it turns out, be a little less lucky.

Three lucky ticketholders in North Carolina, Texas and Puerto Rico have won the $560 million Powerball lottery jackpot, officials said. (Video: Reuters)