Some taxpayers make novel arguments in attempts to be taxed at a favorable capital gains rate. Wolman v. Comm. is a Tenth Circuit Court of Appeals order and judgment affirming a Tax Court decision, and it shows how creative taxpayers can be.

In 1994, Roger Wolman won $1.5 million in the Colorado lottery, payable in twenty-five annual installments. He and his wife reported the first five payments as ordinary income on their federal tax returns. In 1998, Wolman sold his right to receive the remaining lottery installment payments to a financing company in exchange for two lump-sum payments, payable in 1998 and 1999. They reported this sale on their 1998 and 1999 tax returns as the sale of a capital asset resulting in a capital gain.

IRS issued the Wolmans a notice of deficiency for the two years, determining the lump-sum payments received for the assignment of the right to the future lottery installment payments was taxable as ordinary income. The Wolmans filed a petition with the Tax Court disputing the IRS's determination. The Tax Court agreed with the IRS, and held that the lump-sum amounts constituted ordinary income, and not capital gains. The Wolmans appealed that decision to the Tenth Circuit.

The Wolmans continued to argue that the money received in 1998 and 1999 was long-term capital gain and not ordinary income. This court quickly pointed out that it had recently considered and rejected this argument in a case presenting very similar facts, and rejected the Wolmans' argument, holding that the lump-sum payments were taxable as ordinary income.

Wolman also alternatively argued that he made a capital investment in lottery tickets in excess of $4,000 from January 28, 1989 through April 2, 1994, contending that "investment" makes the right to the lottery installment payments a capital asset. That too was rejected, along with one more argument. The Tenth Circuit held neither his "purchase of a computer, printer, and a lottery computer program nor the time he spent making his lottery picks were capital investments."

Even though this is the second decision of the Tenth Circuit on the subject and I believe other courts have similarly decided, I still can't get over the Wolmans' creativity, and, for that matter luck on winning $1.5 million on a $4,000 investment, even if taxed at ordinary income rates.

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