T.C. Memo. 2004-216
UNITED STATES TAX COURT
GEORGE AND ANGELINE LATTERA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4269-03. Filed September 23, 2004.
Mark E. Cedrone, for petitioners.
Carol Lynn E. Moran, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$660,784 in petitioners’ 1999 Federal income tax.1 The sole
issue for decision is whether a lump-sum payment received in
exchange for the assignment of the right to receive future annual
lottery payments is ordinary income or capital gain.
1
All amounts are rounded to the nearest dollar.
- 2 -
Background
The parties submitted this case fully stipulated pursuant to
Rule 122.2 The stipulation of facts and the attached exhibits
are incorporated herein by this reference. At the time they
filed their petition, petitioners resided in Philadelphia,
Pennsylvania.
On June 12, 1991, petitioners won $9,595,326 from the
Pennsylvania Lottery. Petitioners did not have the option of
receiving the prize in a single lump-sum payment. The prize was
payable in 26 annual installments of $369,051. Petitioners
purchased the winning lottery ticket for $1.
On August 12, 1999, petitioners and Singer Asset Finance
Co., L.L.C. (Singer) entered into a “Sale Agreement for Lottery
Prize Payments of George M. Lattera and Angeline Lattera” and
“Terms Rider to Sale Agreement for Lottery Prize Payments of
George M. Lattera and Angeline Lattera” (the sale agreements),
that assigned petitioners’ rights, title, and interest in the
lottery prize to Singer. Under the terms of the sale agreements,
the remaining 17 annual payments of $369,051, payable on or about
June 12, 2000 through 2016, were sold to Singer for $3,372,342.
2
Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
year in issue.
- 3 -
Under Pennsylvania State law, petitioners were required to
obtain court approval before they could transfer their rights to
receive future lottery payments. On August 27, 1999, petitioners
obtained the requisite approval from the Court of Common Pleas of
Dauphin County.
Singer issued petitioners a Form 1099-B, Proceeds From
Broker and Barter Exchange Transactions, for 1999. The Form
1099-B listed proceeds from the sale of “Stocks, bonds, etc.” of
$3,372,342.
Petitioners jointly filed a Form 1040, U.S. Individual
Income Tax Return, for 1999. On Schedule D, Capital Gains and
Losses, petitioners reported the assignment of the 17 future
annual lottery payments of $369,051 to Singer as a sale of a
capital asset held for more than 1 year. Petitioners reported a
sale price of $3,372,342, a cost or other basis of zero,3 and a
long-term capital gain of $3,372,342.
Respondent issued a notice of deficiency to petitioners for
1999. In the notice of deficiency, respondent determined that
the $3,372,342 received from Singer was ordinary income.
Discussion
The issue is whether the $3,372,342 petitioners received
from Singer for the assignment of future lottery payments is
ordinary income or capital gain. Resolution of the issue depends
3
On brief, petitioners assert a cost basis of $1.
- 4 -
on whether the right to receive future annual lottery payments
constitutes a capital asset.
Section 1221 defines “capital asset” as follows:
SEC. 1221. CAPITAL ASSET DEFINED.
(a) In General.
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
- 5 -
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).
Petitioners contend that (1) the Court wrongly decided Davis
v. Commissioner, 119 T.C. 1 (2002), (2) a lottery ticket falls
within the definition of a capital asset, and (3)
characterization of a lottery ticket and the resultant prize
as a capital asset does not frustrate congressional intent.
Davis involved the same issue and nearly identical facts.
The taxpayers in Davis 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
- 6 -
that the right to receive the future annual lottery payments did
not constitute a capital asset within the meaning of section
1221. Id. at 7. We have repeatedly relied upon the analysis in
Davis. Clopton v. Commissioner, T.C. Memo. 2004-95; Simpson v.
Commissioner, T.C. Memo. 2003-155; Johns v. Commissioner, T.C.
Memo. 2003-140; Boehme v. Commissioner, T.C. Memo. 2003-81.4 No
purpose would be served by repeating the analysis in Davis
regarding why the right to receive future annual lottery payments
does not constitute a capital asset.
Petitioners’ remaining arguments all depend upon the
determination that the lottery ticket was the property sold to
Singer under the sale agreements. This argument was considered
and rejected in Simpson and Johns.
Petitioners surrendered the lottery ticket to the
Pennsylvania Lottery and claimed the lottery prize. The lottery
prize was payable in 26 payments. Petitioners did not sell the
lottery ticket to Singer, but rather their right to future
lottery payments. Pursuant to our holding in Davis v.
Commissioner and its progeny, we conclude that the $3,372,342
4
Accord United States v. Maginnis, 356 F.3d 1179, 1187
(9th Cir. 2004) (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 under the “substitute for ordinary
income” doctrine).
- 7 -
petitioners received from Singer is ordinary income and not
capital gain.
To reflect the foregoing,
Decision will be entered
for respondent.