Roger L. Watkins, Petitioner

T.C. Memo. 2004-244 .ROÖÉR I . WÈÈÈÎNS, Fetinioner v.

COMlk1SSÍÔNER ÖF ÎN'I'ERNÁL REVÉNUE, espondent Docket Noe 19587-02.

Filed October,262;2004,.

Eric J.. Zinn and. GrégoEy W. Berger, for petitioner.

Mary T. Klaas n, for respondei .

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. EMORANDÜM OPINÍON .

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HAINES,. Judcie:. Res ondent determined a $518,463 deficiency in petit ioner' s FederÁl inciome ta for 1998 (year in issue) .

The, . sole issue fËr d5cisibú is whetfier petitioner' s receipt of $2,614,744 in x h nge f r an sSignmenE of a right to receive

SERVED OC

2 6 2004 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 The parties submitted this.case fully stipulated pursuant to Rule 122.

The stipulation of facts and the attached exhibits are incorporated herein by this .reference. At the time the petition was filed, petitioner resided in Hotchkiss, Colorado.

Petitioner purchased a $1 lottery ticket sometime befòre 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.

¹ The parties stipulated that if the assignment does not constitute the sale of a capital asset, to Will Hoover Group is deductible only as a miscellaneous itemized deduction on pètitioner's Schedule A, Deductions, deficiency.

for 1998, as respondent determined in the notice of then a $200,000 fee paid Itemized Petitioner reported the receipt of the first five lottery installment paymeñts as ordinary income on his Federal.

income tax returns.

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On February 7, 1997, petitioner.and Mrs. Watkins were divorced by order óf the District Court, Park County, of the State of.Colorado.

As part of the divorce settlement, .the district court awarded petitioner and Mrs. Watkins eagh 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) to sell and assign his añe-half interest in the remaining lottery d installment payments beginning with the annual payment due on.May 3, 1999.

.The remaining lottery installment payments were as .follows:

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Amount.. $384.,220 398,436 413,178 428,465 444.,318 · 460j756 477,805 495,483 513,815 532,826 552,.540 . 572,983 594,183 . 616,167 638;965 662,606 687,122 712,545 738,909 .

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The contract sale price 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 not a sale of a capital asset, and the consideration received was includable as ordinary income in the full amount öf .$2,614,7-44. 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 section 1221.

Petitioner's argument that the assignment was a sale of a capital asset relies on reasoning found in United States v.

Maginnis, 356 F.3d 1179 (9th Cir. 2004). We note from the outset that we are not bound by the opinion of the Court of Appeals for the Ninth Circuit because appeal of this decision would lie in the Court of Appeals for the Tenth Circuit, which has not ruled on this issue.

Sec. 7482(b)(1)(A).

Additionally, in 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 Id. at 1187. Petitioner

argues on the basis of reasoning stated as follows by the Court of Appeals:

to our conclusion, although we do they will be dispositive in all cases.

Two factors are crucial not hold that Maginnis (1) did not make any underlying investment of capital (2) value over cost to any underlying asset Maginnis held. [15L._ at 1183; the sale of his right did not reflect an accretion in in return for the receipt of his lottery right, and fn. ref . omitted) * * * 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 Maginnis are indistinguishable from the instant case.

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.

Id. at 1181.

The Court of Appeals held that the taxpayer could not argue that a purchase of a lottery ticket was a capital investment.

Id. at 1183.

The Court of Appeals stated that "the purchase of a lottery ticket is no more an underlying investment of capital than is a dollar bet on the spin of a roulette wheel."

Id. at 1184. Further, because the Court of Appeals held that the lottery ticket was not a capital investment, it also held that there was no "cost" to the taxpayer for the right.to receive the future lottery payments,- and, therefore,.

the money received for the sale of the right could not be seen as reflecting an increase of value above the cost of any underlying asset.³ Id_._; see also Boehme v.

Commissióner, T.C. Memo. 2003-81 (holding.taxpayer's right to receive future annual.lottery payments did.not constitute a capital asset).

We reiterated this reasoning in Clopton v.

Commissioner T..C.. Memo. 2004-95, in which we held that the lump- sum amount received in exchange for an interest in a trust holding the right to receive future lotteryspayments was ordinary income.

As a result,.petitioner's arguments fail under Maginnis.

Additionally, we find the facts in the instant case indistinguishable in substance from the facts in our opinion of Davis v. Commissioner, 119 T..C.

(2002), and cases relying on this 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; Lattera v.

Commissioner, T.C. Memo. 2004-216; Clopton v.. Commissioner, supra;. Situpson v. Commissioner, T.C. Memo-. 2003-155; Johns v.

Commissioner,.T.C. Memo. 2003-140; Boehme v. Commissioner, supra.

We held in each-.of these cases that a right to. future lottery

the insùallment payments did not constitute a capital asset within the meaning of section 1221.4 Davis v. Commissioner, supra at 7; 4. SEC. 1221.

CAPITAL ASSET DEFINED.

For purposes of this subtitle, the term "capital asset" (whether or not means property held by the taxpayer 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 iñcluded in the inventory of of primarily for sale to customers in the ordinary course of his trade or business; the close the taxable year, or property held by the taxpayer the taxpayer if on hand at (2) property, used in his trade or business, of a character which is subject depreciation provided in section 167, or real property used in his trade or business; to the allowance for (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, 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 for purposes of (B); (4) accounts or notes receivable acquired in the ordinary course of rendered or from the sale of property described in paragraph (1); trade or business for services (5) a publication of the United States Government (including the Congressional Record) which is received (continued...)

Ín 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.

2. Uñder 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. Láke, Inc., 356 U.S. 260, 265 (1958).
3. We.note that petitioner's tax return ·reported a zero cost basis with regard to amount received for the assignment of future lottery in tallment payments to Stóne Street.