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capital asset when taxpayers have made
transparent attempts to transform ordinary
income into capital gain in ways that
undermine Congress’ reasons for
differentially taxing capital gains. * * *
Id. at 1182. After further discussion of the substitute for
ordinary income doctrine, the Court of Appeals held that the sale
of the right to receive future annual lottery payments was
taxable as an ordinary income transaction.
In Lattera v. Commissioner, 437 F.3d 399 (3d Cir. 2006),
affg. T.C. Memo. 2004-216, the Court of Appeals for the Third
Circuit agreed with the result in and generally followed the
Court of Appeals for the Ninth Circuit’s rationale in United
States v. Maginnis, supra. The Court of Appeals for the Third
Circuit also analyzed the effect of the Supreme Court’s holding
in Arkansas Best and whether the substitute for ordinary income
doctrine survived the Supreme Court’s holding. The Court of
Appeals, to address a perceived weakness in the Maginnis
analysis, performed a several-part analysis drawn from its
understanding of the analysis performed in the line of cases that
provided the basis for the substitute for ordinary income
doctrine. That more detailed analysis led the Court of Appeals
to the conclusion that gain from the sale of the right to receive
future annual lottery payments is taxable as ordinary income.
The Court of Appeals for the Tenth Circuit recently affirmed
two of this Court’s decisions to like effect. The Court of
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Last modified: May 25, 2011