Friday, December 6, 2013

Watkins v. Commissioner case brief

Watkins v. Commissioner case brief summary
447 F.3d 1269 (2006)


CASE SYNOPSIS
Appellant taxpayer won over $ 12 million in the Colorado State Lottery, which he was to receive in 25 annual payments. After receiving six installments, the taxpayer sold his interest in the remaining payments to a third party for a lump sum and claimed that the sale resulted in a capital gain. Appellee Internal Revenue Service asserted that the sale proceeds were ordinary income. The United States Tax Court agreed. The taxpayer appealed.

DISCUSSION

  • Lottery winnings, whether received initially and wholly in a lump sum or in annual payments, were treated as ordinary income under the tax code. 
  • All of the payments the taxpayer initially received in a series of annual installments represented ordinary income that the taxpayer had already earned by virtue of his success in the lottery. 
  • The lump sum that the taxpayer received from the third party who bought the taxpayer's interest in the remaining lottery payments served as a substitute for the ordinary income he would have otherwise received over a period of time, and therefore was appropriately taxed as ordinary income under I.R.C. § 64. 
  • The substance of what was assigned was the right to receive future income. 
  • The substance of what was received was the present value of income which the recipient would have otherwise obtained in the future. 
  • In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property. 
  • Under those circumstances, the sale of the taxpayer's future lottery payments did not represent a capital gain under I.R.C. § 1221(a) or I.R.C. § 1222(1), (3).

CONCLUSION
The determination of the tax court was affirmed.

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