FILED U.S. COURT OF AP P E A LS E LE V EN T HC IRC U IT DEC 19, 2007 THOMAS K. KAH

N CLERK [ P UB L I S H] I N THE UN I TE D STATE S C OU RT OF APPE ALS F O R T H E E L E V E N T H C IR C U IT

________________________ N o. 07- 11568

________________________ A ge nc y N o. 13434- 03 R O L A N D W O M A C K , M A R I E W O M A C K , P e titio n e r s - A p p e lla n ts , v ersu s C O M M I S S I O N E R O F I R S , R e s p o n d e n t- A p p e lle e .

______________________ N o. 07- 11569

_______________________ A ge nc y N o. 19829- 03 A N A STA SI O S SPI RI D A K O S, M A RI A SPI RI D A K O S, P et i t i o n ers-A p p el l an t s, ve r s us CO M M I SSI O N ER O F I RS, R es po nd ent -A pp el l ee .Honora ble B everly

B. Ma rtin, United States District Judg e for the Northern Di s tri ct of * Georg ia, sitting by

designation. 2

________________________ A ppe a l s f

r om D e c i s i ons of

the U ni t ed S t at es T ax C ou rt

_________________________ ( D e c e m b e r 19, 2007) B e f o r e E DMON DS ON , C h i e f J u d g e , DU B I NA , C i r c u i tJ u d g e , a n d MAR T I N, * D i stri ctJudg e. M A R T IN , D i stri ctJudg e: T hi s i s a n app ea l by F l ori da S t at e L ot t ery w i nn er s f rom the U ni t ed S t at es T a x C our t ’ s de c i s i on tha tpr oc e e ds f r om the s a l e of

the r i ght s t o f

utur e i ns t a l l m e nt paym ent s f

rom l ot t ery w i nn i ng s ( “ L ot t ery R i gh t s” ) a re t axabl e a s ordi nary i ncom e, r a the rtha n a tthe l ow e rt a x r a t e a ppl i e d t o the s a l e of a l ong t e r m c api t a l a s s e t . T he T a x C o u r t s p e c if

ic a lly h e ld th a t L o tte r y R ig h ts a r e n o t c ap ita l a s s e ts a s d e f in e d in 26 U . S . C . § 1221 ( “ S e c t i on 1221" ) , unde rthe j udi c i a l l y e s t a bl i s he d s ubs t i tut e f or o r d i n a r y i n c o me d o c tr i n e . W e a f f i r m. I . Ba c k g r o und R ol and W om ac k w on a port i on of an $8 , 00 0, 00 0 F l ori da S t at e L ot t ery ( “F lo r id a L o tto ” ) p r iz e o n J a n u a r y 2 0 , 1 9 9 6 . A t th e tim e , th e p r iz e w a s p a y a b le on l y i n t w enty a nn ual i nst al l m ent s of $15 0, 00 0. M r. W om ac k rec ei ved fou r s uchAs required by Florida state law, F la. Stat. § 24.1153(1), Mr. Womack a nd Ms. Spiridakos 1 each o b t ai n ed Circuit Court approval to assign their re spective rights to re ceivefuture lotter y winn ing s. 3 annu al i nst al l m ent s f

rom 19 96 t o 1 99 9, and h e r eport ed tho se paym ent s a s ordi nary i nc om e on the f

e de r a l t a x r e tur ns he f

i l e d j oi nt l y w i th hi s w i f e , M a r i e W om a c k. In 19 99 , F l ori da am ended i t s l aw t o p erm i tl ot t ery w i nn er s t o ass i gn L ot t ery R i ght s . F l a . S t a t . § 24. 1153. M r . W om a c k s ubs e que nt l y s ol d the r i ghtt o r e c e i ve th e r e m a in in g s ix te e n p a y m e n ts to S in g e rA s s e t F in a n c e C o m p a n y ( “S in g e r ” ) in e x c h a n g e f

o ra s u m o f

$ 1 ,3 2 8 ,0 0 0 . T h e to ta l f a c e v a lu e o f

th e r e m a in in g p a y m e n ts w a s $ 2 ,4 0 0 ,0 0 0 . T h e W o m a c k s r e p o r te d th e a m o u n t r e c e iv e d f r o m S in g e ro n th e ir 20 00 j oi ntfe dera l i ncom e t ax re turn as procee ds fr om the sa l e of al on g t erm c a p ita l a s s e t. M a r i a S pi r i da kos i s a l s o a F l or i da L ot t o w i nne r . S he w on a $6, 240, 000 pr i z e on J a nua r y 6, 1990, pa y a bl e i n 20 a nnua l i ns t a l l m e nt s of $312, 000. S he r e c e i ve d t e n a nnua l pa y m e nt s a nd, f r om 1990 t o 1999, s he a nd he rhus ba nd, A n a s ta s io s S p ir id a k o s , r e p o r te d th o s e p a y m e n ts a s o r d in a r y in c o m e o n th e irjo in tly fi l ed fe dera l i ncom e t ax re turns. M s. S pi ri dako s s ol d t he ri gh tt o rec ei ve her r e m a i ni ng pa y m e nt s t o S i nge rf or$2, 125, 000, w hi c h the S pi r i da kos e s r e por t e d on thei r 200 0 j oi ntfe dera l i ncom e t ax re turn as procee ds fr om the sa l e of al on g t erm c a p ita l a s s e t. 1Including the W omacks and the S piridakoses, 59 Florida L otto winners have agreed to be 2 bound by the dec ision in this c ase. Womack v. Comm’r, T.C.M. 2006-240, 2006 WL3208890, at *1 & n.1 (

Nov. 7, 2006). 4 T he IR S i ss ued n ot i ce s of def i ci ency t o t he W om ac ks and t he S pi ri dako se s (c ol l ec t i vel y, “ T axpaye rs ”) for f ai l ure t o p ay t ax on the l um p sum paym entas or di na r y i nc om e . T a xpa y e r s e a c h f i l e d a pe t i t i on w i th the T a x C our ts e e ki ng a r e de t e r m i na t i on. T he T a x C our tc ons ol i da t e d the pe t i t i ons a nd de ni e d both on N o v e m b e r7 , 2 0 0 6 . T a x p a y e r s n o w a p p e a l. 2 II . S tan d ard of R evi ew W e have j uri sdi ct i on i n t hi s c as e pursuantt o 2 6 U . S . C . § 7 48 2, w hi ch s p e c i f i e s th a tw e r e v i e w Ta x Co u r td e c i s i o n s “ i n th e s a me ma n n e ra n d t o th e s a me e xt e nta s de c i s i ons of

the di s tr i c tc our t s i n c i vi l a c t i ons tr i e d w i thouta j ur y . ” 26 U . S . C . § 7 48 2(a) (1). W e r evi ew the T ax C ou rt ’ s i nt erpret at i on s of the Int ernal R evenue C od e de no vo . L . V . C a s t l e I nv. G r oup, I nc . v. C om m ’ r , 465 F . 3d 1243, 12 45 (11t h C i r. 20 06 ). I I I . D i s c u s s i on T he qu es t i on before us i s w hether L ot t ery R i gh t s a re “ capi t al as se t s” as d e f i n e d b y Se c t i o n 1 2 2 1 o f th e I n t e r n a l Re v e n u e Co d e , 2 6 U . S. C. § 1 2 2 1 . I n c o me re pres ent i ng proceeds fr om the sa l e or e xchang e of acapi t al as se tthata t axpaye r h o ld s f o ro v e ra y e a ris c o n s id e r e d a “c ap ita l g a in ,” 2 6 U .S .C . § 1 2 2 2 ( 3 ) , a n d isAs the Tax Court noted, for the year 2000, the maxi mum tax rate for the pa y ment Taxpayers 3 re c e ive d w a s 3 9. 6%if

ordin ary inc ome , a

nd 20 % i f a c a pital g ain. Womac k v . Co mm’ r, T. C.M . 2006-240, 2006 WL3208890, at *4 n.4 (Nov. 7, 2006) . Th ede finition , in

full, state s: 4 For purposes of this subt itle, the t erm ‘capital asset’ means property held by the taxpayer (whether or not conne cted with his tradeor business), but does not include- - (1) stock in trade of the t ax p ayer or other property

of a kind whic h would properly be inc lude d in

theinv e nto ry

of thetaxpaye r i f o n h and

at th ec los eof

thetaxab leye ar, or

prop e rt y he ld by thetaxpaye r p rimari ly

fo r s a leto cus tom e rs in t heordin ary

c ours eof his tra deor

bu sin e ss; (2) property, used in his trade or business, of a cha rac ter whic h is subject to the allowanc e fo r depre c iatio n p ro vide d in se c tio n 1 67 , o r re a l prop e rt y us e d in his tra deor

bu sin e ss; (3) a copy right, a literar

y , musical, or ar

tist i c co mp osition, a letter or memora ndum, or simil ar property, held by--

(A ) a t axp aye r wh o s ep e r s o n a le f

f o rt s c r e at e d

s u c hp ro p e rty, (B ) in th e c a s e o f a lett e r , memo ran d um, o r s imil ar p ro p erty, a taxp aye r for whom such property

was prepare d or produc ed, or (C) a taxpayer in whose hands the basis of such proper ty is determined, for pur

poses of determining gain from a sale or e x chang e, in whole or part by ref erence to the ba sis of such proper ty in the hands of a

taxpayer de scribed in subpa ragraph (A) or ( B) ; ( 4 ) a c c o unts o r n o te s r e c e iv a b le a c qu ire d in th e o rdin ar y c o ur s e o f tra d e o r

business for service s rendered or

from the sale of property described in paragraph ( 1); (5) a publication of the United S t at es Gover nment (includingthe Congressional Rec ord) wh ic h is re c e ive d f

ro m th eUnite d St ate s Gov e rnment or any a g e nc y there of , o ther t ha n b y purcha se at the pric e at whic h it is offere d for sale to the public, and whic h is held by--

(A) a taxpayer who so rec eived suc h publication, or (B) a taxpayer in whosehands the ba sis of such publication is determined, f or purp os e s o f de termining g ain from a saleor e xch ang e , in

wh oleor in p art by re ferenc eto t

heba sis of such publication in the hands of a taxpayer de scribed in subpa ragraph (A); (6) a ny commodities derivative f inancial i nstrument held by a commodities derivatives dealer, unless--

(A) it is established to the satis fa ction of the Sec reta ry that such instrument has no connec tion to the activities of such dealer a s a dealer, a nd (B ) such instrument is clea rly identified in such dealer' s rec ords as be ing de scribed in s ubpa ragra ph(A) b e fo re the c los e of

theda y on wh ic h it wa s a c quire d, orig inate d, or e ntere d into (or suc h other time as the Secreta ry may by regulations prescribe); (7) a ny hedg ing transac tion which is clearly identified as such before the close of the da y on 5 t axed ata f

avorabl e r at e. O ther i ncom e, or “ ordi nary i ncom e, ” i s t axed ata hi gh er

3 r a t e . S e c t i on 1221 de f

i ne s a c api t a l a s s e ta s a ny pr ope r ty the t a xpa y e rhol ds , but e xc l ude s c e r t a i n i t e m s f r om the de f

i ni t i on. T a xpa y e r s he l d the i rL ot t e r y R i ght s f or 4which it was acquire d, orig inated, or entere d into (o r s u ch o th er time as the Secretar y may by regulations prescribe); or (8) supplies of a ty

pe regularly used or consumed by the t axpayer in the ordinary courseof a trade or business of

the taxpayer. 26 U.S.C. § 1221(a). 6 m or e tha n one y e a rbe f

or e s e l l i ng the m , s o T a xpa y e r s m a y r e por tthe l um p s um paym entthey r ec ei ved i n con si dera t i on as a c api t al gai n i f L ot t ery R i gh t s a re c o n s id e r e d a c ap ita l a s s e t. T he T a x C our ta nd the f ourU . S . C i r c ui tC our t s t o c ons i de rthe que s t i on ha ve c o n c lu d e d th a t L o tte r y R ig h ts a r e n o t a c ap ita l a s s e t w ith in th e d e f in itio n s e t f

o r th i n S e c t i on 1221. E . g. , P r e bol a v. C om m ’ r , 482 F . 3d 610 ( 2d C i r . 2007) ; W a tki ns v. C om m ’ r , 447 F . 3d 1269 ( 10th C i r . 2006) ; L a t t e r a v. C om m ’ r , 437 F . 3d 399 ( 3d C i r . 2006) , c e r t . de ni e d, 127 S . C t . 1328 ( 2007) ; U ni t e d S t a t e s v. M a gi nni s , 356 F . 3d 1179 ( 9th C i r . 2004) ; D a vi s v. C om m ’ r , 119 T . C . 1 ( 2002) . T he s e de c i s i ons ar e bas ed on the so-c al l ed subst i tut e f or ordi nary i ncom e doctri ne, w hi ch prov i des thatw hen a party r ec ei ves al um p sum paym entas “ es se nt i al l y asubst i tut e f or w hat w oul d othe r w i s e be r e c e i ve d a ta f utur e t i m e a s or di na r y i nc om e ” tha tl um p s um pa y m e nti s t a xa bl e a s or di na r y i nc om e a s w e l l . C om m ’ rv. P . G . L a ke , I nc . , 356 U . S . 260, 265, 78 S . C t . 691, 694, 2 L . E d. 2d 743 ( 1958) . W e a gr e e tha tthe subst i tut e f

or ordi nary i ncom e doctri ne appl i es t o L ot t ery R i gh t s, and t here fore that proceeds f

rom the sa l e of L ot t ery R i gh t s a re t axabl e a s ordi nary i ncom e.7

A . T he S ubs t i tut e f

orO r di na r y I nc om e D oc tr i ne T h e s ta tu to r y d e f

in itio n o f c ap ita l a s s e t “h a s . . . n e v e rb e e n r e a d a s b r o a d ly a s th e s ta tu to r y la n g u a g e m ig h t s e e m to p e r m it, b e c a u s e s u c h a r e a d in g w o u ld encom pass som e thi ng s C on gres s di d n oti nt end t o b e t axed as capi t al gai ns. ” M a g in n is , 3 5 6 F .3 d a t 1 1 8 1 . C o n g r e s s in te n d e d o r d in a r y in c o m e to b e th e d e f a u lt ta x r a te , w ith c ap ita l g a in s tr e a tm e n t a n e x c e p tio n a p p lic a b le o n ly in a p p r o p r ia te ca se s. In fa ct , “ the t erm ‘ capi t al as se t ’ i s t o b e c on strued narrow l y i n acc ordance w i th the purpos e of

C ongr e s s t o a f

f or d c api t a l - ga i ns tr e a tm e ntonl y i n s i tua t i ons typi ca l l y i nv ol vi ng the re al i za t i on of appreci at i on i n v al ue ac crued o ver a s ubs t a nt i a l pe r i od of

t i m e . ” C om m ’ rv. G i l l e t t e M ot orT r a ns p. , I nc . , 364 U . S . 130, 1 3 4 , 8 0 S . C t. 1 4 9 7 , 1 5 0 0 , 4 L . E d . 2 d 1 6 1 7 ( 1 9 6 0 ) . T h is in te rp r e ta tio n p r e v e n ts t axpaye rs fr om ci rc um vent i ng ordi nary i ncom e t ax ra t es by se l l i ng ri gh t s t o future ordi nary i ncom e pay m ent s i n exchang e f or a l um p sum . S ee L ake, 35 6 U . S . at 2 6 5 , 7 8 S . C t. a t 6 9 4 . T he doc tr i ne i s a t tr i but e d t o f ours e m i na l S upr e m e C our tc a s e s : H or tv. C om m i s s i one r , C om m i s s i one rv. P . G . L a ke , I nc . , C om m i s s i one rv. G i l l e t t e M ot or T r a n s p o r t, I n c ., a n d U n ite d S ta te s v . M id la n d - R o s s C o rp . T h e ta x p a y e rin H o r t, 31 3 U . S . 28 , 29 , 61 S . C t . 75 7, 75 7, 85 L . E d. 11 68 (194 1), a bui l di ng ow ner, r e c e i ve d a l um p s um i n e xc ha nge f orc a nc e l l i ng a l e a s e on the pr ope r ty . T he s um w a s t a xa bl e a s or di na r y i nc om e be c a us e i tw a s “ e s s e nt i a l l y a s ubs t i tut e ” f orthe8

r e n ta l p a y m e n ts , th e m s e lv e s o b v io u s ly o r d in a r y in c o m e . I d . a t 3 1 , 6 1 S . C t. a t 7 5 8 . I n L a ke , 356 U . S . a t261- 62, 78 S . C t . a t692- 93, the t a xpa y e r , a c orpor a t i on, a s s ig n e d a p o r tio n o f

o il a n d s u lp h u rp a y m e n t r ig h ts to its p r e s id e n t in c o n s id e r a tio n f

o rth e c a n c e lla tio n o f

a d e b t th e c o rp o r a tio n o w e d to th e p r e s id e n t. T h e S u p r e m e C o u r t c o n s id e r e d th e p r o f it to b e in e s s e n c e a s u b s titu tio n f o rth e o il a nd s ul phurpa y m e nt s tha tthe c orpor a t i on w oul d ha ve othe r w i s e r e c e i ve d i n the f u tu r e , a n d h e ld it ta x a b le a s o r d in a r y in c o m e f o rth a t r e a s o n . I d . a t 2 6 5 , 7 8 S . C t. a t 6 9 4 . T he G i l l ett e t axpaye r ow ned a m ot or vehi cl e f ac i l i ty duri ng W orl d W arII , w h ic h th e g o v e r n m e n t a s s u m e d c o n tr o l o f a n d f o rw h ic h it p a id ju s t c o m p e n s a tio n . G i l l ett e, 36 4 U . S . at13 1-32 , 80 S . C t . at14 99 . T ho ug h t he t aki ng i nv ol ved

“ pr ope r ty ” f

orpurpos e s of

the F i f th A m e ndm e ntT a ki ngs C l a us e , tha tf a c t“ [ di d] no tansw erthe ent i re l y di ff er entqu es t i on w hether [ the com pensat i on ] com es w i thi n the c api t a l - ga i ns pr ovi s i ons of the I nt e r na l R e ve nue C ode . ” I d. a t133, 80 S . C t . at15 00 . Indeed, the S up re m e C ou rthel d t he com pensat i on pai d t o t axpaye r t a xa bl e a s or di na r y i nc om e . I d. a t136, 80 S . C t . a t1501. F i na l l y , i n M i dl a ndR os s , 381 U . S . 54, 55- 56, 85 S . C t . 1308, 1309, 14 L . E d. 2d 214 ( 1965) , the t a xpa y e rboughtnoni nt e r e s t - be a r i ng pr om i s s or y not e s s ubj e c tt o a n or i gi na l i s s ue di sc ou nt , and t hen sol d t hem for m ore than t he i ss ue pri ce bu tst i l l l es s than face va l ue . T he S upr e m e C our the l d tha tthe ga i ns a t tr i but a bl e t o the or i gi na l i s s ueWe n otetha t T axpaye rs ’ initial brie f i s st riking ly sim ilar t o th at of th ea pp e lla nts in 5 Mag innis. OpeningBr . of Mag innis et al., Defs.- App el l an t s , Un ited States v. Mag innis, No. 02- 35 66 4, F eb. 1. 20 03 . Thu s, theMag innis c ourt c on fronte d, and re

je c te d, larg e ly the samearguments that Taxpayers raise here. 9 d is c o u n t w e r e ta x a b le a s o r d in a r y in c o m e , n o tin g th e s im ila r ity to s ta te d in te r e s t. I d. a t57- 58, 85 S . C t . a t1310. T he ove r a l l e f f e c tof the s e c a s e s ha s be e n t o na r r ow w hata m ec hani ca l appl i ca t i on of S ec t i on 12 21 w ou l d o therw i se cause t o b e tre at ed a s a c a p ita l a s s e t. W i th tha tba c kgr ound, f ourC i r c ui t s ha ve r e vi e w e d the pr e c i s e l e ga l que s t i on w e f ac e her e und erm at er i al l y i dent i ca l ci rc um st ance s. E ac h C i rc ui thas 5 c o n c lu d e d th a t L o tte r y R ig h ts a r e s u b s titu te s f o ro r d in a r y in c o m e , b u t c a m e to th is c onc l us i on i n di f

f e r e ntw a y s . T he N i nth C i r c ui tus e d a c a s e - by - c a s e a na l y s i s , but f oc us e d on tw o f

a c t or s i n pa r t i c ul a r : tha tthe t a xpa y e r“ ( 1) di d notm a ke a ny unde r l y i ng i nve s tm e ntof c api t a l i n r e tur n f

orthe r e c e i ptof

hi s l ot t e r y r i ght , a nd ( 2) the s a l e of

hi s r i ghtdi d notr e f

l e c ta n a c c r e t i on i n va l ue ove rc os tt o a ny u n d e r ly in g a s s e t [ h e ] h e ld .” M a g in n is , 3 5 6 F .3 d a t 1 1 8 3 . T h o u g h th e M a g in n is courtno t ed thatthese fa ct ors w ou l d n otbe di sposi t i ve i n al l ca se s, the T hi rd C i rc ui ti n L att er a, 43 7 F . 3d at40 4-09 , foun d t he fa ct ors probl em at i c, and i nst ea d f o r m u la te d its o w n a p p r o a c h , w h ic h it te r m e d th e “f a m ily r e s e m b la n c e ” te s t. W ith in th e c o n f

in e s o f th is te s t, th e T h ir d C ir c u it a n a ly z e d th e n a tu r e o f th e s a le and t he chara ct erof the as se t , spec i fi ca l l y, w hether the paym entw as for the future10

r i ghtt o ea rn i nc om e orf orthe f utur e r i ghtt o earned

i nc om e . I d. a t409. T he S e c ond a nd T e nth C i r c ui t s di d note xpl i c i t l y a doptthe M a gi nni s r e a s oni ng orthe L attera test, b u t h eld th at “w h atev erth e [ su b stitu te fo r o rd in ar y in co m e] d o ctrin e’s ou t erl i m i t s, thi s c as e f

al l s s qu ar el y w i thi n t hem . ” P re bo l a, 48 2 F . 3d at61 2; se e W a tki ns , 447 F . 3d a t1273 ( “ [ W ] e ne e d notf or m ul a t e a ny s pe c i f

i c t e s tr e ga r di ng the appr opr i a t e l i m i t s of the doc tr i ne ' s a ppl i c a t i on. ” ) ; W ol m a n v. C om m ’ r , 180 F e d . Ap p x . 8 3 0 , 8 3 1 ( 1 0 th C i r . 2 0 0 6 ) ( “ F o rth e s a m e r e a s o n s s t a t e d i n Wa tk i n s , we r e je c t th e W o lm a n s ’ a r g u m e n t a n d h o ld th a t th e lu m p s u m p a y m e n ts w e r e ta x a b le as ordi nary i ncom e. ”) . W e a gree w i th o ur si st erci rc ui t s thatL ot t ery R i gh t s a re a c l ea r c as e of a su b st i tu t e fo r o rd i n ary i n co m e. A l o t t ery w i n n er w h o h as not s o ld th e r ig h t to h is w i nni ngs t o a thi r d pa r ty m us tr e por tthe w i nni ngs a s or di na r y i nc om e w he the rthe s t a t e pa y s hi m i n a l um p s um ori n i ns t a l l m e nt s . S e e 26 U . S . C . § 165( d) ( de s c r i bi ng t a x tr e a tm e ntf orl os s e s f

r om w a ge r i ng tr a ns a c t i ons ) ; C om m ’ rv. G r oe t z i nge r , 480 U . S . 23, 32 & n. 11, 107 S . C t . 980, 986 & n. 11, 94 L . E d. 2d 25 ( 1 9 8 7 ) ( d e s c r i b i n g th e l o t t e r y a s a f o r m o f p u b l i c g a mb l i n g s u b

j e c tt o 2 6 U . S. C. § 1 6 5 ( d ) ’s p r o v is io n r e g a r d in g w a g e r in g lo s s e s ) . T h u s , w h e n a lo tte r y w in n e rs e lls the ri gh tt o h i s w i nn i ng s, he re pl ac es future ordi nary i ncom e. In defi ni ng “ capi t al as se t , ” C on gres s di d n oti nt end for t axpaye rs t o ci rc um ventordi nary i ncom e t ax tre atm entby packagi ng ordi nary i ncom e pay m ent s a nd se l l i ng them t o a thi rdAs they arestated in Mag innis, these fac tors areobviously imperfe ct. For

example, relying 6 on the taxpayer’ s underlying investment ignores leg itimate c apital assets obtained through g ifts or inheritanc es, and c onsideration of accretion in value excludes ca pital assets that ty

pically depre ciate, such as c ars. SeeL attera , 437 F.3d at 405. The Mag innis court properly observe d that the factors would not b e d i s p o sitive in every case . Mag innis, 356 F.3d at 1183. A c ourt would haveno occa sion to evaluate the se factors where theasset sold is something other than a c laim to ordinary income, s u c h a s a c ar . T h e f a c to r s d o , h o w e v e r , s e r

v e to e mp h a s iz e th e e s s e n c e o f a capital transac tion: “that the sale or exchang e of an asset results in a return of a ca pital investment coupled with realiz ed g ain or loss.” Holt v. Comm’r, 303 F.2d 687, 691 (9th Cir. 1962); seealso Gillette, 364 U.S. at 134, 80 S. Ct . at 1500 (“ This Court has long he ld that the term ‘c apital asset’ is to be construed na

rrowly in acc ordanc e with the purposeof Congress to af ford cap ital-g ains treatment only in situations ty

pically involving the realization of appre ci at i o nin value ac crue d over a

11 p a r ty . S e e L a k e , 3 5 6 U .S . a t 2 6 5 , 7 8 S . C t. a t 6 9 4 ( illu s tr a tin g c o u r ts ’ n e e d to prot ec tagai nst“ ar t ful devi ce s” ). T here ar e i m po rt antdi ff er ence s betw ee n L ot t ery R i gh t s a nd the typi ca l c a pi t a l a s s e t . T he s a l e of a c api t a l a s s e tc aptur e s the i nc r e a s e d va l ue of the un derl yi ng as se t . P erhaps the m ostcom m on exam pl e occ urs w hen a t axpaye r p u r c h a s e s s h a r e s o f

s to c k , o w n s th e s h a r e s f o rlo n g e rth a n a y e a r , a n d th e n s e lls them ata hi gh erpri ce . T he t axpaye r m akes an un derl yi ng i nv es tm enti n a capi t al a s s e tw he n he pur c ha s e s the s t oc k. W he n he s e l l s the s ha r e s a ta hi ghe rpr i c e , the g a in r e p r e s e n ts a n in c r e a s e in th e v a lu e o f th e o r ig in a l in v e s tm e n t. A s th e N in th C i rcu i tn o t ed i n M ag i n n i s, 3 5 6 F . 3 d at1 1 8 3 , L o t t ery R i g h t s l ack th ese c ha r a c t e r i s t i c s e m bl e m a t i c of c api t a l a s s e t s - - L ot t e r y R i ght s i nvol ve no unde r l y i ng i nve s tm e ntof

c api t a l . F ur the r m or e , a ny “ ga i n” f r om the i rs a l e r e f

l e c t s no c ha nge i n t he val ue of the as se t . Iti s s i m pl y the am ou ntT axpaye rs w ou l d h ave r ec ei ved eventual l y, di sc ou nt ed t o p re se ntval ue. 6substantial period of time . . . .”) . We also note that the tax treatment of g ifts, inheritance s, and sales

of automobiles is well established a nd neither releva

nt to nor aff

ecte d by the issues in this case. 12 F ur the r m or e , w he n a l ot t e r y w i nne rs e l l s L ot t e r y R i ght s , he tr a ns f e r s a r i ght t o i ncom e thati s a l re ady e arned, no ta r i gh tt o earn i ncom e i n t he future. S ee L a tte r a , 4 3 7 F .3 d a t 4 0 7 - 0 9 . T h e F if th C ir c u it lo n g a g o d r e w th is d is tin c tio n in U n ite d S ta te s v . D r e s s e rI n d u s tr ie s , I n c ., 3 2 4 F .2 d 5 6 ( 5 th C ir . 1 9 6 3 ) , w h e n it h e ld tha tpr oc e e ds f

r om the gr a ntof

a n e xc l us i ve l i c e ns e t o us e a n oi l w e l l s ur ve y i ng pat entw arra nt ed capi t al gai ns tre atm ent . R ec og ni zi ng the “ vastdi ff er ence betw ee n the pres entsa l e of the future r i gh tt o earn i ncom e a nd the pres entsa l e of the future r i ghtt o e a r ne d i nc om e , ” i d. a t59, the D r e s s e rc our tnot e d tha ta n e xc l us i ve pa t e nt lic e n s e is p r o p e r ty th a t c a n p r o d u c e u n k n o w n in c o m e in th e f u tu r e , a s o p p o s e d to p r o p e r ty th a t r e p r e s e n ts in c o m e p a y m e n ts a lr e a d y c e r ta in in a m o u n t, b u t to b e p a id in th e f u tu r e . A c api t a l a s s e tha s the pot e nt i a l t o e a r n i nc om e i n the f utur e ba s e d on the ow ne r ’ s a c t i ons i n us i ng i t . L ot t e r y w i nne r s , by c ontr a s t , a r e “ e nt i t l e d t o the i ncom e m er el y by vi rtue of ow ni ng the prop er ty. ” N ot e, T ho m as G . S i ncl ai r, L im itin g th e S u b s titu te - f o r - O r d in a r y - I n c o m e D o c tr in e : A n A n a ly s is T h r o u g h I ts M o s tRe c e n tAp p l i c a t i o n I n v o l v i n g th e Sa l e o f Fu tu r e Lo t t e r y Ri g h t s , 5 6 S. C. L. R e v . 3 8 7 , 4 0 6 ( 2 0 0 4 ) ; s e e L a tte r a , 4 3 7 F .3 d a t 4 0 9 - 1 0 ; D r e s s e r , 3 2 4 F .2 d a t 5 9 . Incom e nee d n otbe ac crued for t ax pu rposes t o b e “ ea rned” i n t hi s s ense . C f.Ark. B est, 485 U.S. at 216-18, 108 S. Ct. at 974-75, addre ssed the question of whether the 7 taxpayer’ s motiv e i n ac qu i ringan asse t, either a business motive or an investment motive, de termine s whe ther i t is a c a pit a l a sset or

an o rdina

ry a sset. Thesubstitutefo r o rdina ry inc ome doctrine w as not relevant to the dec ision. 13 T hom a s v. U ni t e d S t a t e s , 45 F . S upp. 2d 618 ( S . D . O hi o 1999) , a f f’ d, 213 F . 3d 927 ( 6th C i r . 2000) ( hol di ng tha ta l ot t e r y w i nne rm us tr e por ti nc om e f r om w i nni ngs du ri ng the peri od the paym entw as re ce i ved). T hu s, i ncom e f rom a l ot t ery pa y m e nti s e a r ne d i nc om e de s pi t e the f a c ttha ti tdoe s nota c c rue unt i l the sc hedu l ed annu al paym entdat e. P roce eds f rom the sa l e of L ot t ery R i gh t s a re a c le a rs u b s titu te f

o ro r d in a r y in c o m e a n d a r e ta x a b le a s o r d in a r y in c o m e . 1 . E ffecto f A rk an sas B est W e br i e f l y a ddr e s s T a xpa y e r s ’ a r gum e nttha tthe S upr e m e C our t ’ s de c i s i on i n A r ka ns a s B e s tC orp. v. C om m ’ r , 485 U . S . 212, 108 S . C t . 971, 99 L . E d. 2d 183 ( 1988) , s i gni f

i c a nt l y l i m i t e d the s ubs t i tut e f oror di na r y i nc om e doc tr i ne . L i ke othe rc our t s tha tha ve c onf r ont e d i t , w e r e

j e c tthi s c ont e nt i on. M a gi nni s , 356 F . 3d at11 85 ; L att er a, 43 7 F . 3d at40 3-04 ; D avi s, 11 9 T . C . at6; G l adden v . C om m ’ r, 11 2 T . C . 20 9, 22 1 (19 99 ), re v’ d o n o ther groun ds, 26 2 F . 3d 85 1 (9t h C i r. 20 01 ); F N M A v . C o m m ’r , 1 0 0 T .C . 5 4 1 , 5 7 3 & n .3 0 ( 1 9 9 3 ) . Th e A r k a n s a s Be s tCo u r td i s c u s s e d th e s u b s t i tu t e f o ro r d i n a r y i n c o me d o c tr in e in a f

o o tn o te . T h e f

o o tn o te r e a d s , in f

u ll: 7 P e t i t i one rm i s t a ke nl y r e l i e s on c a s e s i n w hi c h thi s C our t , i n n a r r o w ly appl yi ng the general defi ni t i on of “ capi t al as se t , ” has “ construed14

‘ c a pi t a l a s s e t ’ t o e xc l ude pr ope r ty r e pr e s e nt i ng i nc om e i t e m s or a c c r e tio n s to th e v a lu e o f a c ap ita l a s s e t th e m s e lv e s p r o p e r ly a t tr i but a bl e t o i nc om e , ” e ve n though the s e i t e m s a r e pr ope r ty i n the br oa d s e ns e of

the w or d. U ni t e d S t a t e s v. M i dl a nd- R os s C orp. , 381 U .S . 5 4 , 5 7 , 8 5 S . C t. 1 3 0 8 , 1 3 1 0 , 1 4 L . E d . 2 d 2 1 4 ( 1 9 6 5 ) . S e e , e .g ., C om m ’ rv. G i l l e t t e M ot orC o. , 364 U . S . 130, 80 S . C t . 1497, 4 L . E d. 2d 1617 ( 1960) ( “ c api t a l a s s e t ” doe s noti nc l ude c om pe ns a t i on aw ar ded t axpaye r thatre pres ent ed fa i r r ent al val ue of i t s f ac i l i t i es ); C om m ’ rv. P . G . L a ke , I nc . , 356 U . S . 260, 78 S . C t . 691, 2 L . E d. 2d 2 4 3 [ s ic ] ( 1 9 5 8 ) ( “c ap ita l a s s e t” d o e s n o t in c lu d e p r o c e e d s f r o m s a le of oi l pa y m e ntr i ght s ) ; H or tv. C om m ’ r , 313 U . S . 28, 61 S . C t . 757, 85 L . E d. 1168 ( 1941) ( “ c api t a l a s s e t ” doe s noti nc l ude pa y m e ntt o l e s s or fo r can cel l at i o n o f u n ex p i red p o rt i o n o f a l ease). T h i s l i n e o f cases, b a s e d o n th e p r e mi s e th a t§ 1 2 2 1 “ p r o p e r ty ” d o e s n o ti n c l u d e c l a i ms o rr ig h ts to o r d in a r y in c o m e , h a s n o ap p lic a tio n in th e p r e s e n t c o n te x t. P et i t i on ersol d capi t al st ock, no ta c l ai m t o o rdi nary i ncom e. A r k. B e s t , 485 U . S . a t217 n. 5, 108 S . C t . a t975 n. 5 ( e m pha s i s a dde d a nd c i t a t i on form att i ng m od i fi ed). T hi s f oo tno t e a ff

i rm ed thatthe subst i tut e f or ordi nary in c o m e d o c tr in e a p p lie s to “p r o p e r ty ” th a t r e p r e s e n ts a c la im to o r d in a r y in c o m e . T a xpa y e r s ur ge a di f

f e r e nti nt e rpr e t a t i on. T he y f oc us on the C our t ’ s us e of the w or d “ na r r ow l y ” a nd i ns i s ttha tthe f a c tua l s c e na r i os c or r e s pondi ng t o the f our S u p rem e C o u rtcases ci t ed i n th e fo o tn o t e, H o rt , L ak e, G i l l et t e, an d M i d l an d -R o ss, a r e th e o n ly s u r v iv in g r e m n a n ts o f th e s u b s titu te f

o ro r d in a r y in c o m e d o c tr in e . T he y a r gue tha tbe c a us e the f ootnot e “ di r e c t l y c l a s he s w i th the body of the opi ni on

. . . the on l y l og i ca l re adi ng of the use of the t erm ‘ narr ow l y’ i n foo tno t e 5 i s that o n ly i n t ho se part i cul ar‘ nar r ow ’ f a c tu a l s itu a tio n s th a t e x is te d in th e c ite d c a s e s is the [d] octri ne appl i cabl e. ” ( B r. for the A pp el l ant s 42. )15

T axpaye rs ’ re adi ng i s notthe natural on e. In the foot no t e, the w ord

“ narr ow l y” m od i fi es the ph ra se thati m m edi at el y f ol l ow s, “ appl yi ng the general de f i ni t i on of ‘ c api t a l a s s e t . ’ ” T he f

ootnot e una m bi guous l y e xpl a i ns tha ti n the ci t ed ca se s, the C ou rtappl i ed the s tat ut or y de f i ni t i on of capi t al as se tnarr ow l y. It i n n o w ay i m pl i es thatthe C ou rtappl i ed the s u b s t i t u t e f o ro r d i n a r

y i n c o me doc tr i ne n a r r o w ly , n o rh in ts th a t th e C o u r t w o u ld c o n f in e th e d o c tr in e to th e f

a c ts of the ca se s i tci t es . T o t he cont ra ry , the C ou rtci t es general l angu age thati nd i ca t es tha ti tw oul d appl y the doc tr i ne i n a ny s i tua t i on i nvol vi ng “ ‘ i nc om e i t e m s or a c c r e tio n s to th e v a lu e o f a c ap ita l a s s e t th e m s e lv e s p r o p e r ly a ttr ib u ta b le to i nc om e . ’ ” A r k. B e s t , 485 U . S . a t217 n. 5, 108 S . C t . a t975 n. 5 ( quot i ng M i dl a ndR o s s , 3 8 1 U .S . a t 5 7 , 8 5 S . C t. a t 1 3 1 0 ) . W e h a v e n o tr o u b le r e c o n c ilin g th is f ootnot e w i th the body of the A r ka ns a s B e s topi ni on f orthe r e a s ons s t a t e d i n the foot no t e i t se l f: the t axpaye r i n t hatca se “ sol d capi t al st ock, no ta c l ai m t o o rdi nary i ncom e. ” I d. W e r ej ec tT axpaye rs ’ att em ptt o l i m i tthe subst i tut e f or ordi nary in c o m e d o c tr in e in a n u n r e a s o n a b le m a n n e rn o t s u g g e s te d b y th e r e le v a n t c a s e la w . T hi s i s nott o say thatthe subst i tut e f or ordi nary i ncom e doctri ne appl i es up on the sa l e of every as se tthatprod uces ordi nary i ncom e. T aken t o i t s l og i ca l e xtr e m e , the s ubs t i tut e f oror di na r y i nc om e doc tr i ne w oul d obl i t e r a t e c api t a l ga i ns tr e a tm e n t a lto g e th e rb e c a u s e a c ap ita l a s s e t’s p r e s e n t v a lu e is o f te n b a s e d o n its f utur e a bi l i ty t o pr oduc e r e ve nue i n the f or m of or di na r y i nc om e . M a gi nni s , 35616

F . 3d a t1182. W e a c know l e dge tha tthe doc tr i ne ha s i t s out e rl i m i t s , butw e do not de f i ne the m he r e . W e m e r e l y r e c ogni z e tha tA r ka ns a s B e s tdi d notc i r c um s c r i be the subst i tut e f

or the ordi nary i ncom e doctri ne. S ee , e. g. , M agi nn i s, 35 6 F . 3d at 1185; L a t t e r a , 437 F . 3d a t403- 04. B . “ P r ope r ty ” U nde rS e c t i on 1221 A s T a xpa y e r s not e , A r ka ns a s B e s tm a ke s c l e a rtha ti f a gi ve n a s s e ti s not l i s t e d w i thi n S e c t i on 1221’ s e xc l us i ons , i ti s a c api t a l a s s e tunl e s s i ti s not c ons i de r e d “ pr ope r ty . ” A r k. B e s t , 485 U . S . a t217- 18, 108 S . C t . a t975. T he pert i nentT re as ury D epar tm entre gu l at i on al so prov i des that“ [t ] he t erm capi t al as se t s i ncl ud es al l cl as se s of property notspec i fi ca l l y e xcl ud ed by se ct i on 12 21 . ” 26 C . F . R . § 1. 1221- 1( a ) . T he pa r t i e s do notdi s put e tha tL ot t e r y R i ght s a r e not w i thi n the s t a tut or y e xc l us i ons . T he r e f or e , i n de c i di ng tha tthe s ubs t i tut e f or or di na r y i nc om e doc tr i ne a ppl i e s , w e ne c e s s a r i l y f i nd tha tL ot t e r y R i ght s do not c ons t i tut e “ pr ope r ty ” a s tha tt e r m i s us e d i n S e c t i on 1221. 4 M e r t e ns L a w of F e de r a l I nc om e T a xa t i on § 22: 4 ( S e pt . 2007) [ he r e i na f t e rM e r t e ns ] ( “ I n s i tua t i ons w here the courtdet erm i nes thatthe i nt angi bl e r i gh ti s asubst i tut e f or ordi nary i ncom e, the courtconcl ud es (e i ther i m pl i ci t l y or e xp l i ci t l y) thatthe as se tsol d d oes n o t c o n s titu te p r o p e r ty f o rp u rp o s e s o f

S e c tio n 1 2 2 1 .” ) . T a xpa y e r s a l s o not e tha tL ot t e r y R i ght s a r e pr ope r ty i n the or di na r y s e ns e of the t erm and for pu rposes of ot her s t at e a nd fe dera l l aw s. W e r ec og ni ze thatTaxpayers a rgue that Gillette’s statement about “property” should be c onfined to the na rrow 8 c onte xt of that c a se . Court s a pp lying the su

bs tit ute fo r ordin ary inc ome do c trinehavere lie d o n this statement as a

g eneral proposition. E.g ., M i d l and-Ross, 381 U.S. at 56-57, 85 S. Ct. at 1310; Watkins, 447 F.3d at 1271-72. 17 L ot t e r y R i ght s a r e pr ope r ty f orm os tothe rpurpos e s , but“ pr ope r ty ” unde rS e c t i on 1221 i s a na r r ow e rc onc e pt . G i l l e t t e , 364 U . S . a t134- 35, 80 S . C t . a t1500- 01; M e r t e ns , s upr a , § 22: 4 ( “ T he m e r e f a c t , how e ve r , tha tthe a s s e ti n que s t i on const i tut es ‘ prop er ty’ i n t he broad sense of the w ord d oes notm ea n t hatsuch as se t co n st i tu t es p ro p erty fo r p u rp o ses o f S ect i o n 1 2 2 1 o r th atth e p ro p erty co n st i tu t es a capi t al as se t . ”) ; N ot e, D i st i ng ui shi ng O rdi nary Incom e f rom C api t al G ai n W here R i ght s t o F utur e I nc om e a r e S ol d, 69 H a r v. L . R e v. 737, 737- 38 ( 1956) (“ ‘ P roperty, ’ as i ti s broadl y use d i n o ther a re as of the l aw , i ncl ud es such i t em s a s un pai d cl ai m s f

or pers on al se rvi ce s or f or ac crued rent s. U nl es s C on gres s i nt ended th a t h o ld e r s o f

s u c h c la im s to o r d in a r y in c o m e w o u ld b e a b le b y s e llin g th e m to tr a ns f or m or di na r y i nc om e i nt o c a pi t a l ga i n, ‘ pr ope r ty ’ f orthe purpos e s of

s e c t i on 1221 i s a m or e l i m i t e d c onc e pt . ” ) . A s the S upr e m e C our tha s s t a t e d, “ i ti s e vi de nt th a t n o t e v e r y th in g w h ic h c a n b e c a lle d p r o p e r ty in th e o r d in a r y s e n s e a n d w h ic h is ou t si de the st atut ory e xcl usi on s qual i fi es as a c api t al as se t . ” G i l l ett e, 36 4 U . S . at 13 4, 80 S . C t . at15 00 . T he C ou rtagai n rec og ni ze d i n A rkansa s B es tthata l i t er al 8 r e a d in g o f

th e te r m “p r o p e r ty ” is n o t ap p r o p r ia te w h e r e s u c h a r e a d in g w o u ld i nc l ude or di na r y i nc om e a nd s ubs t i tut e s f oror di na r y i nc om e . S e e A r k. B e s t , 48518

U . S . a t217 n. 5, 108 S . C t . a t975 n. 5 ( de s c r i bi ng the a s s e t s f a l l i ng w i thi n the s ubs t i tut e f

oror di na r y i nc om e doc tr i ne a s “ pr ope r ty i n the br oa d s e ns e of the w ord”); se e a l so D on na D . A dl er , A C on vers at i on al A pp roac h t o S t atut ory A na l y s i s : S a y W ha tY ou M e a n & M e a n W ha tY ou S a y , 66 M i s s . L . J . 37, 106 ( 1 9 9 6 ) ( “I f

th e lite r a l la n g u a g e o f

[ S e c tio n 1 2 2 1 ] w e r e f

o llo w e d , ta x p a y e r s c o u ld c o n v e r t m u c h o f

th e iro r d in a r y in c o m e to c ap ita l g a in m e r e ly b y s e llin g th e r ig h t to th e in c o m e b e f

o r e th e p a y m e n t w a s a c tu a lly m a d e .” ) . T h is in te rp r e ta tio n , w h ic h c o u r ts r e p e a te d ly a d o p t, g iv e s e f f e c t to cong re ss i on al i nt ent . In defi ni ng “ capi t al as se t , ” C on gres s use d t he t erm “p r o p e r ty ” to m e a n “n o t in c o m e ” - - th a t is , “p r o p e r ty ” s e r v e s to d is tin g u is h a s s e ts su i t ab l e fo r cap i t al g ai n s treatm en tfro m m ere i n co m e. “ P ro p erty” i n th e m o st ge ne r a l s e ns e m e a ns a ny thi ng ow ne d, w hi c h w oul d a l s o i nc l ude i nc om e a nd a ny r ig h ts o rc la im s to it. E v e n if o th e rs ta tu te s u s e “p r o p e r ty ” in th is b r o a d s e n s e , to e x c lu d e s u b s titu te s f

o rin c o m e in d e te r m in in g w h a t c o n s titu te s a c ap ita l a s s e t is c o n s is te n t w ith th e w o r d “p r o p e r ty .” N o o th e rin te rp r e ta tio n o f “p r o p e r ty ” w o u ld h a r m o n iz e w ith th e s ta tu te ’s p u rp o s e , a s th e v e r y n a tu r e o f th e te r m “c ap ita l a s s e t” excl ud es w hati s i n ess ence ordi nary i ncom e. S ee S t anl ey S . S urre y, D ef i ni t i on al P robl em s i n C api t al G ai ns T axat i on , 69 H arv. L . R ev. 98 5, 98 7-88 (195 6) (“ S i nce i n o ne se nse e very thi ng thatthe t axpaye r hol ds i s ‘ prop er ty’ and h ence w i l l be a c a pi t a l a s s e t , a tthi s poi nti tw oul d s e e m t o f ol l ow tha ta l l i nc om e c oul d w e l l be19

‘ c a p i t a l g a i n ’ . . . . ” ) . I n d e e d , i n ap p l y i n g th e s u b s t i tu t e f o ro r d i n a r y i n c o me d o c tr in e , th e G ille tte c o u r t d e c lin e d to u s e th e a ll- in c lu s iv e d e f in itio n o f p r o p e r ty the S upr e m e C our te s pous e d i n one of i t s e a r l i e rde c i s i ons , C r a ne v. C om m ’ r , 331 U . S . 1, 6, 67 S . C t . 10 47 , 10 51 , 91 L . E d. 13 01 (194 7) (i nt erpret i ng “ prop er ty” as a n y th i n g s u b

j e c tt o o w n e r s h i p ) . Ra th e r , th e G i l l e t t e c o u r tc o n f i r me d th a ts o me thi ng s thatw ou l d n orm al l y be “ prop er ty” ar e notcapi t al as se t s, even i f no st atut ory excl usi on covers them . G i l l ett e, 36 4 U . S . at13 4, 80 S . C t . at15 00 . L ot t ery R i ght s , a s w e e xpl a i ne d a bove , a r e s ubs t i tut e s f oror di na r y i nc om e . W e now a d d r e s s tw o o f

T a x p a y e r s ’ a r g u m e n ts r e la te d to s p e c if ic ty p e s o f

p r o p e r ty . 1 . A c c o u n ts R e c e iv a b le T a x p a y e r s a r g u e th a t L o tte r y R ig h ts a r e p r o p e r ty b e c a u s e th e y a r e “a c c o u n ts r e c e iv a b le .” S e c tio n 1 2 2 1 e x c lu d e s f r o m th e d e f

in itio n o f c ap ita l a s s e t c e r ta in ty p e s o f a c c o u n ts r e c e iv a b le , s p e c if ic a lly “a c c o u n ts o rn o te s r e c e iv a b le a c q u ir e d in the or di na r y c our s e of

tr a de orbus i ne s s f

ors e r vi c e s r e nde r e d orf r om the s a l e of pr ope r ty de s c r i be d i n pa r a gr aph ( 1) . ” 26 U . S . C . § 1221( a ) ( 4) . T he e xc l us i on of bu si ness -r el at ed ac coun t s r ec ei vabl e, ac cordi ng t o T axpaye rs , i m pl i es thatal l ot her ty p e s o f a c c o u n ts r e c e iv a b le a r e p r o p e r ty , b e c a u s e o th e r w is e th a t e x c lu s io n w o u ld b e s u rp lu s a g e . T axpaye rs ’ pri m ary s up po rtfor thei r a rgum entthatL ot t ery R i gh t s a re ac coun t s r ec ei vabl e c om es fr om the U ni form C om m er ci al C od e, w hi ch defi nes20

“ a c c ount ” t o i nc l ude r i ght s t o pa y m e nt“ a s w i nni ngs i n a l ot t e r y orothe rga m e of chance opera t ed or spon sore d b y aS t at e. ” U . C . C . § 9 -102 (a )( 2). B utthe I nt e r nal R e v e nue C ode d o e s n o t d e f in e “a c c o u n ts r e c e iv a b le .” A s th e F if th C ir c u it s ta te d in a c as e i nv ol vi ng cont ra ctual ri gh t s i n a m ort gage se rvi ci ng agency , “ [t ] he fa ctthat [ thos e r i ght s ] c ons t i tut e a s pe c i e s of ‘ pr ope r ty ’ unde rs t a t e l a w a f f or ds no a s s is ta n c e in d e te r m in in g w h e th e rs u c h r ig h ts a r e c ap ita l a s s e ts .” B is b e e - B a ld w in C orp. v. T om l i nson , 32 0 F . 2d 92 9, 93 2 (5t h C i r. 19 63 ); se e a l so M i l l erv. C om m ’ r, 2 9 9 F .2 d 7 0 6 , 7 0 8 ( 2 d C ir . 1 9 6 2 ) ( n o tin g th a t a lth o u g h o r d in a r y p r o p e r ty c o n c e p ts a r e r e l e va nt , non- t a x de f i ni t i ons a r e “ c e r t a i nl y notbi ndi ng” on a c our ti nt e rpr e t i ng S e c tio n 1 2 2 1 ) . I n a n y e v e n t, th e s ta tu s o f L o tte r y R ig h ts a s a c c o u n ts r e c e iv a b le is a s e p a r a te q u e s t i o n f

r o m w h e th e rLo t t e r y Ri g h t s f a l l u n d e rth e s u b s t i tu t e f o ro r d i n a r y i n c o me doc tr i ne . A s the M a gi nni s c our ts t a t e d: “ A l though s om e a c c ount s r e c e i va bl e not c ove r e d by 1221( a ) ( 4) ' s e xc e pt i on w i l l be c api t a l a s s e t s , unde rthe s ubs t i tut e f or or di na r y i nc om e doc tr i ne , s om e w i l l notbe c api t a l a s s e t s . A s s um i ng w i thout de c i di ng tha tM a gi nni s ’ l ott e r y r i ghtw a s a n a c c ountr e c e i va bl e , tha tf a c tdoe s not af fe ctou r a nal ys i s. ” M agi nn i s, 35 6 F . 3d at11 87 n. 9. In ot her w ords, even i f a c e r t a i n a s s e ti s c l a s s i f

i e d a s a non- bus i ne s s - r e l a t e d a c c ountr e c e i va bl e , the a p p lic a tio n o f

th e s u b s titu te f

o ro r d in a r y in c o m e d o c tr in e is n o t n e c e s s a r ilyThis is consistent with Arkansas B est. There, the Court re jected a tax p ay er ’s readingof 9 Section 1221 that would have made surplusag e of thestatutory exceptions. Ark. B est, 485 U.S. at 218, 108 S. Ct . at 975. The Arka nsas Be st taxpayer argued that the exceptions in the statute were “illustrative, rather than e x haustive,” a nd sug g ested that the Court wa s fre e to createadditional exceptions. I d. at 217, 108 S . Ct. at 975. The c ourt reje cted that a rgument, but disti nguished ca ses in which cour

ts apply the substitute for ordinar y income doctrine. I d. at 217 n.5, 108 S. Ct. at 975 n.5. The doc trine’s purposeis to n arro w the statutory languag e in order to eff

ect c ongressional int e nt. B y

c ontra st, wh e reno su

bs tit ute fo r ordin ary inc ome is inv olv e d, Ar ka ns a s B e st re quire s a 21 pr e c l ude d, i f

the a s s e ti s othe r w i s e a s ubs t i tut e f oror di na r y i nc om e unde rthe p r in c ip le s o f

th e d o c tr in e . W e a c k n o w le d g e th e m e r its o f T a x p a y e r s ’ s ta tu to r y in te rp r e ta tio n a r g u m e n t. B uti n or de rt o e f

f e c tc ongr e s s i ona l i nt e nt , c our t s a ppl y i ng the s ubs t i tut e f or o r d in a r y in c o m e d o c tr in e s o m e tim e s r e a c h a d if f e r e n t r e s u lt th a n th e y w o u ld a ppl y i ng ba r e i nt e rpr e t i ve c a nons w i thoutc ont e xt . S e e I n r e G r i f f i th, 206 F . 3d 13 89 , 13 93 (11t h C i r. 20 00 ) ( expl ai ni ng thatca no ns of construct i on “ ‘ ar e no m ore than rul es of thu m b t hathel p cou rt s det erm i ne the m ea ni ng of l egi sl at i on . ’ ”) ( quot i ng C onn. N a t ’ l B a nk v. G e r m a i n, 503 U . S . 249, 253, 112 S . C t . 1146, 1149, 11 7 L . E d. 2d 39 1 (19 92 )) . T he subst i tut e f or ordi nary i ncom e doctri ne pri ori t i ze s s ubs t a nc e ove rf

or m t o e l i m i na t e c api t a l ga i ns tr e a tm e nti n s i tua t i ons i nvol vi ng c l a i m s f oror di na ry i nc om e . S e e L a ke , 356 U . S . a t266, 78 S . C t . a t695 ( “ T he s u b s ta n c e o f

w h a t w a s a s s ig n e d w a s th e r ig h t to r e c e iv e f u tu r e in c o m e .” ) . C ongr e s s di d noti nt e nd t o t a x l ot t e r y w i nni ngs a s c api t a l ga i ns . T hus , w he the ror no tL ot t ery R i gh t s a re “ ac coun t s r ec ei vabl e, ” they a re no tcapi t al as se t s und er S e c t i on 1221. 9broad readingof Section 1221 that would re sult in capital gai n s treatment unless one of the listed

exceptions a

pplies. Arka

nsas Be st suppor

ts a n approach in which cour ts analy ze the substitut e for ordinary income doctrine somewhat independently of the ba re statutory

text . See id. at 217 &n.5, 108 S. Ct . at 975 &n.5. Taxpaye rs no tetha

t a ssets c lass if

ied as debt ins tr

uments un der § 12 75 aretra dition a lly 10 capital a ssets under § 1221, but do not cite any authority for this proposition. W e did not locate a ny case s in which an asset was held to be a capital asset under § 1221 be c auseit was a debt instrument under § 1275, a

nd we agreewith th e T ax C o urt b elow that § 1275 is not determinative of capital asset status under

§ 1 2 2 1 . Womack v. Comm’r, T.C.M. 2006-240, 2006 WL3208890, at *8 (N ov . 7 , 2 00 6) . In a

ny e vent, wea c c ept t

heNinth Circ uit ’s int e rp retati on of § 1 27 5 in Mag innis, 35 6 F .3 d at 11 87 , which e xclude s L ott e ry Rights . 22 2 . D e b t I n s tru m e n ts F i nal l y, w e a re un pers uaded b y T axpaye rs ' ar gu m entthatL ot t ery R i gh t s a re “d e b t in s tru m e n ts ” u n d e r2 6 U .S .C . § 1 2 7 5 . T h a t s e c tio n d e f in e s “d e b t in s tru m e n t” a s “ a bond, de be ntur e , not e , orc e r t i f i c a t e orothe re vi de nc e of i nde bt e dne s s . ” 26 U . S . C . § 1275( a ) ( 1) ( A ) . T a xpa y e r s a r gue tha tL ot t e r y R i ght s a r e pr ope r ty , a nd there fore capi t al as se t s, beca use they a re “ evi dence of i nd ebt edness . ” In 10 c onf r ont i ng the s a m e a r gum e nt , the M a gi nni s c our tc i t e d D e puty v. du P ont , 308 U . S. 4 8 8 , 4 9 8 , 6 0 S. Ct . 3 6 3 , 3 6 8 , 8 4 L. Ed . 4 1 6 ( 1 9 4 0 ) , i n w h i c h th e Su p r e me C our ts t a t e d tha t“ ‘ i nt e r e s ton i nde bt e dne s s ’ m e a ns c om pe ns a t i on f orthe us e or forbear ance of m on ey . ” M agi nn i s, 35 6 F . 3d at11 87 . F or exam pl e, an i nd i vi du al bor r ow i ng m one y f

r om a ba nk pa y s i nt e r e s tt o the ba nk i n e xc ha nge f orha vi ng ac ce ss t o t he bank ’ s m on ey up fr on t . T he M agi nn i s c ou rtst at ed thata l ot t ery w i nne r“ r e c e i ve [ s ] hi s r i ghtt o pa y m e nt s f r om the s t a t e . . . a s a pr i z e , nota s a ny c om pe ns a t i on f

orthe us e orf

orbe a r a nc e of

m one y , a nd the r e f

or e the l ot t e r y r i ght23

d[oes] no tconst i tut e e vi dence of an i nd ebt edness fr om [the st at e] t o [the l ot t ery w i nn er ] . ” I d. W e a gree . T hatL ot t ery R i gh t s a re tra ded i n t he fi nanci al m arketpl ac e i s i rr el evantt o an ass et ’ s c hara ct er i za t i on un der S ec t i on 12 75 . In de t e r m i ni ng w he the rL ot t e r y R i ght s a r e e vi de nc e of i nde bt e dne s s , w e l ook t o the pa r ty a l l e ge dl y i nde bt e d, he r e the s t a t e of F l or i da . F l or i da i nc ur r e d no de b t w h e n it un dert oo k t he ob l i gat i on t o m ake pri ze paym ent s t o l ot t ery w i nn er s. T he l ot t ery w i nne r s w on a ga m e of

c ha nc e , f

orw hi c h the y w e r e a w a r de d a c e r t a i n a m ountof m o n ey t o b e p ai d an n u al l y. T h ey l en tn o m o n ey t o F l o ri d a, an d m ad e n o p ro m i se t o F l or i da t o us e m one y , ort o r e f r a i n f r om us i ng m one y . L ot t e r y R i ght s a r e thus no tevi dence of F l ori da’ s i nd ebt edness t o T axpaye rs , no r debti nstrum ent s und er S e c t i on 1275. I V . C on c l u s i on F or the foregoi ng re as on s, w e hol d t hatproceeds fr om the sa l e of L ot t ery Ri g h t s s h o u l d b e t a x e d a s o r d i n a r y i n c o me u n d e rth e s u b s t i tu t e f o ro r d i n a r y i n c o me d o ctri n e. T h e T ax C o u rt ’ s d eci si o n i s A FFI R M ED .