2004 Tax Ct. Memo LEXIS 255 | Tax Ct. | 2004
Commissioner's deficiency determination sustained.
MEMORANDUM OPINION
HAINES, Judge: Respondent determined a $ 518,463 deficiency in petitioner's Federal income tax for 1998 (year in issue). The sole issue for decision is whether petitioner's receipt of $ 2,614,744 in exchange for an assignment of a right to receive future lottery installment payments constitutes ordinary income or capital gain during the year in issue. 1
Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
2004 Tax Ct. Memo LEXIS 255">*256 The parties submitted this case fully stipulated pursuant to
Petitioner purchased a $ 1 lottery ticket sometime before May 1, 1993. On May 1, 1993, petitioner won $ 12,358,688 from the Colorado State lottery with this ticket. At the time he won the lottery, petitioner was married to Tammy Watkins (Mrs. Watkins). The lottery prize amount was payable in 25 annual installments beginning on May 3, 1993, and payable on the third of May for the next 24 years.
Petitioner reported the receipt of the first five lottery installment payments as ordinary income on his Federal income tax returns.
On February 7, 1997, petitioner and Mrs. Watkins were divorced by order of the District Court, Park County, of the State of Colorado. As part of the divorce settlement, the district court awarded petitioner and Mrs. Watkins each one-half interest in the future lottery installment payments as of May 3, 1998.
On or about April 10, 1998, petitioner entered into a contract with Stone Street Capital, Inc. (Stone Street) to2004 Tax Ct. Memo LEXIS 255">*257 sell and assign his one-half interest in the remaining lottery installment payments beginning with the annual payment due on May 3, 1999. The remaining lottery installment payments were as follows:
Year Amount
1999 $ 384,220
2000 398,436
2001 413,178
2002 428,465
2003 444,318
2004 460,756
2005 477,805
2006 495,483
2007 513,815
2008 532,826
2009 552,540
2010 572,983
2011 594,183
2012 616,167
2013 638,965
2014 662,606
2015 687,122
2016 712,545
2017 738,909
The contract sale price2004 Tax Ct. Memo LEXIS 255">*258 of petitioner's interest in the remaining lottery installment payments was $ 2,614,744. On June 16, 1998, an order from the District Court for the City and County of Denver, Colorado, directing the Colorado State lottery to make assigned payments to Stone Street was issued. Petitioner received consideration of $ 2,614,744 for the remaining lottery installment payments from Stone Street on June 29, 1998.
On petitioner's 1998 tax return, he reported the one-half share of the annual installment payment awarded in the divorce settlement, i.e., $ 185,256, due on May 3, 1998, as ordinary income. Also on the 1998 tax return, petitioner reported the consideration received for the assignment of his one-half interest in the remaining lottery installment payments to Stone Street as the sale of a capital asset of $ 2,414,744, with a basis of zero. The sale amount represented the price paid by Stone Street, i.e., $ 2,614,744, minus $ 200,000 paid to Will Hoover Group as consulting fees for services provided in the assignment to Stone Street.
In the notice of deficiency, respondent determined that petitioner's assignment of his right to future lottery installment payments to Stone Street was not2004 Tax Ct. Memo LEXIS 255">*259 a sale of a capital asset, and the consideration received was includable as ordinary income in the full amount of $ 2,614,744. Further, respondent determined the deduction of $ 200,000 for consulting fees was allowable as a miscellaneous itemized deduction. Petitioner timely filed a petition with the Court to dispute respondent's determinations.
Discussion
The parties dispute whether petitioner's receipt of $ 2,614,744 in exchange for the assignment of his right to receive future lottery installment payments constitutes ordinary income or capital gain during the year in issue. Resolution of this issue depends on whether petitioner's right to receive the remaining lottery installment payments was a capital asset within the meaning of
Petitioner's argument that the assignment was a sale of a capital asset relies on reasoning found in
Additionally, in2004 Tax Ct. Memo LEXIS 255">*260 Maginnis, the Court of Appeals affirmed the District Court holding that under the substitute for ordinary income doctrine the sale of a right to future lottery payments should be taxed as ordinary income. 2
Two factors are crucial to our conclusion, although we do not
hold that they will be dispositive in all cases. Maginnis (1)
did not make any underlying investment of capital in return for
the receipt of his lottery right, and (2) the sale of his right
did not reflect an accretion in value over cost to any
underlying asset Maginnis held. * * * [
ref. omitted]
2004 Tax Ct. Memo LEXIS 255">*261 Petitioner argues that his purchase of the lottery ticket was an underlying investment of capital. Further, petitioner argues that the assignment of lottery installment payments did reflect an accretion in value over cost to an underlying asset petitioner held because the assigned future lottery installment payments appreciated in value due to "impersonal market forces outside of the control of the asset's owner". We disagree. We find that the facts in
In Maginnis, the taxpayer assigned his right to receive the remaining installments of a lottery prize to a third party in exchange for a lump-sum payment.
Additionally, we find the facts in the instant case indistinguishable in substance from the facts in our opinion of
2004 Tax Ct. Memo LEXIS 255">*265 Pursuant to
In reaching our holding herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for respondent.
Footnotes
1. The parties stipulated that if the assignment does not constitute the sale of a capital asset, then a $ 200,000 fee paid to Will Hoover Group is deductible only as a miscellaneous itemized deduction on petitioner's Schedule A, Itemized Deductions, for 1998, as respondent determined in the notice of deficiency.↩
2. Under the "substitute for ordinary income doctrine", a court narrowly construes the term "capital asset" when taxpayers make attempts to transform ordinary income into capital gain. See
Commissioner v. P.G. Lake, Inc., 356 U.S. 260">356 U.S. 260 , 356 U.S. 260">265, 2 L. Ed. 2d 743">2 L. Ed. 2d 743, 78 S. Ct. 691">78 S. Ct. 691↩ (1958).3. We note that petitioner's tax return reported a zero cost basis with regard to amount received for the assignment of the future lottery installment payments to Stone Street.↩
4.
SEC. 1221 . CAPITAL ASSET DEFINED.For purposes of this subtitle, the term "capital
asset" means property held by the taxpayer (whether or not
connected with his trade or business), but does not include --
(1) stock in trade of the taxpayer or other property
of a kind which would properly be included in the inventory
of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or
business;
(2) property, used in his trade or business, of a
character which is subject to the allowance for
depreciation provided in
section 167 , or real property usedin his trade or business;
(3) a copyright, a literary, musical, or artistic
composition, a letter or memorandum, or similar property,
held by --
(A) a taxpayer whose personal efforts created
such property,
(B) in the case of a letter, memorandum, or
similar property, a taxpayer for whom such property
was prepared or produced, or
(C) a taxpayer in whose hands the basis of such
property is determined, for purposes of determining
gain from a sale or exchange, in whole or part by
reference to the basis of such property in the hands
of a taxpayer described in subparagraph (A) or (B);
(4) accounts or notes receivable acquired in the
ordinary course of trade or business for services rendered
or from the sale of property described in paragraph (1);
(5) a publication of the United States Government
(including the Congressional Record) which is received from
the United States Government or any agency thereof, other
than by purchase at the price at which it is offered for
sale to the public, and which is held by --
(A) a taxpayer who so received such publication, or
(B) a taxpayer in whose hands the basis of such
publication is determined, for purposes of determining gain
from a sale or exchange, in whole or in part by reference
to the basis of such publication in the hands of a taxpayer
described in subparagraph (A).↩
