T.C. Memo. 2004-262

UNITED STATES TAX COURT

ROGER LESLIE WOLMAN AND CAROLINE R. WOLMAN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18953-02. Filed November 16, 2004.

Roger Leslie Wolman and Caroline R. Wolman, pro sese.

Sara J. Barkley, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Respondent determined deficiencies of $1,600

and $88,434 in petitioner Roger Wolman’s (Mr. Wolman’s) and

petitioner Caroline Wolman’s (Mrs. Wolman’s), collectively

petitioners’, Federal income taxes for 1998 and 1999,

respectively (years in issue). The sole issue for decision is

whether petitioners’ receipt of $20,000 and $550,000, in 1998 and
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1999, respectively, in exchange for an assignment of a right to

receive future lottery installment payments constitutes ordinary

income or capital gain during the years in issue.

Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue. Amounts

are rounded to the nearest dollar.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioners resided in Littleton, Colorado.

In 1988, Mr. Wolman purchased a computer and a computer

program, “Lotto Challenger”. Beginning in January 1989, Mr.

Wolman used this program to choose numbers each week for the

lottery.

On April 2, 1994, Mr. Wolman won $1,500,000 in the Colorado

lottery. The lottery prize amount was payable in 25 annual

installments beginning on April 4, 1994, and ending on April 4,

2018. Mr. Wolman reported the first five annual lottery

installment payments received as ordinary income on his

respective Federal tax returns.
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On or about June 29, 1998, Mr. Wolman entered into a sale

agreement with Capital First Financing (Capital First), which 

stated:

Lottery Winner hereby sells and assigns to Purchaser and its

assigns all Lottery Winner’s right, title, and interest in

and to the Assigned Payments, including without limitation,

the right to receive the Assigned Payments from the State

Lottery, and all related benefits and rights. * * *

This sale agreement was effective as of the lottery installment

payment due on April 4, 1999. The total face amount of Mr.

Wolman’s interest in the remaining lottery installment payments

was $1,298,107. The contract sales price for the 20 remaining

lottery installment payments was $20,000 in advance and $550,000

upon closing on or about January 8, 1999.

On September 23, 1998, the District Court for the City and

County of Denver, Colorado, issued an order approving Mr.

Wolman’s assignment of his interest in the remaining lottery

installment payments to Capital First.

On petitioners’ 1998 and 1999 Federal income tax returns,

they reported the sale of Mr. Wolman’s interest in the remaining

lottery installment payments as the sale of a capital asset for

$20,000 and $550,000, respectively. On the Schedules D, Capital

Gains and Losses, attached to the tax returns, petitioners

reported a cost basis of zero for the payments for 1998 and did

not report a cost basis for the payments for 1999.
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Respondent sent petitioners a notice of deficiency in which

respondent determined that the amounts received from Capital

First from the assignment of the rights to the remaining lottery

installment payments were not the result of the sale of a capital

asset, and the amounts were not capital gains. Respondent

determined that these amounts were includable as ordinary income. 

Petitioners timely filed a petition with the Court to dispute

respondent’s determination.

OPINION

The parties dispute whether petitioners’ receipt of $20,000

and $550,000 in exchange for the assignment of Mr. Wolman’s right

to receive future lottery installment payments constitutes

ordinary income or capital gain during the years in issue. 

Resolution of this issue depends on whether Mr. Wolman’s right to

receive the remaining lottery installment payments was a capital

asset within the meaning of section 1221.

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 that 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; Watkins v. Commissioner, T.C. Memo. 2004-

244; Lattera v. Commissioner, T.C. Memo. 2004-216; Clopton v.

Commissioner, T.C. Memo. 2004-95; Simpson v. Commissioner, T.C.
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1 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);

(continued...)

Memo. 2003-155; Johns v. Commissioner, T.C. Memo. 2003-140;

Boehme v. Commissioner, T.C. Memo. 2003-81. We held in each of

these cases that a right to future lottery installment payments

did not constitute a capital asset within the meaning of section

1221.1 Davis v. Commissioner, supra at 7; Watkins v.
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1(...continued)

(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).

Commissioner, supra; 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 to repeat 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).

Petitioners try to distinguish themselves from the Davis v.

Commissioner, supra, line of cases because of Mr. Wolman’s

“investment” of time and money. Petitioners do not have any
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unique arguments that would cause us to stray from the holding we

reached in Davis v. Commissioner, supra; the end result is the

same. The relevant events occurred after Mr. Wolman won the

lottery, i.e., the assignment of future lottery installment

payments, and those events do not change his receipt of ordinary

income into gain from a sale of a capital asset.

Further, petitioners’ argument that their assignment of all

rights and benefits related to the lottery installment payments

caused the character of the transaction to change must also fail. 

In Lattera v. Commissioner, supra, the taxpayers similarly

assigned their “rights, title, and interest in the lottery prize”

to a third party, and we held that the amount received by the

taxpayers from the third party for the assignment of future

lottery payments was ordinary income, not capital gain. See also

United States v. Maginnis, 356 F.3d 1179, 1186-1187 (9th Cir.

2004)(concluding that a sale of an entire interest in a lottery

winning is “not a persuasive reason to treat the sale of that

right as a capital gain.”).

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

we hold that the amounts received by petitioners from Capital

First in exchange for Mr. Wolman’s right to receive the remaining

lottery installment payments are ordinary income and not capital

gains.
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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.