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Petitioner filed Form 1040, U.S. Individual Income Tax
Return, for 2000. On Schedule D, Capital Gains and Losses,
attached to that return, petitioner reported the sale of her
lottery rights as a long-term capital gain of $7.1 million. The
Internal Revenue Service determined that petitioner’s income from
the sale of the lottery rights was includable as ordinary income,
not as a capital gain.
Discussion
The parties dispute whether petitioner’s receipt of
$7.1 million in exchange for the assignment of her right to
receive future lottery installment payments to Settlement Funding
constitutes ordinary income or capital gain. Resolution of this
issue depends on whether petitioner’s right to receive the
remaining lottery installment payments was a capital asset within
the meaning of section 1221.
Petitioner’s argument that the assignment of the right to
receive the remaining payments was the sale of a capital asset
purports to apply the “parameters” but disputes the reasoning in
United States v. Maginnis, 356 F.3d 1179 (9th Cir. 2004). In
Maginnis, the Court of Appeals held that, under the substitute
for ordinary income doctrine, the sale of a right to future
lottery payments should be taxed as ordinary income. Id. at
1187. (Under the substitute for ordinary income doctrine, a
court will narrowly construe the term “capital asset” when a
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Last modified: May 25, 2011