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stocks, bonds, and options, because the taxpayers received the
lump-sum payment as a substitute for the right to receive
ordinary income. Id. at n.7.
The most recent case on this issue is United States v.
Maginnis, 356 F.3d 1179 (9th Cir. 2004), which involved a
taxpayer who assigned to a third party his right to future
lottery payments from the State of Oregon. The Court of Appeals
for the Ninth Circuit thoroughly analyzed Supreme Court precedent
regarding the definition of a capital asset and concluded that
under the substitute for ordinary income doctrine the taxpayer’s
right to the future payments was not a capital asset. Id. at
1182. The Court of Appeals ultimately rejected the taxpayer’s
argument that the right to future lottery payments is a capital
asset within the meaning of sections 1221 and 1222. Id. at 1185.
In analyzing whether the right to future lottery payments was a
capital asset, the Court of Appeals for the Ninth Circuit relied
on Supreme Court precedent and looked at whether there was an
underlying investment of capital and an accretion in value over
the cost of any underlying asset held. Id. at 1183. The Court
of Appeals concluded capital gains treatment was not appropriate
because the taxpayer made no underlying investment in exchange
for the right to future payments, and, because there was no
underlying investment, there was no cost to the taxpayer for the
right to receive the payments (i.e., the money he received for
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