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despite the fact that they did not make an underlying investment
in exchange for their right to future lottery payments or for the
beneficial interest in the trust, capital gains treatment is
appropriate.
There is no question that the lottery payments in the first
instance were ordinary income. See United States v. Maginnis,
supra at 1183. The trust was simply a conduit to facilitate the
distribution of the lottery proceeds. The character of the
lottery payments as ordinary income did not change as a result of
the payments being distributed through the trust. Sec. 652(b);
see also Van Buren v. Commissioner, 89 T.C. 1101, 1106 (1987);
Picchione v. Commissioner, 54 T.C. 1490, 1492 n.1 (1970), affd.
440 F.2d 170 (lst Cir. 1971). Thus, the sale of the future
lottery payments to Singer lacked the requisite realization of
appreciation in value accrued over a substantial period of time
that is typically necessary for capital gains treatment,
regardless of whether Singer bought rights to the trust
distributions or direct lottery payments. United States v.
Maginnis, supra at 1184 (citing Commissioner v. Gillette Motor
Transp., Inc., supra at 134).
At the time the agreement between Mr. Clopton and Singer was
made, Texas law prohibited the assignment of rights to a lottery
prize. Tex. Govt. Code Ann. sec. 466.406 (Vernon 1998).
However, Texas law changed effective September 1, 1999, prior to
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