## Facts

- J. Michael Maginnis and his family won $23 million in the Oregon state lottery in 1991; Maginnis and his wife each received a $9 million share.
- Maginnis’s $9 million was payable as 20 equal annual installments of $450,000, funded through an annuity purchased by the State of Oregon.
- Oregon law initially prohibited assignment of future lottery payments, but a 1995 amendment permitted court-approved assignments subject to statutory safeguards.
- In 1996, after receiving five annual payments, Maginnis assigned his right to the remaining 15 installments to Woodbridge Financial Corporation for $3,950,000, with Oregon court approval.
- Maginnis reported the $3,950,000 as ordinary income on his 1996 federal return and paid the corresponding tax.
- In 1998, the Maginnises filed an amended 1996 federal return seeking a refund (about $305,043) on the theory that the lump sum should be treated as capital gain; the IRS initially issued the refund.
- The United States sued to recover the refund as erroneous, asserting the payment was ordinary income and also arguing estoppel based on Maginnis’s prior reporting position.

## Issues

1. Whether the lump sum received for assigning the right to future lottery installments is taxable as ordinary income or as capital gain for federal income tax purposes.
2. Whether, if the payment could otherwise be capital gain, Maginnis was estopped from claiming that treatment due to inconsistent prior reporting.

## Decision

- The Ninth Circuit affirmed summary judgment for the United States.
- The court held the $3,950,000 lump sum was ordinary income, not capital gain.
- Because the payment was ordinary income on the merits, the estoppel argument was not necessary to the outcome.

## Legal Principles

- Capital-gain treatment generally requires disposition of a capital asset involving capital investment and gain attributable to appreciation over basis.
- Assigning a right to receive future ordinary income in exchange for a present lump sum typically produces ordinary income because the lump sum is a substitute for that future ordinary income.
- A right created by winning lottery installments, without capital investment and without asset appreciation, is not treated as a capital asset generating capital gain upon assignment.
- Recharacterizing future ordinary income as capital gain through assignment is disfavored where it would create an unwarranted tax preference compared to economically similar choices (e.g., electing a lump sum initially).

## Conclusion

The Ninth Circuit held that selling the right to future lottery installment payments for a discounted lump sum produces ordinary income, because the transaction merely accelerates receipt of income and does not reflect appreciation of a capital asset acquired through investment.


United States v. Maginnis, 356 F.3d 1179 (9th Cir. 2004)