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Government. The precise question is whether gain from the sale
of the right to receive future annual lottery payments is taxable
as ordinary income or as capital gain. It has been held that
gain from the sale of such rights is taxable as ordinary income.
The facts in the two cases under consideration are alike in every
material detail and are also indistinguishable from fact patterns
considered by this and other courts that have already decided
this question.
Essentially, petitioners in each case won the lottery and,
for a time, reported each annual installment payment as ordinary
income. At some point, petitioners sold the right to their
remaining installment payments and claimed that the resulting
gain was reportable as capital gain, rather than ordinary income,
as respondent contends. Case precedent has consistently held
that the sale of the remaining installments does not convert what
would have been ordinary income payments into income taxable as
capital gain. Petitioners contend, as a matter of law, that
precedent on this question is in error.
Petitioners’ legal arguments fall into the following four
broad categories: (1) Lottery rights are capital assets because
they are denominated “accounts receivable” under the Florida
Uniform Commercial Code and, as such, are not in the category
“business accounts receivable” so as to be excluded from the
statutory definition of capital asset under section 1221(a)(4);
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Last modified: May 25, 2011