- 10 -
the question of whether the sale of the right to receive future
annual lottery payments is entitled to capital gain treatment.4
Three Federal Courts of Appeals have also held that
taxpayers are not entitled to capital gain treatment on gain from
the sale of their right to receive future annual lottery
payments. In United States v. Maginnis, 356 F.3d 1179 (9th Cir.
2004), the Court of Appeals for the Ninth Circuit affirmed the
District Court’s holding that the sale of a right to receive
future annual lottery payments was taxable as an ordinary income
transaction. The Court of Appeals, after acknowledging that the
section 1221 definition of “capital asset” was broad and seemed
all encompassing, held that Congress did not intend certain
property to be included in that definition. As an example, the
court explained that an employee's right to be paid for work to
be performed in the future was not intended to be taxed as a
capital asset. The court also explained that the broad
definition of section 1221 would permit taxpayers to treat most
assets as capital. To avoid this, the Court of Appeals
referenced
a series of cases that have established what
is commonly known as the “substitute for
ordinary income” doctrine, [where] the
Supreme Court has narrowly construed the term
4 For petitioners’ 2000 tax year, the maximum capital gain
rate was 20 percent, whereas the maximum ordinary income rate was
39.6 percent. Obviously, the almost doubled rate for ordinary
income has motivated taxpayers to seek capital gain treatment.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Next
Last modified: May 25, 2011