No Gain, Some Pain for Another Lottery Winner

BY RYAN H. PACE

The Second Circuit Court of Appeals joined other courts holding that a taxpayer’s sale of rights to future installments of lottery winnings is ordinary income and not capital gain.

Shirley Prebola won $17.5 million in the New York State Lottery. The winnings were to be paid in 26 annual installments. Prebola reported the first three payments as ordinary income. She then sold her rights to the remaining payments for a lump sum of $7.1 million and reported that amount as a long-term capital gain. The IRS disagreed and issued a notice of deficiency for $1.31 million. The Tax Court (TC Memo 2005-261) held for the IRS.

On appeal, Prebola pointed to the broad definition of “capital asset” in section 1221 and market forces outside her control, such as variable interest rates, that determined the value of the right to the future payments. The circuit court, however, agreed with the Tax Court and relied on the long-standing doctrine developed by the Supreme Court holding that, with few exceptions, a lump-sum payment received in exchange for what would otherwise be a stream of ordinary income payments is treated as ordinary income and not capital gain.

The Third, Ninth and Tenth circuits have also ruled for the IRS in similar recent cases.

Shirley Prebola v. Commissioner , 99 AFTR 2d 2007-1660.

Prepared by Ryan H. Pace , M.Tax, J.D., LL.M., assistant professor of accounting, Goddard School of Business and Economics, Weber State University, Ogden, Utah. 

SPONSORED REPORT

Revenue recognition: A complex effort

Implementing the new standard requires careful judgment. Learn how to make significant accounting judgments and document them and collaborate with peers for consistent application.

TECHNOLOGY Q&A

How to create maps in Excel 2016

Microsoft Excel 2016 has two new mapping capabilities. J. Carlton Collins, CPA, demonstrates how to make masterful 2D and 3D maps in Excel 2016.

QUIZ

News quiz: Economy and health care changes top CPAs’ list

CPA decision-makers’ economic outlook and the House Republicans’ proposed tax changes as part of replacing the Patient Protection and Affordable Care Act received attention recently. See how much you know with this short quiz.