Roland and Marie Womack - Page 13

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          determinative of whether gains from the sale of such property               
          will be taxed as ordinary or capital gain income.  Petitioners              
          question whether the substitute for ordinary income doctrine                
          should apply to their circumstances.  They contend that the                 
          doctrine is the sole legal impediment that could prevent their              
          right to future lottery payments from qualifying for capital gain           
               The basic principle of the doctrine was expressed in                   
          Commissioner v. P.G. Lake, 356 U.S. 200, 266 (1958):                        
               The substance of what was assigned was the right to                    
               receive future income. The substance of what was                       
               received was the present value of income which the                     
               recipient would otherwise obtain in the future.  In                    
               short, consideration was paid for the right to receive                 
               future income, not for an increase in the value of the                 
               income-producing property.                                             
          Stated another way:  if a taxpayer merely transfers for                     
          consideration the right to receive ordinary income in the future,           
          the right transferred will not be treated as a capital asset.               
               Petitioners attempt to limit application of the doctrine to            
          the following four fact patterns derived from the seminal cases             
          and contend that none of them applies to their situation:  (1)              
          Carve-outs in which the taxpayer retains an interest in the                 
          asset, citing Hort v. Commissioner, 313 U.S. 28 (1941), and                 

               5 Petitioners’ argument assumes that the right to receive              
          future lottery installment payments does not fit within any of              
          the exceptions listed in sec. 1221 that would take it out of the            
          definition of a “capital asset”.                                            

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