An Oregon Lottery jackpot winner is going to have to pay a higher tax rate after a federal appeals court rejected his argument the prize money should be taxed like an investment at the lower capital gains rate.
J. Michael Maginnis won a record $23 million jackpot in July 1991 that he divided among himself, his wife and their three sons.
Maginnis chose to receive his $9 million share in 20 annual installments, a typical payment schedule at the time for state lotteries, which purchase an annuity for the prize amount.
But after receiving an annual payment of $450,000 before taxes for five years, Maginnis chose to assign his right to the remaining 15 yearly installments to a third party in return for a lump sum payment of $3.95 million.
He initially reported the lump sum payment as ordinary income on his tax return, but later filed a refund claim, arguing that the payment was a capital gain subject to a lower tax rate.
The Internal Revenue Service initially granted the refund, but later determined the lump sum payment was ordinary income, not investment income taxed at the capital gains rate.
The 9th U.S. Circuit Court of Appeals ruled Friday in favor of the IRS, saying the payment of $3.95 million should be treated as ordinary income.
A three-judge panel called Maginnis argument that lottery payments should be considered a long-term investment a novel question.
But in an opinion written by Judge Raymond Fisher, the court said 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.