Lattera v. Commissioner

437 F.3d 399 (3d Cir. 2006)



While the United States Court of Appeals for the Third Circuit agrees with Maginnis's result in the context of the proper taxation resulting from the conversion of future lottery payments into a lump sum, it does not simply adopt its reasoning. And it is both unsatisfying and unhelpful to future litigants to declare that the court knows ordinary income when it sees it. Unless and until Congress establishes an arbitrary line on the otherwise seamless spectrum between Hort-Lake transactions and conventional capital gain transactions, the courts must locate the boundary case by case, a process that can yield few useful generalizations because there are so many relevant but imponderable criteria.


After receiving several annual installments of their lottery prize, the Latteras sold for a lump sum the right to their remaining payments. The proceeds were reclassified as ordinary income on their income tax return, and a deficiency was assessed. The Commissioner of Internal Revenue and the United States Tax Court held that the lump sum was characterized as ordinary income, and the taxpayer sought review.


Did the Commissioner of Internal Revenue and the United States Tax Court err in holding that the lump sum was characterized as ordinary income?




In affirming, the appellate court determined that such matters were properly decided on a case-by-case basis. It adopted the family resemblance test to determine whether capital gains or ordinary income applied. The appellate court held that the right to receive annual lottery payments did not bear a strong family resemblance to either the "capital assets" or the "income items" listed at the polar ends of the analytical spectrum. The taxpayers sold their right to all their remaining lottery payments, so this was a vertical carve-out, which could have indicated either capital-gains or ordinary-income treatment. But because a right to lottery payments was a right to earned income, the lump-sum payment received by the taxpayers should receive ordinary-income treatment.

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