Roland and Marie Womack - Page 10

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          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                     
                    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.              

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