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the sale of his right did not reflect an increase of value above
the cost of any underlying capital asset). Id. at 1184.
The Court of Appeals also rejected the taxpayer’s argument
that the substitute for ordinary income doctrine was limited to
specific fact situations, none of which were present in the case.
The court noted that treating the sale of a lottery right as a
capital gain would reward lottery winners who elect to receive
periodic payments in lieu of a direct lump-sum payment from the
State and then sell that right to a third party. Id. at 1184.
The court stated:
Nothing in the Revenue Code compels the creation of
such a dichotomous system for the taxation of lottery
winnings. The purpose of narrowly construing the term
capital asset under the substitute for ordinary income
doctrine is to “protect the revenue against artful
devices” that undermine the Revenue Code’s standard
treatment of ordinary income and capital gains. * * *
That is precisely what Maginnis has attempted here.
[Id. at 1184-1185.]
Finally, the Court of Appeals rejected the taxpayer’s argument
that capital gains treatment was appropriate because his lottery
right is a debt instrument under section 1275. Id. at 1187.
Petitioners, relying on McAllister v. Commissioner, 157 F.2d
235 (2d Cir. 1946), revg. 5 T.C. 714 (1945), and Bell’s Estate v.
Commissioner, 137 F.2d 454 (8th Cir. 1943), revg. 46 B.T.A. 484
(1942), contend that property not within the statutory exclusions
for capital assets produces capital gain on its sale. We have
previously recognized that the cases cited by petitioners were
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