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Tax Court Reaffirms Lottery Payments are 'Ordinary Income'

Insider BuzzInsider Buzz: Tax Court Reaffirms Lottery Payments are 'Ordinary Income'

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).

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2 comments. Last comment 10 years ago by Bradly_60.
Page 1 of 1
Raven62's avatar - binary
New Jersey
United States
Member #17843
June 28, 2005
49784 Posts
Offline
Posted: November 9, 2006, 10:04 am - IP Logged

After investing in the Lottery for 20 years, you'd think that a Jackpot Win should be considered Long Term Capital Gains! LOL!

    Bradly_60's avatar - disney37
    Atlantic Mine, Michigan
    United States
    Member #416
    June 23, 2002
    1614 Posts
    Offline
    Posted: November 9, 2006, 2:16 pm - IP Logged

    Well after thinking about this I would have to agree with the tax courts.  Why should people that take the annuity and then sell it get special treatment compared to all other lottery winners.  I mean if you take the lump sum you have to pay 35% of most of the income.  If they have to, then should everyone else no matter what way you decided to take it.  If this were the case then everyone would take the annuity, sell it right away and get away with paying only 15% in taxes on it.  Now that would be a major loophole.

    B-rad