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Under Pennsylvania State law, petitioners were required to
obtain court approval before they could transfer their rights to
receive future lottery payments. On August 27, 1999, petitioners
obtained the requisite approval from the Court of Common Pleas of
Dauphin County.
Singer issued petitioners a Form 1099-B, Proceeds From
Broker and Barter Exchange Transactions, for 1999. The Form
1099-B listed proceeds from the sale of “Stocks, bonds, etc.” of
$3,372,342.
Petitioners jointly filed a Form 1040, U.S. Individual
Income Tax Return, for 1999. On Schedule D, Capital Gains and
Losses, petitioners reported the assignment of the 17 future
annual lottery payments of $369,051 to Singer as a sale of a
capital asset held for more than 1 year. Petitioners reported a
sale price of $3,372,342, a cost or other basis of zero,3 and a
long-term capital gain of $3,372,342.
Respondent issued a notice of deficiency to petitioners for
1999. In the notice of deficiency, respondent determined that
the $3,372,342 received from Singer was ordinary income.
Discussion
The issue is whether the $3,372,342 petitioners received
from Singer for the assignment of future lottery payments is
ordinary income or capital gain. Resolution of the issue depends
3 On brief, petitioners assert a cost basis of $1.
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Last modified: May 25, 2011