T.C. Memo. 2004-262
UNITED STATES TAX COURT
ROGER LESLIE WOLMAN AND CAROLINE R. WOLMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18953-02. Filed November 16, 2004.
Roger Leslie Wolman and Caroline R. Wolman, pro sese.
Sara J. Barkley, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies of $1,600
and $88,434 in petitioner Roger Wolman’s (Mr. Wolman’s) and
petitioner Caroline Wolman’s (Mrs. Wolman’s), collectively
petitioners’, Federal income taxes for 1998 and 1999,
respectively (years in issue). The sole issue for decision is
whether petitioners’ receipt of $20,000 and $550,000, in 1998 and
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1999, respectively, in exchange for an assignment of a right to
receive future lottery installment payments constitutes ordinary
income or capital gain during the years in issue.
Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the years in issue. Amounts
are rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioners resided in Littleton, Colorado.
In 1988, Mr. Wolman purchased a computer and a computer
program, “Lotto Challenger”. Beginning in January 1989, Mr.
Wolman used this program to choose numbers each week for the
lottery.
On April 2, 1994, Mr. Wolman won $1,500,000 in the Colorado
lottery. The lottery prize amount was payable in 25 annual
installments beginning on April 4, 1994, and ending on April 4,
2018. Mr. Wolman reported the first five annual lottery
installment payments received as ordinary income on his
respective Federal tax returns.
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On or about June 29, 1998, Mr. Wolman entered into a sale
agreement with Capital First Financing (Capital First), which
stated:
Lottery Winner hereby sells and assigns to Purchaser and its
assigns all Lottery Winner’s right, title, and interest in
and to the Assigned Payments, including without limitation,
the right to receive the Assigned Payments from the State
Lottery, and all related benefits and rights. * * *
This sale agreement was effective as of the lottery installment
payment due on April 4, 1999. The total face amount of Mr.
Wolman’s interest in the remaining lottery installment payments
was $1,298,107. The contract sales price for the 20 remaining
lottery installment payments was $20,000 in advance and $550,000
upon closing on or about January 8, 1999.
On September 23, 1998, the District Court for the City and
County of Denver, Colorado, issued an order approving Mr.
Wolman’s assignment of his interest in the remaining lottery
installment payments to Capital First.
On petitioners’ 1998 and 1999 Federal income tax returns,
they reported the sale of Mr. Wolman’s interest in the remaining
lottery installment payments as the sale of a capital asset for
$20,000 and $550,000, respectively. On the Schedules D, Capital
Gains and Losses, attached to the tax returns, petitioners
reported a cost basis of zero for the payments for 1998 and did
not report a cost basis for the payments for 1999.
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Respondent sent petitioners a notice of deficiency in which
respondent determined that the amounts received from Capital
First from the assignment of the rights to the remaining lottery
installment payments were not the result of the sale of a capital
asset, and the amounts were not capital gains. Respondent
determined that these amounts were includable as ordinary income.
Petitioners timely filed a petition with the Court to dispute
respondent’s determination.
OPINION
The parties dispute whether petitioners’ receipt of $20,000
and $550,000 in exchange for the assignment of Mr. Wolman’s right
to receive future lottery installment payments constitutes
ordinary income or capital gain during the years in issue.
Resolution of this issue depends on whether Mr. Wolman’s right to
receive the remaining lottery installment payments was a capital
asset within the meaning of section 1221.
We find the facts in the instant case indistinguishable in
substance from the facts in our opinion of Davis v. Commissioner,
119 T.C. 1 (2002), and cases relying on that opinion, in which a
taxpayer assigned a right to future lottery installment payments
in return for a lump-sum payout at a discounted value from a
third party. Id. at 3; Watkins v. Commissioner, T.C. Memo. 2004-
244; Lattera v. Commissioner, T.C. Memo. 2004-216; Clopton v.
Commissioner, T.C. Memo. 2004-95; Simpson v. Commissioner, T.C.
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Memo. 2003-155; Johns v. Commissioner, T.C. Memo. 2003-140;
Boehme v. Commissioner, T.C. Memo. 2003-81. We held in each of
these cases that a right to future lottery installment payments
did not constitute a capital asset within the meaning of section
1221.1 Davis v. Commissioner, supra at 7; Watkins v.
1
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);
(continued...)
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Commissioner, supra; Lattera v. Commissioner, supra; Clopton v.
Commissioner, supra; Simpson v. Commissioner, supra; Johns v.
Commissioner, supra; Boehme v. Commissioner, supra. Given the
similarity of facts, it would serve no purpose to repeat the
analysis provided in Davis v. Commissioner, supra. See also Sec.
State Bank v. Commissioner, 111 T.C. 210, 213-214 (1998)(“The
doctrine of stare decisis generally requires that we follow the
holding of a previously decided case, absent special
justification.”), affd. 214 F.3d 1254 (10th Cir. 2000).
Petitioners try to distinguish themselves from the Davis v.
Commissioner, supra, line of cases because of Mr. Wolman’s
“investment” of time and money. Petitioners do not have any
1
(...continued)
(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).
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unique arguments that would cause us to stray from the holding we
reached in Davis v. Commissioner, supra; the end result is the
same. The relevant events occurred after Mr. Wolman won the
lottery, i.e., the assignment of future lottery installment
payments, and those events do not change his receipt of ordinary
income into gain from a sale of a capital asset.
Further, petitioners’ argument that their assignment of all
rights and benefits related to the lottery installment payments
caused the character of the transaction to change must also fail.
In Lattera v. Commissioner, supra, the taxpayers similarly
assigned their “rights, title, and interest in the lottery prize”
to a third party, and we held that the amount received by the
taxpayers from the third party for the assignment of future
lottery payments was ordinary income, not capital gain. See also
United States v. Maginnis, 356 F.3d 1179, 1186-1187 (9th Cir.
2004)(concluding that a sale of an entire interest in a lottery
winning is “not a persuasive reason to treat the sale of that
right as a capital gain.”).
Pursuant to Davis v. Commissioner, supra, and its progeny,
we hold that the amounts received by petitioners from Capital
First in exchange for Mr. Wolman’s right to receive the remaining
lottery installment payments are ordinary income and not capital
gains.
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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.