                         T.C. Memo. 2004-216



                       UNITED STATES TAX COURT



           GEORGE AND ANGELINE LATTERA, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4269-03.            Filed September 23, 2004.


     Mark E. Cedrone, for petitioners.

     Carol Lynn E. Moran, for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    Respondent determined a deficiency of

$660,784 in petitioners’ 1999 Federal income tax.1   The sole

issue for decision is whether a lump-sum payment received in

exchange for the assignment of the right to receive future annual

lottery payments is ordinary income or capital gain.


     1
         All amounts are rounded to the nearest dollar.
                               - 2 -

Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.2   The stipulation of facts and the attached exhibits

are incorporated herein by this reference.   At the time they

filed their petition, petitioners resided in Philadelphia,

Pennsylvania.

     On June 12, 1991, petitioners won $9,595,326 from the

Pennsylvania Lottery.   Petitioners did not have the option of

receiving the prize in a single lump-sum payment.   The prize was

payable in 26 annual installments of $369,051.   Petitioners

purchased the winning lottery ticket for $1.

     On August 12, 1999, petitioners and Singer Asset Finance

Co., L.L.C. (Singer) entered into a “Sale Agreement for Lottery

Prize Payments of George M. Lattera and Angeline Lattera” and

“Terms Rider to Sale Agreement for Lottery Prize Payments of

George M. Lattera and Angeline Lattera” (the sale agreements),

that assigned petitioners’ rights, title, and interest in the

lottery prize to Singer.   Under the terms of the sale agreements,

the remaining 17 annual payments of $369,051, payable on or about

June 12, 2000 through 2016, were sold to Singer for $3,372,342.




     2
        Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
year in issue.
                                - 3 -

     Under Pennsylvania State law, petitioners were required to

obtain court approval before they could transfer their rights to

receive future lottery payments.    On August 27, 1999, petitioners

obtained the requisite approval from the Court of Common Pleas of

Dauphin County.

     Singer issued petitioners a Form 1099-B, Proceeds From

Broker and Barter Exchange Transactions, for 1999.    The Form

1099-B listed proceeds from the sale of “Stocks, bonds, etc.” of

$3,372,342.

     Petitioners jointly filed a Form 1040, U.S. Individual

Income Tax Return, for 1999.    On Schedule D, Capital Gains and

Losses, petitioners reported the assignment of the 17 future

annual lottery payments of $369,051 to Singer as a sale of a

capital asset held for more than 1 year.    Petitioners reported a

sale price of $3,372,342, a cost or other basis of zero,3 and a

long-term capital gain of $3,372,342.

     Respondent issued a notice of deficiency to petitioners for

1999.    In the notice of deficiency, respondent determined that

the $3,372,342 received from Singer was ordinary income.

Discussion

     The issue is whether the $3,372,342 petitioners received

from Singer for the assignment of future lottery payments is

ordinary income or capital gain.    Resolution of the issue depends


     3
         On brief, petitioners assert a cost basis of $1.
                                 - 4 -

on whether the right to receive future annual lottery payments

constitutes a capital asset.

     Section 1221 defines “capital asset” as follows:

     SEC. 1221.    CAPITAL ASSET DEFINED.

     (a) In General.

     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
                              - 5 -

               reference to the basis of such
               property in the hands of a taxpayer
               described in subparagraph (A) or
               (B);

               (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).

     Petitioners contend that (1) the Court wrongly decided Davis

v. Commissioner, 119 T.C. 1 (2002), (2) a lottery ticket falls

within the definition of a capital asset, and (3)

characterization of a lottery ticket and the resultant prize

as a capital asset does not frustrate congressional intent.

     Davis involved the same issue and nearly identical facts.

The taxpayers in Davis won a California State lottery prize and

subsequently assigned a portion of future annual lottery payments

to Singer in exchange for a lump-sum payment.   Id. at 3.   We held
                                 - 6 -

that the right to receive the future annual lottery payments did

not constitute a capital asset within the meaning of section

1221.     Id. at 7.   We have repeatedly relied upon the analysis in

Davis.    Clopton v. Commissioner, T.C. Memo. 2004-95; Simpson v.

Commissioner, T.C. Memo. 2003-155; Johns v. Commissioner, T.C.

Memo. 2003-140; Boehme v. Commissioner, T.C. Memo. 2003-81.4    No

purpose would be served by repeating the analysis in Davis

regarding why the right to receive future annual lottery payments

does not constitute a capital asset.

     Petitioners’ remaining arguments all depend upon the

determination that the lottery ticket was the property sold to

Singer under the sale agreements.     This argument was considered

and rejected in Simpson and Johns.

        Petitioners surrendered the lottery ticket to the

Pennsylvania Lottery and claimed the lottery prize.     The lottery

prize was payable in 26 payments.     Petitioners did not sell the

lottery ticket to Singer, but rather their right to future

lottery payments.     Pursuant to our holding in Davis v.

Commissioner and its progeny, we conclude that the $3,372,342




     4
        Accord United States v. Maginnis, 356 F.3d 1179, 1187
(9th Cir. 2004) (holding that the amount that the taxpayer
received in exchange for the taxpayer’s assignment to a third
party of his right to receive certain future annual lottery
payments is ordinary income under the “substitute for ordinary
income” doctrine).
                                 - 7 -

petitioners received from Singer is ordinary income and not

capital gain.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
