L K Williams <lanny[at]loxinfo.co.th> wrote:

- quote -

Suppose I buy a call option rather than a share of stock.

That's treated the same as the stock, in terms of taxes; but
it's clearly a contingent asset.

Seth

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"L K Williams" <lanny[at]loxinfo.co.th> wrote:

- quote -

Ok, but what's the difference between the right to receive
annual payments for 20 years for a winning lottery ticket,
and the right to receive payments for 20 years under a note
secured by a mortgage? One is apparently a capital asset and
the other is not.

Stu

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"Stuart O. Bronstein" <stu[at]lexregia.com> writes:
- quote -

Lottery winnings are defined somewhere as ordinary income.

- quote -

Interest on the note is ordinary income; gain on sale would
be a capital gain either short-term or long-term.

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Dick Adams <rdadams[at]smart.net> wrote:

- quote -

I'm not familiar with the specific cases. But I'd imagine
that the ruling would be based as much on the fact that,
after declaration of a winner, it's no longer an investment
per se, but a matured right to payment.

How is the sale of a long term note (perhaps secured by a
mortgage) treated?

- quote -

Damn! I wasn't planning on being cooperative, but the rest
was already cut when I got down here. Please don't tell my
clients -it's bad for business.

Stu

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Dick Adams <rdadams[at]smart.net> wrote:

- quote -

If records are being kept, put me down as agreeing with Ed
on this one. (But, I reserve the right to disagree with him
on other issues in the future. <g> )

MTW

==========================
Moderator: That hurts!!
==========================

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"Dick Adams" <rdadams[at]smart.net> wrote:

- quote -

Does B sell the stock?

When that happens, then there is a taxable event.

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For ease of reading, I have combined a series of responses.

"Dick Adams" <rdadams[at]smart.net> wrote:

- quote -


For B to have income, it must be realized. Merely holding
appreciated stock does not constitute realized income. The
stock must be sold or exchanged. The lottery winnings, well
Dick and Ed have already gone at it on this one.
---

Ed Zollars, CPA replied:

Because the IRC holds that way and allows the deferral of
capital gains until a sale, not (generally) under a mark to
market basis. And, as the Tax Court has now held multiple
times, the lottery ticket doesn't generate capital gains.

If person B had regulated futures contracts instead of
stock, they would have income (again simply because the IRC
says they would).
---

Frederick E. Jorden replied:

Because your elected representatives say so. :-D
---

Martha Matthews, EA replied:

Because A will get the payoff but B will not get anything
unless B sells the stock. By the next day it could be worth
less.

- quote -



Stuart O. Bronstein replied:

I'd guess that the reason is that A gets cash while B
doesn't. B has taxable income whenever he converts his
stock into cash or some other type of property.

Which leads to another question. A wins the lottery in a
drawing occurring on December 15. No matter what he does,
he can't receive any money until January 2. Which year is
he taxed in?

I'd imagine it would be year two.

- quote -

--

Joel Berry, CPA replied:

Neither has income until he or she "cashes in". If A
doesn't redeem the tickets, he or she has no income. B
doesn't have income until he or she sells the shares.

In Texas, we call the lottery a tax on people who aren't
good at math.
---

lotax[at]hotmail.com replied:

....and while we're trying to answer that one, here's another
one to consider:

Why is the stock taxed as "investment" and the lottery ticket
as "gambling"?
---

Phoebe Roberts, EA replied:

Because some Congresspeople said it was that way? If you're
looking for logic, I'd say that the lottery winner has
absolutely no chance that holding the ticket would cause him
to lose (or gain) principal, whereas the stockholder has a
good chance of getting more or less if he "cashes out" a
week later. Can you imagine the nightmare of marking to
market your stock transactions, particularly if you only
mark to market for gains?
---

Christopher Green replied:

(1) A got $100,000 in cash. B got $200,000 in paper.

(2) A is gambling, a reprehensible recreation for
reprobates. B is investing, a contribution to the
general good by captains of industry ;-)
--

D. Stussy replied:

A has income because his transaction is completed - he
gambled and won, and it's over. His winnings are due and
payable.

B doesn't have income because his transaction hasn't
completed. Without selling the stock, he is not entitled to
be paid for it, and therefore, he hasn't realized anything.
His $100k is only "potential income."
---

Harlan Lunsford, EA replied:

You know, any time I see a question like this, I'm thinking
maybe that's a college student looking for help on a take
home quiz by an accounting instructor. I'm always tempted
to ask what textbook are you using?

Then I wonder, is this a trick question?

If it IS a trick question, then the answer is that both of
them have income.

However for federal income tax purposes, only A has both
realized and recognized income, since he has money in hand,
while B hasn't performed any event to realize his income.

And Dick, how did you know I just happen to live 31 1/2
miles from Auburn University?

Cheer$,
Harlan Lunsford, EA in LA
(Lee county, named for our general)
---

Summary:
1 out of 11 agreed with me,
9 out of 11 agreed with Ed,
1 out of 11 chose not to take sides,
2 out of 11 defended Harlan, and
Harlan chose to risk mentioning Auburn in a possibly Bama crowd.

Two statements:
1. The Tax Court has never dealt with this issue directly.
What they have decided enough times that I would call it
'a well-settled issue' is that you can not convert the
cash flow from a lottery annuity from ordinary income
into a long-term capital gain by selling the annuity.

2. If you reply to this post, please cut and paste as the
moderator does not want the whole thing back.

Dick

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Person A purchases $500 in lottery tickets.
Person B Purchases 10,000 shares of a $0.05 stock.

With one week A wins $100,000 in the lottery and
B's stock goes to $20 per share. Why would A have
income when B does not? (Ignore the possibility
that B may get investigated by the S.E.C. <G> )

Dick

P.S.: Harlan, that's the Securities and Exchange Commission
not the South Eastern Conference <g
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