David K. and Elizabeth Simpson - Page 4

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          1099-B showed proceeds from the sale of “Stocks, bonds, etc.” of            
          $4,485,000.                                                                 
               On April 15, 1999, petitioners jointly filed Form 1040, U.S.           
          Individual Income Tax Return, for 1998.  On Schedule D, Capital             
          Gains and Losses, petitioners reported the assignment of the 10             
          future annual lottery payments of $647,000 to Singer as a sale of           
          a capital asset held more than 1 year.  Petitioners reported a              
          sales price of $4,485,000, a cost or other basis of $0, and a               
          long-term capital gain of $4,485,000.                                       
               On January 7, 2002, respondent issued a notice of deficiency           
          to petitioners for the year 1998.  In the notice, respondent                
          determined:                                                                 
               It has been determined that the sale of rights to                      
               future annual lottery payments reported as a long term                 
               capital gain on Schedule D in tax year 1998 do not meet                
               the definition of a capital asset.  Accordingly, the                   
               net income reported of $4,485,000.00 has been                          
               reclassified as ordinary income.                                       
          Petitioners timely filed a petition to this Court seeking a                 
          redetermination.                                                            
          Discussion                                                                  
               The parties dispute whether the $4,485,000 received in                 
          exchange for the assignment of future lottery payments is                   
          ordinary income or capital gain.4  Resolution of this issue                 
          depends on whether the right to receive future annual lottery               


               4Our resolution of the issue presented does not depend on              
          who has the burden of proof in this case.                                   




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