The Tax Court reaffirmed that proceeds from the sale of a right to future annual lottery payments constitutes ordinary income, not capital gain, after reviewing two test cases involving winners of the Florida State Lottery.
In both cases, petitioners in the cases won the lottery and reported the annual installment payments as ordinary income for a number of years. Eventually, however, the petitioners sold the right to their remaining installment payments and claimed that the resulting gain (a lump payment) was reportable as capital gain, rather than ordinary income.
Citing "extensive precedent" against the petitioners' claims that lottery rights should be considered property under state and federal law, the Tax Court rejected the taxpayers' arguments, saying that the sale of the remaining installments does not convert what would have been ordinary income payments into income taxable as capital gain.
The court said that, as in prior cases, the sale of a right to future lottery payments produces ordinary Income (taxable at a 35 percent rate), not capital gain (taxable at a 15 percent rate).