DAVIS V. COMMISSIONER
119 T.C. 1 (2002)
NATURE OF THE CASE: Davis (P) disputed a deficiency in their federal income tax over
whether a lottery winning was ordinary income or a capital gain.
FACTS: P won $13,580,000 in the California State Lottery. P became entitled to receive
the $13,580,000 in 20 equal annual payments of $679,000 (annual lottery payments), less
certain tax withholding. The Lottery did not offer to any lottery winner the option to elect
to receive a single lump-sum payment of the lottery prize. Sometime thereafter P assigned
the right to receive the annual lottery payments to himself and his spouse as cotrustees of
James and Dorothy Davis Family Trust. In 1997, Ps and Singer Asset Finance Company, LLC
(Singer), entered into an agreement in exchange for a lump- sum payment to Ps by Singer of
$1,040,000, Ps assigned to Singer their right to receive a portion (i.e., $165,000 less
certain tax withholding) of each of 11 of the future annual lottery payments that they were
entitled to receive during the years 1997 through 2007. After the assignment, Ps were
entitled to receive only $514,000 (less certain tax withholding) of each of the $ 679,000
future annual lottery payments (less certain tax withholding) to which they had been
entitled prior to that assignment. In Ps' 1997 joint return, they reported the assignment as
a sale of a capital asset held for more than 1 year, a sale price of $1,040,000, a cost
basis of $7,009, and long-term capital gain of $1,032,991. In that return, petitioners also
reported as ordinary income the $514,000 payment that they received from the Lottery. The
IRS determined that the monies received were ordinary income because rights to future annual
lottery payments do not meet the definition of a capital asset according to the provisions
of the Internal Revenue Code. Ps petitioned.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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