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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
treatment.5
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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