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intended that Mary retain at least $150,000 after repayment of
the outstanding balance of the loans. In August 1996, $250,000
was paid in satisfaction of the balance due on the loans, and
$150,000 was received and retained by Mary.
On Schedule D, Capital Gains and Losses, of their 1996
return, petitioners reported a $264,000 long-term capital loss
arising out of the foregoing transactions. That loss was derived
by treating $400,000 as the sales price or amount realized by
virtue of Mary’s assignment of the 12 future lottery payments to
Woodbridge and treating the gross amount of the assigned payments
($664,000) as Mary’s basis in such payments. Petitioners then
claimed a capital loss deduction of $3,000 in computing their
total income for 1996. Respondent’s notice of deficiency issued
on March 31, 2000, disallowed the $3,000 deduction and determined
that the transaction with Woodbridge resulted in $400,000 of
ordinary income to petitioners. During the hearing, petitioners
conceded that the entire $400,000 is includable in income, but
they maintain that it should be treated as capital gain.2
2 Although the matter is not specifically addressed by the
parties, they appear to agree that the issue is whether to
characterize the $400,000 as ordinary income or as long-term
capital gain. Petitioners originally reported the transaction as
generating long-term capital loss, and respondent has not raised
an issue as to petitioners’ holding period for the assigned right
to the 12 future lottery payments. We, therefore, assume that
respondent agrees that such right, which arose in 1991, had been
held for more than 1 year at the time of its sale to Woodbridge
in 1996; and that, assuming such right constitutes a capital
(continued...)
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