T.C. Memo. 2003-155
UNITED STATES TAX COURT
DAVID K. AND ELIZABETH SIMPSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 191-02. Filed May 28, 2003.
Kevin G. Staker, for petitioners.
Linette B. Angelastro, for respondent.
MEMORANDUM OPINION
GOEKE, Judge: Respondent determined a deficiency in
petitioners’ 1998 Federal income tax of $879,060. The sole issue
for decision is whether a lump-sum amount received in exchange
for the assignment of the right to receive a portion of certain
future annual lottery payments is ordinary income or capital
gain.
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Background
The parties submitted this case fully stipulated pursuant to
Rule 122.1 The stipulation of facts and the attached exhibits
are incorporated herein by this reference. Petitioners, Mr.
Simpson and Mrs. Simpson, are husband and wife and resided in
Santa Barbara, California, at the time they filed their petition.
On April 29, 1992, Mr. Simpson won a California lottery
prize of $15,740,000. Under California law at that time, the
prize was payable in 20 annual installments of $787,000, with the
first installment payable on April 29, 1992, and subsequent
installments payable each year on April 29 through the year 2011.
On July 20, 1992, Mr. Simpson assigned his California lottery
prize to the Simpson Trust.2
On April 20, 1997, Mr. Simpson, in his capacity as trustee
of the Simpson Trust, assigned a portion of the lottery prize to
Singer Asset Finance Company, LLC (Singer). Under the assignment
agreement, all rights to $140,000 of 12 annual lottery payments
1
Unless otherwise indicated, 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.
2
The evidence in the record indicates that Mr. Simpson was
the sole trustee of the Simpson Trust and that he took all
subsequent actions with respect to the annual lottery payments
discussed herein in his capacity as trustee. Petitioners
apparently have taken and continue to take the position, which
respondent does not dispute, that all income of the Simpson Trust
is includable in their income.
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commencing April 20, 1997, through and including April 20, 2008,
were assigned to Singer.3 The assignment left the Simpson Trust
with the right to receive future annual lottery payments of
$647,000 through the year 2008. The right to receive the 2009,
2010, and 2011 payments was not assigned.
On June 2, 1998, Mr. Simpson, as trustee of the Simpson
Trust, entered into another assignment agreement with Singer.
Pursuant to this agreement, the right to receive the remaining
$647,000 of 10 annual lottery payments for the years 1999 through
2008 was assigned to Singer in exchange for a lump-sum payment of
$4,485,000.
At all relevant times, the laws of the State of California
precluded a lottery winner from assigning the right to receive
future annual lottery payments without obtaining California
Superior Court approval. On June 26, 1998, the Simpson Trust and
Singer filed with the California Superior Court for the County of
Sacramento (Sacramento County Superior Court) a joint petition
for an order approving voluntary assignment of lottery winnings.
On July 7, 1998, the Sacramento County Superior Court issued an
order approving the assignment.
Singer issued to Mr. Simpson a Form 1099-B, Proceeds From
Broker and Barter Exchange Transactions, for 1998. The Form
3
The evidence in the record does not reflect the
consideration paid by Singer under this assignment agreement.
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1099-B showed proceeds from the sale of “Stocks, bonds, etc.” of
$4,485,000.
On April 15, 1999, petitioners jointly filed Form 1040, U.S.
Individual Income Tax Return, for 1998. On Schedule D, Capital
Gains and Losses, petitioners reported the assignment of the 10
future annual lottery payments of $647,000 to Singer as a sale of
a capital asset held more than 1 year. Petitioners reported a
sales price of $4,485,000, a cost or other basis of $0, and a
long-term capital gain of $4,485,000.
On January 7, 2002, respondent issued a notice of deficiency
to petitioners for the year 1998. In the notice, respondent
determined:
It has been determined that the sale of rights to
future annual lottery payments reported as a long term
capital gain on Schedule D in tax year 1998 do not meet
the definition of a capital asset. Accordingly, the
net income reported of $4,485,000.00 has been
reclassified as ordinary income.
Petitioners timely filed a petition to this Court seeking a
redetermination.
Discussion
The parties dispute whether the $4,485,000 received in
exchange for the assignment of future lottery payments is
ordinary income or capital gain.4 Resolution of this issue
depends on whether the right to receive future annual lottery
4
Our resolution of the issue presented does not depend on
who has the burden of proof in this case.
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payments constitutes a capital asset within the meaning of
section 1221.
Section 1221 provides the following definition of the term
“capital asset”:
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 used in 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
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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).
Petitioners argue that (1) the sale of a lottery award is the
sale of a capital asset, (2) a lottery ticket falls within the
definition of a capital asset, (3) assets similar to lottery
tickets are classified as capital assets, and (4) recent court
decisions regarding the sale of lottery proceeds are incorrect.5
5
Although petitioners’ primary argument is that the right to
receive future annual lottery payments is a capital asset, it
appears that they are also arguing that the winning lottery
ticket is a capital asset and that somehow the lump-sum payment
received from Singer is therefore capital gain. Petitioners did
not assign the lottery ticket to Singer; rather, they
relinquished the lottery ticket to the State of California in
order to claim the lottery prize and secure the right to the 20
annual installments of $787,000. The right to a portion of some
of the annual lottery payments, not the actual lottery ticket,
was subsequently assigned to Singer in exchange for the lump-sum
payment of $4,485,000. It is this right to future lottery
payments that is the focus of our inquiry, not the actual lottery
ticket. See Johns v. Commissioner, T.C. Memo. 2003-140.
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This is not an issue of first impression. In Davis v.
Commissioner, 119 T.C. 1 (2002), we decided the same issue under
almost identical factual circumstances. The taxpayers in that
case also won a California State lottery prize and subsequently
assigned a portion of future annual lottery payments to Singer in
exchange for a lump-sum payment. Id. at 3. We held that the
right to receive such payments does not constitute a capital
asset within the meaning of section 1221. Id. at 7. Petitioners
are aware of our holding in Davis; however, they contend that
case was incorrectly decided.
In Davis, we thoroughly analyzed section 1221 and relevant
caselaw interpreting the statute. We recently relied on and
followed our analysis in Davis. See Johns v. Commissioner, T.C.
Memo. 2003-140; Boehme v. Commissioner, T.C. Memo. 2003-81.6 No
purpose would be served by repeating the analysis that led us to
hold in Davis that the right to receive future annual lottery
payments does not constitute a capital asset.7
6
Accord United States v. Maginnis, 89 AFTR 2d 2002-3028,
2002-2 USTC par. 50,494 (D. Or. 2002) (holding that the amount
that the taxpayer received in exchange for the taxpayer’s
assignment to a third party of his right to receive certain
future annual lottery payments is ordinary income).
7
On brief, petitioners imply that the right to receive
future annual lottery payments is analogous to currency
contracts, stocks, bonds, and options. Unlike the situations
cited by petitioners, in this instance petitioners received the
lump-sum payment as a substitute for the right to receive
ordinary income.
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The doctrine of stare decisis generally requires that we
follow the holding of a previously decided case, absent special
justification. Sec. State Bank v. Commissioner, 111 T.C. 210,
213-214 (1998), affd. 214 F.3d 1254 (10th Cir. 2000). After
reviewing petitioners’ arguments in support of their position
that the right to receive future annual lottery payments
constitutes a capital asset, we find nothing therein that would
cause us to refrain from applying the doctrine of stare decisis.
Accordingly, we rely on the legal analysis in Davis and hold that
(1) the right in this case to receive the future lottery payments
does not constitute a capital asset within the meaning of section
1221, and (2) the lump-sum payment of $4,485,000 received from
Singer in exchange for that right is ordinary income.
Decision will be entered
for respondent.