WATKINS V. COMMISSIONER
447 F.3d. 1269 (10th Cir. 2006)
NATURE OF THE CASE: Watkins (D) sold his interest in the remaining payments of a lottery
prize to a third party for a lump sum and claimed the sale resulted in a capital gain. The
IRS and the tax court claimed monies were ordinary income.
FACTS: Watkins (D) won $12,358,688 from the Colorado State Lottery with a ticket he
purchased for one dollar. D was married to Tammy. The prize winnings were to be distributed
to him in twenty-five annual installments through an annuity purchased by the Colorado State
Lottery. D reported the receipt of his first six prize payments as ordinary income. In 1997,
D and his wife were divorced. The court awarded each party a one-half interest in the future
payments. D entered into a contract with Stone Street to assign his one-half interest in the
remaining lottery payments. In consideration for the assignment, D received $2,614,744,
which represented the discounted present value of his remaining share of the lottery
winnings. D gave $200,000 to a third party who provided consulting services in connection
with the sale to Stone Street. D reported that the lump sum from Stone Street was the result
of a sale of a capital asset worth $2,414,744 with a cost basis of zero. The I.R.S. issued a
notice of deficiency claiming the money received from Stone Street was ordinary income. The
tax court agreed with the IRS.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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