                        T.C. Memo. 2004-244



                      UNITED STATES TAX COURT



                 ROGER L. WATKINS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19587-02.               Filed October 26, 2004.



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

     Mary T. Klaasen, for respondent.



                        MEMORANDUM OPINION


     HAINES, Judge:   Respondent determined a $518,463 deficiency

in petitioner’s Federal income tax for 1998 (year in issue).      The

sole issue for decision is whether petitioner’s receipt of

$2,614,744 in exchange for an assignment of a right to receive
                                - 2 -

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 before 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, then a $200,000 fee paid
to Will Hoover Group is deductible only as a miscellaneous
itemized deduction on petitioner’s Schedule A, Itemized
Deductions, for 1998, as respondent determined in the notice of
deficiency.
                                 - 3 -

     Petitioner reported the receipt of the first five lottery

installment payments as ordinary income on his Federal income tax

returns.

     On February 7, 1997, petitioner and Mrs. Watkins were

divorced by order of the District Court, Park County, of the

State of Colorado.     As part of the divorce settlement, the

district court awarded petitioner and Mrs. Watkins each 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 one-half interest in the remaining lottery

installment payments beginning with the annual payment due on May

3, 1999.   The remaining lottery installment payments were as

follows:

                Year                      Amount
                1999                     $384,220
                2000                      398,436
                2001                      413,178
                2002                      428,465
                2003                      444,318
                2004                      460,756
                2005                      477,805
                2006                      495,483
                2007                      513,815
                2008                      532,826
                2009                      552,540
                2010                      572,983
                2011                      594,183
                2012                      616,167
                2013                      638,965
                2014                      662,606
                2015                      687,122
                2016                      712,545
                2017                      738,909
                                - 4 -

     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 of $2,614,744.    Further, respondent

determined the deduction of $200,000 for consulting fees was

allowable as a miscellaneous itemized deduction.    Petitioner
                                - 5 -

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




     2
        Under 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. Lake, Inc., 356 U.S. 260, 265 (1958).
                              - 6 -

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

of Appeals:

     Two factors are crucial to our conclusion, although we do
     not hold that they will be dispositive in all cases.
     Maginnis (1) did not make any underlying investment of
     capital in return for the receipt of his lottery right, and
     (2) the sale of his right did not reflect an accretion in
     value over cost to any underlying asset Maginnis held. * * *
     [Id. at 1183; 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
                                 - 7 -

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.

Commissioner, 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 lottery payments 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. 1 (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; Simpson 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




     3
        We note that petitioner’s tax return reported a zero cost
basis with regard to amount received for the assignment of the
future lottery installment payments to Stone Street.
                                - 8 -

installment 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”
     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 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
                                                    (continued...)
                                - 9 -

Lattera v. Commissioner, supra; Clopton v. Commissioner, supra;

Simpson v. Commissioner, supra; Johns v. Commissioner, supra;

Boehme v. Commissioner, supra.    Given the similarity of facts, it

would serve no purpose in repeating the analysis provided in

Davis v. Commissioner, supra.     See also Sec. State Bank v.

Commissioner, 111 T.C. 210, 213-214 (1998)(“The doctrine of stare

decisis generally requires that we follow the holding of a

previously decided case, absent special justification.”), affd.

214 F.3d 1254 (10th Cir. 2000).

     Pursuant to Davis v. Commissioner, supra, and its progeny,

we hold that the $2,614,744 received by petitioner from Stone

Street in exchange for petitioner’s right to receive one-half of

the remaining lottery installment payments is ordinary income and

not capital gain.




     4
      (...continued)
          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).
                             - 10 -

     In 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.
