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taxpayer makes an attempt to transform ordinary income into
capital gain. See Commissioner v. P.G. Lake, Inc., 356 U.S. 260,
265 (1958).) The Court of Appeals found that there was no sale
of a capital asset because there was no underlying investment of
capital in return for the receipt of the lottery ticket and
because the sale did not reflect an increase in value over cost
to any underlying asset held by the taxpayer. Id. at 1183.
Petitioner argues that her right to receive future lottery
payments in this case was a capital asset because her purchase of
the lottery ticket was an underlying investment in capital.
Further, petitioner argues that there was an increase in value
above the cost of any underlying asset she held because “the
assigned payments appreciated in value due to impersonal market
forces”. Finally, petitioner argues that respondent’s reliance
on the substitute for ordinary income doctrine is misplaced.
In Maginnis, the taxpayer assigned his right to receive the
remaining installments of a lottery prize to a third party in
exchange for a lump-sum payment. The Court of Appeals held that
the taxpayer could not argue that a purchase of a lottery ticket
was a capital investment. Id. Further, because the Court of
Appeals held that the lottery ticket was not a capital
investment, it also held that there was no “cost” to the taxpayer
for the right to receive the future lottery payments. Therefore,
the money received for the sale of the right could not be seen as
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Last modified: May 25, 2011